The Point of No Return

The holiday season is passing (it’s now the returns-mania day after) — and more retailers charged fees to make returns this year than ever. Yet, consumers have been conditioned on free returns. And as we close this year and look ahead, that has me thinking about where this goes from here.

When retailers rode the pandemic wave of online shopping growth, the volume of goods returned exploded. Are those days finally coming to an end? What will be the impact on the consumer and what’s the solution? One of the areas where this problem seems rampant is (not surprisingly) apparel.

To be sure, the conversation about free returns heated up this past Spring, when Amazon began testing the $1.00 fee for returns not taken to Amazon authorized centers but say, to UPS stores. And that is now in place, while Amazon continues to offer free returns at Whole Foods Market and Amazon Fresh stores, Amazon HubLocker+ locations, and Kohl’s stores nationwide. However, Amazon is not alone.

The issue has grown steadily with new reports that returns accounted for $816 billion in lost sales, or 17% of total sales in 2022, up from 11% in 2020, according to the National Retail Federation.

Last September, H&M started charging customers $2.40 to return online purchases. The company was not alone: last May, Zara implemented a $3.95 return fee for items returned by mail. American Eagle charges $7 to return purchases; Saks Fifth Avenue charges $9.95; and TJ Maxx, $10.99.

As we reflect on this holiday shopping season, the practice appears to have gone mainstream: approximately 40% of online retailers charged some sort of return fee for shipping an item back to a warehouse, repackaging it or (sadly) disposing of it. While some retailers charge a fee regardless of whether it comes back in-store or online, most are willing to let customers return an item purchased online to a brick-and-mortar location at no charge.

Of course, when you buy it online, it has to go back to a fulfillment center, then back through the distribution center, and finally back into inventory. To be sure, the probability of it being resold turns out to be quite small, and this situation is not sustainable for retailers.

The Crux of the Problem

The root of this is obvious when we think it through. By the time the COVID pandemic hit, the vast majority of online retailers had accrued years of experience with same-day processing, packaging and delivery. So they were prepared as online sales rocketed. However, they hadn't built out a robust parallel process for managing the much more complicated, and expensive challenge of processing returns for the exploding volume of sales—a process known in the industry as “reverse logistics.”

These problems aren't just about a lack of warehouse capacity to re-package piles of returned goods: actually its costing retailers money to process those returns. Studies show that retailers spend about $33 per return including postage, packaging, labor, missed sales windows not to mention the depreciation of an item's value. And for retailers that resell returned goods, refurbishment can be 20% of the product's retail cost.

This problem is exacerbated by the increasing popularity of “bracket buying” (buying multiple sizes with the intention of returning whatever doesn't fit) and “ward-robing” (buying clothes, wearing them for an event, then returning them for at least a partial refund). The fashion industry bears the brunt of this, since “fit” isn’t an exact science. Arguably, aside from “ward-robing” its different than purchasing say, a new desk lamp; you need to physically experience the garment and see if it's completely right for you.

Whatever the consumers’ motivation, online purchase returns in the U.S. alone totaled $212B in 2022. That's far more than many retailers are able to absorb. Actually, its not hard to imagine that in some cases, digital commerce operations are effectively being underwritten by the retailer’s brick-and-mortar revenue.  This is the main reason why retailers are introducing return fees.

All is Not Lost

Yet, while retailers are trying to make up for some of these losses, they are likely trying to change consumer habits in order to grow revenue.

• If return fees give consumers reason to shop more prudently (for instance, measuring twice rather than bracket buying), then retailers could reduce their return costs through a lower volume of product returning to their warehouse.

• Return fees can increase margins. For example, some retailers allow customers to return items at no charge if they bring them back to a physical store location, rather than shipping it. That means increased in-store foot traffic. When a customer returns an item in-store, studies show that they are considerably more likely to spend more than the refund amount while there.

Our Recommended Strategy

We believe an answer lies in the customer relationship itself: loyalty strategy and programs. Free Returns for only loyalty members could drive registrations for loyalty programs that waive these costs. This is an approach that has been in place for some time at the Gap, along with Levi's; both offer no-charge returns to "members." And these loyalty programs can drive considerable revenue: a 2020 research from McKinsey & Co revealed that shoppers enrolled in loyalty programs spend 30% more than non-members, and 60% more if they actually pay for a membership. So the win-win here may be expanding loyalty programs to offer more perks, such as free returns for the most valuable customers (i.e., those spending the most), instead of points for discounts.

And that just makes plain dollars and sense.