The Outside View: Returns Are Every Retailer’s Double-Edged Sword
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The holiday shopping season means two things to most retailers: a ton of sales, and a host of returns.
Many shoppers will load up their carts guilt-free, knowing return perks are now table stakes. I’m talking pre-printed return labels, the option to drop off in-store, free return shipping, and generous return windows.
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In the last several years, retailers have invested millions into making this annoying errand virtually painless for consumers. In fact, it’s changed how many people shop. Today we order five different sizes of the same jeans, and return the ones that don’t fit. We buy seasonal merchandise and return it after the holidays, no questions asked. We buy a mattress online and schedule a return pickup on the 99th day of use.
But behind the curtains, the rising cost of returns is becoming unsustainable. On top of labor costs to handle legitimate returns, revenue loss from fraudulent or un-restockable returns are sky-high. Last year, experts estimate retailers took back an overall value of $369 billion in returned merchandise, $24 billion of which was estimated to be fraudulent.
Naturally, retailers are bracing themselves for the return avalanche this shopping season. Both Asos and L.L. Bean have recently tightened their lenient return policies. Others, like Puma, have invested in offering channel partners much clearer 360-degree product photography to reduce easily avoidable returns.
Many, however, have found a silver lining. At a recent student event hosted by Baker Retailing Center here at Wharton, Vince chief executive officer Brendan Hoffman revealed how cross-selling at the return counter has improved customer loyalty. “If we can help a returning customer walk away with a new item she truly enjoys,” he said, “she’ll want to come back again and again.”
He’s on to something. In a recent study, retail tech company Narvar found 95 percent of customers who were satisfied with a return process would absolutely buy again.
So how do you wield the double-edged sword of returns? My advice is to be thoughtful in your efforts to discourage returns, but find your own unique way to use them to your advantage.
The first step in prevention is to treat sales associates as your first line of defense. Research by my colleagues Marshall Fisher, Santiago Gallino, and Serguei Netessine showed that “every dollar saved on staffing may cause several dollars in lost revenues.”
That is, if you don’t invest in skilled staff who know your product, are tuned in to customer needs, and are skilled in cross-selling — you’ll be paying for it later in return costs.
Consider the holiday shopper. He stops into a local store, intent on buying a gift for his teenage daughter. Not one sales associate offers to help. Frustrated, he grabs a reindeer-patterned pajama set, unaware that his 14-year-old will deem them “too babyish.” Had a skilled sales associate helped him, he would have walked out with a moto jacket — a gift his daughter wouldn’t want to return on Dec. 26. The reindeer PJ’s, unfortunately, would likely be tossed into a 50 percent-off bargain bin, or worse, sent to a landfill to join the estimated 4 billion pounds of apparel returned every year. It’s a lose-lose situation for everyone.
Tech platforms like True Fit are also proving to be a good line of defense against returns as it solves the “size and style uniformity” issue that frustrates many online shoppers. Using True Fit, a shopper can confidently buy a pair of size six high-rise jeans from Calvin Klein, knowing they’ll fit just like her favorite size four pair from Levi’s. In a 2018 interview, True Fit’s James Lasson said retail partners experienced an average 35 percent reduction in returns after implementing the software.
Establishing a customer “risk score” is smart, too. Retail Equation’s software has helped brands like Sephora and Victoria’s Secret identify customers with excessive return profiles and sets thresholds for future returns: For example, limiting a “risky” customer to seven returns every 90 days.
But even as retailers find their own ways to tackle the most common reasons for returns — such as size, fit and product misrepresentation — the worst thing they can do is to treat returns purely as a cost center.
Digital-first brands such as Rothy’s rely on Happy Returns, which is basically an automated version of Vince’s cross-selling strategy. Customers can physically bring their returns to a “Return Bar,” conveniently located in a partner store such as Paper Source. There, customers can opt for a full refund or click a button to exchange it for something else. An executive from Rothy’s recently said the initiative has boosted the company’s exchange (instead of returns) rate by 33 percent.
Brick-and-mortar partner stores are reaping the benefits of in-store returns, too. When Kohl’s agreed to beta test Amazon’s proprietary drop-off kiosks within a few Chicago stores last year, they saw an 8 percent year-over-year sales increase in those locations.
Best Buy’s annual post-holiday sale has proven to be its secret weapon to recoup some lost revenue from returned, un-restockable electronics. Every January, customers can buy open-box returned items at a deep discount. It’s an event that helps maintain customer loyalty while simultaneously saving the retailer’s bottom line.
While it’s true that our addiction to returns has brought many retailers to a breaking point, the future isn’t dire. I recently read that retail returns are expected to grow to $1 trillion in the coming years. If you start now to build return rate into your business model and to treat returns as one of the most important touchpoints in your customer journey, that $1 trillion figure won’t seem so daunting.
Thomas S. Robertson is the academic director of the Baker Retailing Center at The Wharton School of the University of Pennsylvania and the Joshua J. Harris Professor is a professor of marketing and former dean of The Wharton School.
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