An Amazon employee works on April 11, 2015 in Lauwin-Planque, northern France.
Atlantico: In France, online commerce is more and more affecting the economy, it went from 57 billion euros in 2014 to 112 billion euros in 2020. So customers flock to online platforms to do their shopping, but they demand more and more and benefit from one thing: Free returns. This prospect is so attractive that in France in 2018, according to Statista, 45% of consumers returned a product purchased online. What is the economic impact of these returns on the business? Is it expensive?
Michael Roemi: For customers, sometimes having to return unsuitable items prevents them from shopping online. To help them feel confident about their purchases, many US retailers have actively encouraged returns by offering frequent free delivery, returns and even discount codes, thus encouraging purchases but also… returns. Recently, with the health crisis, the rise of e-commerce has accompanied the explosion of this practice even though some merchants did not have adequate logistics to manage this flood of items.
However, managing it is a long and complex process. Goods pass from a consumer to a retailer, then to the seller, liquidator, wholesaler, seller and finally to the second-hand buyer. Some goods, such as beauty products, underwear, and swimwear, are destroyed for hygienic reasons, even if they appear unopened or unused. Others lose value along the way. Almost a third of them do not even fall into the hands of another consumer, and they end up in landfills.
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If the average rate of return on a retail business is around 10%, it is between 15 and 30% for an online business. This rate may be higher for clothing due to the common practice of purchasing items of multiple sizes and colors in order to return some.
Although technology can help save time and increase the efficiency of the returns management process (some US startups such as Stitch-Fix, Rent the Runway … use an algorithm that tracks products and predicts order probability while allowing selection of the most effective return method: ground, air ), it is difficult to accurately estimate the fraction of returned merchandise that has been disposed of or even the amount of waste it represents.
Thus, in 2020, American merchants accounted for more than $100 billion in goods sold online.
Why encourage the return of online purchases when the process is costly for businesses? How profitable are the offers (free returns, free delivery, discount code) for businesses?
Michael Roemi: For some clients, the magic of shopping—and the returns—is that it takes place today in the privacy of the home, without human interaction or judgment.
This phenomenon is a creation of American consumerism, which emerged nearly twenty years ago with Zappos. In the mid-2000s, the company persuaded millions of Americans to buy shoes online—a practice that seemed unlikely at the time—by marketing a policy of fast, free shipping, and returns at no cost, no questions asked. By changing consumer behavior, this company inadvertently caused many other companies to adopt similar purchase and return policies that have become an industry standard. Nordstrom, among other things, has long been notorious for its indulgence in taking back items the brand didn’t sell in order to satisfy customers.
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These returns have a high cost to the companies involved in this phenomenon. Considering all the short-term costs (labor required to pick, pack and ship the item, outbound and return shipping, labor required to receive and sort the returned item, cartons and plastic packaging, as well as the sorting center overhead costs, etc.), the company has already lost money. By one estimate, the online return will cost the retailer $10 to $20, before the cost of shipping. However, they hope to offset this initial loss, in the long run, by creating economies of scale.
Are returned products always reused and returned to market as in physical stores? What are the differences between the two?
Michael Roemi: While Zappos’ success has helped solidify and shape the way people shop, the free returns model has never before been applied to this scale of online sales, where the process of giving buyers plenty of leeway is more expensive, and where companies like Amazon, Target and Walmart are in The United States has a financial structure that allows it to absorb more cost of returns and the cost of broken products than small enterprises.
In the race to acquire and retain new customers at any cost, merchants have taught buyers—who have no idea how much these returns will cost—to behave in ways that are harmful to nearly all parties involved. Because reintegrating a sold item, which is sometimes in a completely different state, into the company’s new merchandise sales flow can be logistically prohibitive. First, returned items are not restocked and/or forwarded to another hopeful customer, in most cases. On the other hand, some of these merchandise is directed to a global parallel industry for wholesalers. Another is stripped of its valuable parts, and the last goes directly to an incinerator or landfill. All this is inefficient and, moreover, harmful to the environment (compare trucks, semi-trailers, planes, container ships… I proceeded to deal with changes of opinion or misleading product descriptions, not to mention the material waste of the products themselves).
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However, while some retailers prohibit resale in new condition for any opened product, others face costs that they must meet, sometimes circumventing this strategy by deeming that products sent directly to the original store can be considered nearly new enough to be re-used. Sell them while those mailed in in original and unused condition are unlikely to be transferred to the company’s inventory.
Is the solution to this problem is to charge a fee to return the product? Should brands be encouraged to donate their products rather than throw them away?
Michael Roemi: In fact, customers are starting to wonder more and more today why more revenue is not just given away. Donating and providing these products to people in need may be a good way of communication for these companies.
However, companies are reluctant to act from an ethical standpoint. Many shy away from large-scale national donations due to “brand dilution”: if paying customers pay a company and it gives things to the poor for free, logic forces them to feel that the things you sell to them are priceless. This is why some major retailers (Amazon, Target…) are quietly beginning to realize that it doesn’t make sense for them to incur the cost of “reverse logistics” (refunds for unwanted items sold). They’ll make up for your clothes, your pillows…it’s up to you to give them. What sounds like an act of generosity is, in fact, outsourcing the task of getting rid of the product.
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