E-commerce in the United States represented more than $861 billion in 2020, a 44% increase from 2019. As the pandemic forced people to stay home, they took to shopping online. By the end of 2021, analysts predict global e-commerce sales exceeding $4.2 trillion with US consumers comprising 25% of the spending. But this article is not about going forward, it is about what comes back. More online shopping means more returns. In fact, billions of dollars in merchandise needing to get from people’s homes back to retailers as efficiently as possible. To succeed in e-commerce, retailers must master reverse logistics because the “wrong size, wrong color, wrong product” problem is here to stay.
A Sizeable Reverse Logistics Challenge
Nearly 30% of e-commerce merchandise ends up as a return. That number is three times higher than purchases made within a physical store. In fact, retailer’s liberal shipping policies to increase sales, also eats into profits. E-commerce sites make it easy to buy a product in multiple colors and sizes—a frequent practice for 41% of shoppers. Consumers just send back what they don’t want. However, for sellers, reverse logistics could cost them as much as 59% of the item’s original purchase price. Any company would want to remove that kind of bottom-line impact from their operations. Yet, creating more stringent return policies to save money also costs sales. About 97% of surveyed customers agree or strongly agree that the way a retailer handles returns influences if they will buy from them in the future. That leaves retailers in a catch-22.
Complications of Reverse Logistics
So, if a retailer knows how to get a product to a consumer quickly, why is getting that product back so tricky? The return flow complicates the process. First, retailers must decide what to do with the product. Items may be sold as new, discounted, recycled, remanufactured, refurbished, donated, disposed of, or rejected. Each activity may send the item to a different location.
Cost also plays a large factor. The industry’s leading parcel carriers FedEx and UPS are issuing multiple rate hikes per year. High shipping costs for returned items that may end up in the discount bin anyway has many retailers telling consumers to “keep it.” Issuing a refund without paying to get the item back often represents the cheapest option. Amazon is creating pool points for customer returns at locations like Kohls and UPS to help cut costs. Smaller retailers are banding together through apps like Happy Returns which creates drop-off kiosks called Return Bars.
Processing outbound purchases and inbound returns also takes tremendous space—something already in short supply. Reverse logistics requires 20% more space and labor capacity when compared to forward logistics. Current industrial space vacancy sits at just 4.7%. Yet real estate company CBRE estimates that returns processing will require 400 million square feet more of space in the coming years to keep up with e-commerce growth trends.
A Way Forward with Returns
Expect technology to play a large part in driving down returns. The application of artificial intelligence helps companies predict return trends before they become problematic. Big data on shopping patterns and returns isolates the products eating the most profits. Virtual dressing rooms and camera technology is proving effective in assisting shoppers with finding the right size and color of apparel online to dramatically decrease return volume.
Watch for retailers to change their returns policies. Prior to the pandemic, Amazon instituted QR technology allowing for label-free, box-free returns at designated locations. Walmart stepped up its buyer-friendly process by allowing customers to schedule free pickups through FedEx and issuing near-instant credit on returns.
But to date, third-party logistics providers have proven to be the most effective tool in managing returns. The move plays to retailer strengths by freeing up their space and capacity to focus on other aspects of the business. The logistics experts work their networks and warehouse facilities for inbound returns. Now 3PLs are starting to outpace e-commerce providers as real estate buyers of warehouses exceeding 100,000 square feet. In the world of returns, retailer partnerships with 3PLs are here to stay.
Langham Logistics is excellent at working in reverse. Our 1-million square feet of warehouse space accommodates returned product storage and processing. Cutting-edge, proprietary business intelligence software isolates and analyzes data to manage costs, streamline returns, and keep customers happy. Learn more about Langham’s forward-thinking approach to project logistics.