(Bloomberg View)—For retailers, December isn’t just the holiday shopping season. It’s also holiday return season, when consumers decide to send back all the stuff that didn’t fit, work or meet expectations.
It’s an expensive ritual. According to the National Retail Federation, returns account for about 8% of total annual retail sales. Online retailers face an even heavier burden, with returns averaging 25% of all goods purchased and as much as half of apparel. If those percentages hold through the 2017 holidays, online retailers could face $32.1 billion worth of returns on projected holiday-season sales of $107 billion, according to the consulting firm CBRE.
That’s a heavy expense, and one reason that online retailers are proving to be less profitable than the stores they are trying to replace. In part, the problem is that online retailers traded one set of expenses—storefront real estate—for costs that can turn out to be higher.
Online retail’s return problems date back to the early 2000s and the free-return policy introduced by the shoe merchant Zappos. It was a customer-pleasing move, letting customers order multiple pairs of the same shoe in different sizes and sending back all but the one that fit.
In 2010, Zappos’ chief executive Tony Hsieh revealed that returns exceeded one-third of the company’s revenue. At a traditional shoe store, that would be a crippling expense. At Zappos, which was acquired by Amazon.com Inc. in 2009, it was viewed as a tolerable marketing cost. Amazon is No. 1 in the Internet Retailer 2017 Top 500.
The gambit helped shift customer expectations and corporate practices. According to a 2016 UPS survey on online retail customers, 60% now consider free shipping an essential element of the shopping experience. As of 2015, roughly half of all online retailers, including Amazon, had free-return policies.
The expense goes well beyond free shipping. Once a product is returned, a retailer pays for it to be unpacked and assessed. Shoes and apparel worn only to try the fit might get another shot at full-price retail. But that’s a small percentage of everything that comes back used or damaged. According to Optoro Inc., a Nashville-based company that helps retailers including Target Corp. (No. 20 in the Top 500), The Home Depot Inc. (No. 8) and Best Buy Co. Inc. (No. 10) manage their returns, less than 10% of the merchandise it processes goes back to retail shelves. And according to a recent survey of 300 retailers, only 48% of what’s returned can be resold at full price.
Instead, companies look for the option that loses them the least money. For electronics, that might mean routing to a refurbisher who cleans and fixes returned devices; for clothes, that might mean routing to a Dollar Store; and for other items it might mean being packed into a trailer and being sold to a liquidator at auction. Some retailers receive as little as 15 cents on the dollar for things customers ordered and didn’t want.
The burden of handling returns is one reason that e-commerce companies from Amazon to Alibaba are investing in physical stores. Amazon customers can now return packages to Amazon-owned Whole Foods stores. For Amazon, that reduces logistics costs associated with free returns, but also brings customers into stores where they’re likely to shop. A customer printing out a return label at home won’t buy a bag of kale.
Online retailers are also looking for ways to cut costs that don’t rely upon physical stores. That’ll probably mean eliminating some of the customer-pleasing perks, like free returns, that spurred the development of e-commerce in the first place.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Favorite