In an effort to keep up with the competition, fashion retailers are instituting customer-centric return policies. But they may not be aware of the total financial impact these services have on their bottom line.
According to consulting and technology firm Newmine, one of the issues plaguing retail is a lack of accountability when it comes to reducing returns. Additionally, retailers are often missing an organization-wide strategy on and visibility into return activities. Newmine is aiming to foster collaboration between retailers’ teams through an artificial intelligence-powered platform dubbed Chief Returns Officer, seeking to help not only minimize return costs but also prevent consumers from returning goods by solving product issues in real time.
“We named our software Chief Returns Officer because there is no position like that in retail today,” said Navjit Bhasin, CEO and founder of Newmine. “Returns touch every department in the enterprise, but there’s rarely an executive in the business responsible for unifying silos under a shared vision of reducing returns and optimizing the returns management process…Because returns are an enterprise problem that requires collaborative effort, moving the organization forward requires ownership from the very top to both direct functional area accountability and incentivize success.”
Here, Bhasin, Newmine chief operating officer Mark Holmes and Mark Lightbody, partner at Newmine, discuss the cause and financial cost of returns and how a data-driven approach can help to reduce return rates.
Sourcing Journal: What is the full economic and environmental cost of returns for fashion retailers?
Navjit Bhasin: For fashion retailers, this is a difficult time. Every dollar matters when it comes to building a thriving business that also has longevity. We did a comprehensive modeling with a CFO of a prominent shoe retailer to find out how much returns cost retailers, and we discovered that if you reduce your returns by $1 million, you add $0.5 million to your bottom line. And it only takes a modest decrease in return rate percentage to see that kind of money flow back to your bottom line. That’s a huge savings opportunity in a time where retailers are struggling.
The full environmental cost is something we’re actively working to quantify. The fashion industry is already a significant contributor to waste and carbon emissions, and the influx of online returns has added to the problem. Fashion retailers often need to choose whether to dispose of a returned garment or refurbish and sell the garment at a loss. That’s how you end up with 5 billion pounds of returned goods being thrown into landfill each year. Add to that the greenhouse gasses from product going back and forth, and packaging waste from single-use plastic, and there’s a lot to be accounted for when calculating full cost.
SJ: Why do you identify returns as the “most expensive problem” plaguing retail?
MH: For any given return, which average 20 percent to 30 percent of sales for online fashion retailers, the cost of shipping, receiving, refurbishing, repackaging, restocking and then reselling a returned item often exceeds the original margin on the sale of the item. Simply stated, retailers lose money on all returns, even if they resell them, putting increased pressure on gaining margins on the sales that are not returned to cover this overhead.
NB: Retailers are building their business on net sales and not taking into account the full cost of returns. When you’re looking at a financial statement that doesn’t have gross or returns, then you’re losing visibility and masking over the problem.
Mark Lightbody: When you think about it, if I say ‘I’m a $100-million business, and I have a 20 percent overall returns rate,’ my $100-million business is really an $80-million business.
SJ: How is Newmine working with retailers to reduce their return rates?
NB: Because returns have become such a big challenge for retailers, there has been a growing ecosystem of partners focused on managing the result of returns, which includes the need for returns transaction management, reverse logistics and product refurbishment and remarketing. We looked at the market and saw one big piece of the puzzle missing: How can retailers reduce returns, not just manage them?
We built Chief Returns Officer, an AI-powered returns reduction platform, to get to the root cause of returns. We have spoken to several retailers who are spending 90 percent of their time collecting and analyzing all the data needed to understand their returns problem, and then spend the other 10 percent taking action to reduce the occurrence of returns. What Chief Returns Officer does for them is synthesize all necessary data, analyze it and based on the root cause, assign cross-collaborative tasks to different departments in the enterprise that lead to an overall reduction. It does all this in-season as well, rather than looking at returns in a postmortem, which doesn’t give you an opportunity to take corrective action.
MH: Newmine is a niche company of only very experienced retail leaders. We have all lived this challenge and have novel ideas on how to mitigate the impact of returns. When we created Chief Returns Officer, we developed a product that we all desperately wanted when we were retailers.
SJ: How does Newmine’s Chief Returns Officer platform work?
NB: : Two main challenges when it comes to reducing returns are the access to real-time, data-driven returns intelligence and the lack of resources. So, by the time retailers have realized they have a returns problem, it’s too late in the season to take corrective action. Chief Returns Officer uses AI, machine learning, predictive and prescriptive analytics, as well as a trained natural language processing algorithm that analyzes customer reviews in order to identify why returns are happening in the first place. But imagine if retailers were alerted in real-time to returns issues, as well as given the solutions to correct the issue.
Let’s say you’re selling a shirt that all of a sudden has a 35 percent return rate. Chief Returns Officer analyzes all the data and identifies that it’s primarily the red shirts being returned the most. The NLP [natural language processing algorithm] discovers multiple reviews mention that “Hey, the red shirt is actually orange.” Chief Returns Officer alerts the retailer and suggests a few actions that can be taken immediately to prevent future occurrences of returns, such as pulling stock for QA or adjusting the image on the website to better match the product. It sounds simple in concept, but these kinds of problems happen all the time, fly under the radar and cause revenue leakage. For retailers doing it manually, it’s a complex and labor-intensive process, but Chief Returns Officer makes it easy.
ML: It also never sleeps. The system is always working even when your team can’t. It’s like having your customers whispering in your ear and telling you exactly what you need to fix and how.
SJ: What opportunities exist for retailers if they get the return experience right?
MH: Given the state of business today, the opportunities are the gains you’d see to your bottom line and cash flow savings. Retailers don’t need to lose hard earned money because of returns.
ML: Returns are also part of the customer’s experience with you. There have been studies that show that 80 percent of first-time customers who experience a return will not shop with you ever again. And that’s why we say the best return is one that never has to happen. Customers aren’t buying products thinking, “I can’t wait to return this!”
MH: Returning is a hassle, even with no-questions-asked return policies and the most streamlined experience possible.
SJ: How can fashion brands use technology to learn from consumer returns? What lessons can be funneled into product development or merchandise allocation?
NB: Returns data informs and supports every phase of the product lifecycle for fashion brands. Chief Returns Officer can identify errors in fulfillment, recommend updates to customer communications and enhance a QC team’s ability to make informed decisions, to name a few. For product development and merchandising, having access to return data at their fingertips allows for better product assortment analysis and design evaluation.