The National Retail Federation (NRF) predicted a 13-percent year-over-year jump in online sales this November and December, reaching a whopping $222.3 billion. While confident consumer spending spells good news for brands’ bottom lines, the influx of orders stands to strain the retail supply chain to its breaking point.
Between persistent shipping delays, ballooning transportation costs and labor shortages, retailers have multiple hurdles to jump in pursuit of a successful holiday season. And according to a recently released report from commercial real estate group CBRE and logistics provider Optoro, a wave of post-holiday returns stands to see at least $66.7 billion worth of product pushed back into the reverse logistics system. Two out of three shoppers plan to return at least one gift during the holiday season, including apparel, toys and electronics—amounting to about 30 percent of all online purchases, the groups’ research showed.
While shoppers have come to expect free returns, managing those unwanted gifts will cost retailers dearly. Optoro’s reverse logistics research estimated that the average return cost for a $50 item will total $33, or 66 percent, of its original MSRP, taking into account transportation, processing, and discounting or liquidation. These costs have skyrocketed by 59 percent from the same period in 2020.
“The return process for an online order includes item pickup, handling and the many ‘touches’ needed to move the item back into inventory,” Optoro analysts wrote. Returns are typically sent to a store’s distribution facility, to a centralized returns center or to a manufacturer, where they may be repaired or refurbished. While some items in new condition may be put back in stock online or in stores, excess inventory and out-of-season products might be sold through discount channels or liquidators, sold in bulk to resellers, donated, or even destroyed.
More than 40 percent of shoppers surveyed by Optoro said they planned to begin their holiday shopping earlier this year, out of concerns about inventory availability and supply chain disruptions. The fact that consumers began checking loved ones off their lists as early as October could be a boon to retailers, as they’re likely to see some returns flow in earlier in the season than in years past. “Earlier holiday returns of top-quality merchandise could be put back on the shelf or made available online before Christmas, thereby giving retailers an opportunity to make more sales at full margin and reduce returns,” Optoro analysts wrote.
Savvy retailers are becoming more adept at managing the returns process in order to recoup losses. Querying shoppers online or by phone about the condition of an item they plan to return can help retailers assess whether the item needs to be shipped back to a distribution center or a manufacturer, bypassing unnecessary touch points. Some retailers have given consumers the option to keep or donate unwanted items, rather than incur costs on processing. They can also drive efficiency by implementing tech-driven automated decision-making processes, which route returns to the next most profitable channel.
Returns at physical retail locations are beneficial to brands, analysts wrote, as they allow associates to assess an item’s condition on-site to determine whether it can be re-shelved and sold. Giving shoppers the option to return their e-commerce purchases in-store cuts costs on call center labor, transportation, processing and discounts, ultimately getting goods back on shelves quicker to preserve their seasonality. “Maximizing opportunities to resell returned items is key to avoiding losses on liquidated returns,” they added.
Unfortunately for retailers, they’re unlikely to see an increase in brick-and-mortar returns this year. Optoro surveys found that consumer appetite for in-store returns dropped to 40 percent in 2020 and 39 percent in 2021, down from 67 percent in 2019, likely due to pandemic-related fears. With the spread of the Omicron variant this December, shoppers’ anxieties about visiting brick-and-mortar retail are apt to increase.
Most online purchases will instead be returned to reverse logistics facilities, which cost on average 20 percent more in space and labor capacity per item than forward logistics facilities, which are responsible for getting goods into shoppers’ hands. Retailers with reverse logistics facilities located closest to their consumers are better positioned to manage the rising carrier and trucking costs, Optoro analysts said.
According to CBRE’s data, warehouse space in the U.S. is extremely limited, with 23 industrial markets across the country having vacancy rates below the national average of 3.6 percent. A greater volume of retail sales this season will lead to more returns and a heightened demand for warehouse and distribution space. E-commerce growth alone is slated to result in more than 1.5 billion square feet of new construction over the next five years, the group wrote. Regardless of warehouse capacity and location, though, retailers are likely to have trouble keeping pace with a steady stream of returns this season due to labor shortages.
While they might be scrambling behind the scenes, retailers must present a polished front to shoppers in order to retain their business through the holidays and beyond, analysts wrote. “Effective real estate and supply chain management can only partially address” the challenges they’re feeling this season. Retailers also need to be laser-focused on implementing more sophisticated, automated processes to manage the flow of returns, as well as revamping point-of-sale processes so that shoppers can make more informed decisions. More in-depth sizing information and tools like virtual try-ons can help reduce the need for returns, they said.
“The solution starts with consumer-use data, product and packaging design and operational data,” analysts wrote. In order to keep up with the unbridled growth of e-commerce, retailers must “better understand why an item was returned, and how that should effectively influence [their] product offerings.”