Most people think sales and deliveries are the only key drivers of peak success, but reverse logistics can make or break a retailer’s profit goals. The surge in eCommerce, and the resulting surge in returns handling, is driving demand for dedicated processing warehouse space around the world. Online sales in the U.S. continue to grow at a steady 15 to 16 percent rate annually, and will top $500 billion in 2018. Based on historical trends, National Retail Federation (NRF) projections call for approximately 30 percent of online purchases to be returned, compared to approximately 10 percent of in-store purchases. NRF also projects approximately $350 billion in total merchandise returns between online and in-store in 2018.
At three times the return rate of instore purchases, it is clear that the huge disruption on the sell-side of our increasingly omni-channel world is matched by disruption in what happens post-sale. By offering a free, seamless returns experience, retailers all but incentivize us to buy all the sizes and styles we might possibly need, knowing we can keep the ones we want and return the balance. With no consequence of over-ordering, there is little reason to moderate our bulk-buying habits. Just as there is no such thing as free lunch, there is no such thing as free returns. To retailers, returns – or “reverse logistics” – is another cost of attracting and engaging customers.
How did we get here?
Among the many ways Amazon has changed consumer preferences is its passion for customer experience. Amazon has successfully gotten us addicted to not only instant gratification, but to demand a frictionless returns process everywhere we shop. UPS and Comscore’s annual UPS Pulse of the Online Shopper study cite 79 percent of shoppers surveyed view a free and effortless return policy as an important factor in online retailer selection and purchase decisions. Online retailers must provide an acceptable returns policy to stay competitive.
According to Forrester Research, companies need to increase focus and spend on retaining existing customers compared to what is spent attracting new customers. Return policies and processing are vital parts of the investment needed for customer retention because of the value-add for customers. Faced with the daunting, yet customer-critical task of managing returns, retailers have two basic options: selfperform or outsource.
The most appropriate option depends on many factors. Smaller, digitally-native brands often outsource fulfillment to third-party logistics providers (3PLs) as they scale. Doing the same for reverse logistics is often the best solution for those sellers. As the outsourced reverse logistics industry continues to expand, we can expect to see continued consolidation of smaller providers being rolled up into fewer, larger, often global providers. The leading delivery and fulfillment providers are scaling their reverse logistics offerings to gain economies of scale. Many retailers find it uneconomical to invest in and maintain infrastructure required to handle peak returns for the entire year, which is another reason using a 3PL might be a preferred solution for many retailers.
In contrast, omni-channel retailer giants handle much of their online reverse logistics themselves, most commonly in dedicated warehouse processing facilities if not in physical stores. At scale, some retailers will self-perform reverse logistics for some inventory types while outsourcing other return types requiring specialized skills or equipment. A good example of this is handling returns of electronics, where returned devices must be assessed for damages and shelf life, then potentially placed in open box inventory to be resold.
Many retailers of varying sizes and types elect to self-perform processing in a dedicated portion of a fulfillment or distribution center. Designating certain dock doors and separate process flows within a larger center can be a compromise solution.
The demand on returns
Whether self-performed or outsourced, reverse logistics processing generally requires significantly manual procedures. Unpackaging, inspecting, logging, making disposition decisions and forwarding for further handling commonly require higher labor costs and more job training. The goal is to process returns as quickly and economically as possible, whether that means dispatching the goods to store shelves or a fulfillment/distribution center for future sale; selling in bulk to a discounter or jobber; or trashing damaged goods if necessary. In fact, some retailers provide a full refund and tell customers to keep items that are too cumbersome and costly to return, like furniture.
A recent Internet Retailer / Bizrate survey found 46 percent of shoppers prefer to handle returns at a store while 27 percent prefer return shipping. Retailers that have been among the most successful in leveraging their store network for online purchases realize the advantages of customers driving their returns to physical stores. Inventory eligible for resale at full value can be re-stocked immediately without further transportation, and historical trends confirm high incidence of additional impulse purchases then consumers opt for an in-store return.
Reverse logistics facility requirements are determined by the type of goods being processed. For smaller inventory items, 40’
clear heights and wide bay spacing may not be necessary. A significant dock door count ensures flexible material handling flows inbound and outbound along with generally standard trailer parking. On the other hand, some 3PLs may start tenancy with more manual returns processing and later choose to repurpose the leasehold
for more automated fulfillment processing. Against this possibility, some reverse logistics users may seek more of a modern fulfillment type shell with 40’ clear, significant power and extensive associate and trailer parking. Most supply chains are built around the need to push goods in one direction. Never has there been such a mandate for equally robust and efficient reverse logistics processes and warehouse space in which to execute them. Just imagine the journey that too-small pair of sneakers takes after you print that return label and drop it in the mail. You can be sure that every time those shoes are touched through the process on the way to the next customer, the retailer’s margin gets slightly smaller.
Impact in EMEA
The situation is similar in the UK and continental Europe. BarclayCard, a leading global payments business with extensive data on online and in-store purchase and return behavior, reports: “It’s clear having an effective and convenient returns policy that satisfies customer needs is a crucial factor of success for retailers.” Aside from the competitive pressure to offer free and simple returns, BarclayCard finds inconsistency in clothing sizes among leading retailers as a contributing factor to over-ordering by
customers. One retailer’s size 12 is not necessarily another’s. In the UK, for example, survey data finds that 26 percent of retailers have experienced an increase in returns in-store and online over the last two years, with the number of returned items up an average of 22 percent. The so-called ‘Phantom Economy’ of reverse logistics is a global challenge.
Impact in APAC
While not identical, similar customer behaviors are pressuring retailers to up their returns game across Asia. According to UPS’s Pulse of the Online Shopper Study, a convenient and transparent return policy increases sales and customer satisfaction. Two-thirds of shoppers surveyed in Asia indicated free returns shipping is important when selecting online retailers. There appears to be plenty of room for improvement in the service, as only 47 percent of shoppers are satisfied with the ease of returns. Remarkably, return rates in Asia are well below those in EMEA and North America, with most shoppers returning 10 percent or less of their orders. Similar to other regions, however, Asian shoppers are heavy impulse buyers when processing returns, with 69 percent reporting new purchases when returning in-store, and 67 percent when returning online. The massive retail market in Asia – online and in-store – faces the continuing challenge of providing customers fast, seamless and free returns experiences.
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