There's no such thing as a free return

A new study, led by the University of Portsmouth, has found that returns from online sales, particularly returns to store, are seriously impacting company profits.

Many retailers aspire to be ‘omnichannel’ – integrating their online and physical shopping outlets.  Great customer service is seen as a cornerstone of the omnichannel experience, and as driving sales. As part of this, most retail businesses offer free delivery and multiple ways of returning items – including return to store of items sold online. However, the downside has been the unanticipated number of returns generated by online sales. With this ‘free’ offering to customers, many businesses are unclear about the costs to the business.

’Buy Online, Return in Store’ creates unexpected additional costs.  For example, businesses have to find more physical space to store returns in their shops and use store staff to process returns. It has also been difficult for firms to integrate and develop underlying IT systems quickly enough to cope with the demands of online shopping and returns.  Many businesses have complex procedures for managing returns. With little senior management oversight of the returns process, retailers find it difficult to pin down crucial information such as the rate of return and the costs of handling a returned item.

However, just a small reduction in the rates of returns and the additional costs can directly improve profitability. For an average company, the researchers estimate that a five percent improvement in the rate of returns has the potential to deliver real improvements (200 basis points) in net margin. In the tough trading conditions retailers face, such improvements could be critical to help them deliver the services which customers expect (such as free delivery and returns) whilst keeping prices competitive.

Lead Investigator Professor Lisa Jack from the University of Portsmouth said: “Increased online sales are not bringing in the profits that were anticipated and one reason for this is the complexity that returns from online sales create. We wanted to investigate the reasons why this might be the case, and what can be done to bring about a more profitable environment for the future.”

In a new report, published today (21 January), the researchers make a number of recommendations to improve the management of returns and increase profits from online sales. These include:

• Have a strategic plan to treat returns as a profit centre; understanding the true cost of returns and the potential opportunities in reducing this cost is a key step;
• Develop lean management thinking in returns to realise an effective omnichannel organisation;
• Manage the growing impact of returns to the business by simplifying and integrating IT systems;
• Make communications with customers and employees smarter as a low-cost initiative that reduces cost of returns and increases income from secondary sales;
• Participate in the circular economy to create net benefits in terms of cash, corporate social responsibility and reputation.

Co-author Dr Sally-Ann Krzyzaniak said: “Treating returns as assets with the potential to generate income and contribute to net margins is key to realising a profitable fully omnichannel shopping environment for the future. We suggest that making returns activity effectively a profit centre, led by senior management and with a cross-functional team engaged in maximising the benefit from returns would bring an impact on the bottom line and help ensure that retailers can continue to offer the service, such as free deliveries and returns, which today’s customers expect.”

Furthermore, report co-author Dr Regina Frei highlighted the importance of handling returns properly from a sustainability perspective. She said: “Recent publicity on plastics in the oceans shows how customers are driving environmental change. Retailers need to understand the environmental impact of returns as part of their CSR commitments and work towards a circular economy, where products are repaired, refurbished, re-manufactured and reused, or materials recycled.”

The report was produced by researchers from the University of Portsmouth on behalf of the ECR Community Shrinkage and On-shelf Availability Group, a retailer-manufacturer working group focused on creating new ways to better manage the issues of on-shelf availability, shrink and food waste.

They carried out a comprehensive investigation involving a desk study of 100 retailers’ online returns policies; a review of other existing studies; conducted four in-depth case studies with major UK retailers, including over 25 interviews, observations and site visits; and held structured interviews with another 17 retailers in the UK and Europe.

John Fonteijn, Chair of the ECR Community Shrinkage and On-shelf Availability Group, added: “This research offers new insights in how organisations should start to think about product returns, how they should organise themselves, how they should collect the right data to know the true cost of a return, and to start applying management techniques such as lean, a technique used successfully on forward logistics, and yet to be proven in the management of reverse logistics. The report also highlights the need to see product returns in the context of an organisation’s sustainability strategy, and to explore how returns can fit with the circular economy.

“For our members and other retailers around the world, facing this tsunami of product returns, I’m confident that this will be a timely and welcome report. Retailing is fast moving away from a simple bricks and mortar operation only, and with the growth in e-commerce, the importance of managing the product returns process, ensuring the organisation remains profitable and losses due to theft and fraud are minimised, will become ever more relevant.”