The Future of Returns in Retail

Consumers returning stock has become embedded in our shopping culture; one in three items are returned during annual Black Friday events and returned stock is becoming the largest source of inbound supply at multiple retailers.¹ Returns represent a substantial challenge for retailers. The traditional approach to returns is both costly and often unsustainable. However, there are a growing number of approaches that retailers are adopting to minimise the negative impact of returns.

Reverse logistics: no longer an exception

Reverse logistics refers to the process of products moving upstream through the supply chain and is not historically something that bricks-and-mortar retailers are set up to deal with. The traditional retail supply chain is linear, ending when the product is handed to the consumer. Any product entering back into the supply chain after the sale is considered an ‘exception’ and is both costly and complex to deal with – increasing cost to serve, reducing margin and masking true consumer behaviour through reporting inconsistencies.

Despite reverse logistics being sub-optimal for retailers to handle, the concept has become common due to retailers prioritising short-term revenue growth and offering attractive returns policies for consumers to drive purchases.Therefore, although many supply chains weren’t set up for reverse logistics, they must now handle them constantly in the form of returns.

Due to growing cost-pressures, retailers must find a balance between keeping consumers happy with flexible and generous returns policies and managing the logistical complexities and costs that an increased reverse logistics footprint brings. In addition, more pressure is expected to be put on retailers to accept end-of-life returns in the name of sustainability and the circular economy.

There are three key strategies retailers can employ to begin the process of future-proofing their returns policies.

1. Disincentivising returns whilst keeping consumers happy

Given the cost and complexity of returns, some retailers penalise consumers for returning items by introducing friction to the process. This commonly includes removing the concept of ‘free returns’ and passing the postage fee onto the consumer.

Although methods like this do disincentivise returns, and might reduce a small amount of impulse purchasing, these policies are sub-optimal. They don’t cover the full cost of reprocessing, cleaning or restocking products, and also negatively impact consumer experience.

Worsening the consumer experience matters when there is increased competition in the market, and consumers have choice in where they’re buying a product from. Deloitte analysis suggests/states that over two thirds of consumers consult return policy before making a purchase.

Instead of making returns more difficult, retailers should employ a strategy that focuses on increasing conscious consumerism. For example, techniques to provide improved product information can decrease returns significantly by educating the consumer on whether the product is right for them. This can be as simple as improved sizing guides for clothes, product videos / 360s, FAQs or chatbots. In more advanced situations virtual AR for placing a product in the home, or virtual try on software can also help the consumer make a clearer decision about whether they really want the product.

Retailers could also encourage no-return behaviour. This includes rewards for consumers with low return rates or repurchasing behaviour, displaying the carbon footprint of a return, or sharing the percentage of purchase vs returns rate per consumer in their account summary.

2. Simplifying and standardising reverse logistics processes

While there is a necessary focus on reducing returns, it is still imperative that robust processes are in place to manage a product when it does re-enter the supply chain.

Processes should be implemented to simplify and standardise processes once products are returned. The individual tactics employed will differ depending on the retailer or the geography / products / consumers of the business, but some basic principles can be applied across the board:

• Consolidation of stock is more likely to be cost effective and minimises the chance of parcels getting ‘lost’ on their way back to the warehouse. This consolidation also helps in terms of reducing emissions by reducing the number of miles travelled to return a product.
• Outsourcing of returns logistics can play a crucial role in optimising processes – this can include simply leveraging third party logistics providers to broaden returns networks and consolidate parcels.
• Stock visibility across the network (made possible through Order Management Systems) allows returns to be visible earlier on, meaning that action can be taken on them immediately, rather than when they arrive at the warehouse. Restocking a product quickly can be especially important in the fashion industry where products might only be relevant for a few months and, restocked too late, might have to go straight into markdown.
• Standardised return policies for different categories of products will aid retailers in treating products differently when they return to the warehouse. Many retailers have blanket policies when it comes to returns. However, the cost to serve, and cost to return will often vary significantly depending on the type of product. Implementing standard processes for different categories, price points and states of products can reduce the costliness of returned goods.
• Encouraging consumer feedback, including asking for a returns reason is a simple but effective way to identify manufacturing issues, or even to isolate where product detail pages aren’t clear.
  

3. Establishing foundational building blocks for end-of-life returns

Many retailers have started to invest in sustainability initiatives, and returns is a crucial area for sustainable innovation. In ecommerce, returns account for 25 per cent of total emissions.²

Although reducing returns has an immediate impact on improving the sustainability of a retailer, this is mainly because retailers only measure their carbon footprint up until the end of the supply chain, at which point it becomes the consumer’s responsibility.

However, as regulations and consumer attitudes to the circular economy become more mature, retailers will need to look further afield and employ a sense of responsibility about indirect emissions (known as Scope 3 emissions), and what happens to their products towards the end of their lifecycle. They will need to think creatively about how used products could still be useful within the business.

There are different methods of exploring this, including but not limited to:

• Introducing buy-back or recycling programmes for end-of-life products allows the retailer to investigate used products for product-improvement research and can be paired with loyalty rewards to strengthen the customer relationship. The crucial element for retailers to think through with these programmes is to ensure there’s a standardised process for the bought-back products to be re-used / recycled and not simply collected and sent to landfill.
• Increased involvement in the resale market, which is expected to grow 16 times faster than the broader retail market by 2026.³ This is an untapped area of potential for many retailers, with some businesses already starting to look at gaining a share of the market, either by launching their own marketplace or, for luxury brands, authenticating products through certificates specifically for resale.
• Providing repairing / fixing services for broken products to enhance the longevity of items. Some retailers have started to help consumers get more out of their items in aid of conscious consumerism. This can be in the form of specific repair shops, services in-store, or even simply providing FAQs / advice online. This reflects changing consumer behaviour – 24 per cent of consumers in the Deloitte Consumer Tracker said they would increase spending on getting items fixed in 2023 vs 2022.⁴
  

Returns should therefore be seen as an opportunity, rather than a challenge, for retailers. By integrating reverse logistics within the supply chain and viewing their responsibility and relationship to the consumer as beyond the initial sale of their product, retailers can potentially reduce operational costs and enhance customer experience.

Want to find out more? Speak to our digital supply chain team

If you would like to hear more about the retail industry and the opportunities returns could represent for your business, please contact our team below.

______________________________________________________________________________________________

¹ The Twenty Minute VC (20VC) Venture Capital Start Up Funding The Pitch (2022), The Most Revealing Breakdown of Unit Economics for Quick Commerce; AOVs, Retention, Deliver Costs and more, Why The Business Model is Different for Emerging Markets & Will This Be a Market Consolidation or Many Players, https://open.spotify.com/episode/6JQLbNCIlyeEGWr06HG6pY & Sardana, T. (2022) Black Friday 2022: Attributing Returns, Flyshot, viewed 26 April 2023, <https://www.flyshot.io/blog/black-friday-2022-attributing-returns>

² Sharma, A.; Kumar, A.; Kleinveld, A.; van Appeldorn, D. (2023), How to Optimise Reverse Logistics, Narvar, viewed 26 April 2023, <How to Optimize Reverse Logistics in Retail (narvar.com)>

³ Hughes, H. (2022) Resale market to more than double by 2026, US to lead the charge, FashionUnited, viewed 26 April 2023, <https://fashionunited.uk/news/business/report-resale-market-to-more-than-double-by-2026-us-to-lead-the-charge/2022051863139>

⁴ The Deloitte Consumer tracker Q4 2022 (2023) Deloitte United Kingdom, viewed 26 April 2023, <https://www2.deloitte.com/uk/en/pages/consumer-business/articles/consumer-tracker.html>