Returns are no longer just a cost of doing business. When most shopping was done in stores, returns were around 8-10%, however with online sales added in the estimated average rate of return is 20%, and even higher for apparel.
This is a real hit on the bottom line. Online grew around free deliveries and returns which grows sales but increases costs. To manage this huge increase in the volume of returns, many businesses have had to set up dedicated returns distribution centres. Using our true cost of returns model, it’s at least £2.50 per item just to run the system to deal with returns and around £7.95 in total to process returns. It is no wonder that some are now making a nominal charge for returns, or looking for other mechanisms, for example, encouraging shoppers to buy only what they are going to keep or incentivise them to return to a physical store, which can cost the retailer less and at the same time, grow sales.
The environmental hit from returns is also getting recognised. The additional packaging, extra travel miles when fuel costs are high, and then disposal of items that cannot be resold should be a real concern for businesses.
Reverse logistics need to be re-engineered, and our research found that these were less lean and agile than forward logistics. One retailer shared that it costs 4-5 times as much to bring back an item than to ship it in the first place.
All parts of the business need to play a role, the buying teams need to ensure that the images, sizing, and wording are accurate as well as appealing. The marketing team need to design appropriate and legal returns policies. The supply chain team needs to build the right capabilities to support the business needs, especially with the couriers, while the Loss Prevention team need to build tools, techniques and technologies to prevent returns fraud.
Our study with the ECR Retail Loss Group published in 2018 identified that few, if any, businesses had cross-functional teams working together to manage and mitigate the growing, and now very visible, returns problem. In the majority of cases, it seemed that responsibility for returns landed below director level. We believed that this organisational approach created a “blind spot” and an inability for their business to understand, track or even know the full and true cost of returns, the one thing we were certain of, was that it was not free.
Given four years of additional experience, the growth of online sales during the Covid-19 pandemic lockdowns and the increased awareness of the environmental impact of unnecessary returns, we wanted to learn how organisations are now managing returns, their policies, the reverse logistics, the KPIs and fraud in this area. And further, we wanted to understand whether the people at the top now have greater oversight and control of returns.
We asked loss managers from the ECR Retail Group Loss to update us on the oversight of returns in July 2022. What we found was that in around three-fifths of the 44 businesses who responded, each function or team dealt with its own aspect of returns and that the lead manager of that function takes responsibility. Around one-fifth of businesses have a multi-functional taskforce to deal with setting policies, aligning reverse logistics, monitoring performance and countering fraud. The latter was most likely to be the subject of a taskforce. Half of the remaining businesses (around 5 out of the 44) had dedicated cross-functional departments or teams to deal with policies and logistics. In two or three cases, these teams also dealt with fraud and KPIs.
Overall responsibility for returns is shared among the heads of departments or teams, although in many cases one team head takes overall responsibility. There is no convention apparent on this: logistics, asset protection, loss management, customer service and others all took this role somewhere. In 12 cases, there was executive oversight of returns with one executive having returns included in their portfolio. Again, these were across functions. In only three cases was one person given the title of ‘Head of Returns’, ‘Returns Manager’ and ‘VP Returns and Recommerce’, suggesting sole responsibility. It was not clear from the short survey whether these were executive directors or senior managers.
This strongly suggests that despite the growing hit to net profits and the difficult implications of whether to reduce returns or increase customer growth returns are not as visible as they should be to the executives of a business. Our model suggests that a loss in sales can be compensated by increased profits if returns are controlled and reduced. It would be interesting to see from those in a head of returns role what difference that makes.
We also looked at how sales returns are reported in the annual reports of companies, because this gives us some insight into what the executive board are discussing. We looked at the annual reports of 10 major apparel companies. Returns would be dealt with in the notes to the financial statements. We found only two companies (NEXT and John Lewis) that disclosed a returns figure, which is an estimated ‘right of returns’ cost of goods returned within the online 14 day cooling off period but not necessarily the full cost of returns. They also showed their refund liabilities or the amounts still owed in refunds at the year end, along with percentages. In all 10 cases, there is a statement that the sales revenue given is the figure after discounts, returns and similar costs are deducted. Only five disclosed their returns policies in the financial statements. There is no requirement in the international financial reporting standards or accepted industry norm that requires CFO to give this information, meaning that sensitive information or difficult news about returns can be hidden inside other items.
Whilst it is hoped that the board get rather more internal information to ensure that the issue of returns is discussed, this rather suggests that after all, returns are still seen as the hidden cost of doing business. A clear line of accountability to the top is needed to tackle the real and growing problems of returns. The recent reports of businesses such as Zara and Boohoo making a charge for returns suggests that the issue is getting nearer to the top of the agenda.
With thanks to Maria Akinmaye (PhD student at University of Portsmouth) for her help in the analysis of annual reports