December 26, 2000, 9:55 AM

Pile Up

When entrepreneur Vince Bianco visited the California headquarters of an Internet retailer last year, he knew he’d stumbled onto the next big thing-literally. “I had to walk around boxes piled up in the halls and the conference room,” he recalls. “Any returned merchandise was going back to the corporate office, and there it sat.”

The problem wasn’t a higher-than-usual rate of returns. Instead, working with limited systems and lacking a warehouse, the recently launched e-retailer simply hadn’t figured out what to do with the goods customers were sending back.

Bianco was soon at work on a solution, along with rivals who have spotted the same opportunity. In fact, a market is fast emerging for third parties hoping to solve the return problem for e-retailers. Bianco’s fledgling company, the Return Exchange, is among a growing number of players motivated by estimates that online shopping will generate 2.8 billion parcels destined for residences across the United States by 2003. The market is in the math: Figure a conservative return rate of about 15%, subtract perishables that won’t get returned as well as goods returned to brick-and-mortar stores, and you’re left with a staggering 300 million packages heading back from whence they came.

“That’s a lot of packages,” says Pete Rector of Genco Distribution System, a longtime reverse logistics contractor for brick-and-mortar stores that has expanded to Web merchants. “It’s about a five-fold increase from 63 million parcels that went back last year.”

Forrester Research, Cambridge, Mass., calculates the market in terms of dollars. Consumers returned $600 million in goods purchased online during the 1999 holiday shopping season alone, estimates Forrester analyst Stacie McCullough. “Return logistics,” she adds, “is an e-marketplace waiting to happen.”

All systems are go

By limiting the number of SKUs, according to the Forrester survey, merchants and manufacturers selling online were able to fill orders at an average rate of about 400 per day. But most reported problems managing returns. Among the issues for many dot-coms and even brick-and-mortar merchants with electronic storefronts: a lack of warehouse space, a dearth of systems for sorting and disposing of returned merchandise, and pricing structures inadequate to cover the cost of handling returns. “It just hasn’t been a priority,” says Dale Rogers, director of the Reverse Logistics Executive Council, a professional and research organization based at the University of Nevada business school in Reno. “Returns are important, but you’ve got to get product out the door first.”

Nevertheless, returns can constitute a significant drain on slim (make that nonexistent) profits for online retailers. In the brick-and-mortar world, Rogers figures, returns account for about 5% of retailers’ logistics costs. But he can’t say for sure whether this figure also applies online, since many e-retailers don’t adequately track how much returns are costing them. For example, some 43% of e-retailers surveyed by Forrester acknowledged they couldn’t calculate their return costs because they don’t separate those made to their brick-and-mortar stores.

About two-thirds of e-retailers recently polled by Jupiter Communications reported return rates of less than 5%. Genco estimates the figure is more than twice as high, 13 to 15% on average, with categories such as apparel much higher. But even at 15%, online returns so far are well below the rate for catalog purchases, which averaged 30% in a recent survey by Operations & Fulfillment magazine.

What accounts for the lower online rate? Some industry sources think it stems from the fact that online shopping-and returning-hasn’t reached the comfort level of catalog or in-store shopping. More than one-third of consumers polled by Jupiter say they would limit their purchases at Internet merchants posting unclear directions for returns. But as shoppers become more familiar with the Web, they may not be nearly as cautious. In fact, the ease of clicking to buy may result in a larger number of ill-considered-and likelier to be returned-purchases.

“The impulse buy is built into Internet shopping,” says Malcolm MacLachlan, an analyst with International Data Corp., Framingham, Mass. With Internet merchants pursuing increasingly large wallet shares, and with technologies like pop-up windows enticing shoppers, the purchasing action online can more closely resemble spur-of-the-moment buys on cable TV’s QVC or though 800-number infomercials.

While these issues aren’t unique to Internet shopping, they’re seen as more of a problem online than with catalogers. “Internet sellers who are taking 400 orders a day now are concerned about what happens if they get bigger,” Rector says. “If they ride the hockey-stick upward curve of buying online, they’ll have returns riding up right along with them.”

The same elements that made the early vision of online selling attractive to retailers-an automated flow of goods from supplier to consumer through electronic storefronts unburdened by overhead expenses like warehouses-can become drawbacks when the flow of merchandise is reversed. Establishing a returns policy is only a piece of what Internet merchants must do to effectively handle reverse logistics. But to their customers, it’s the most important piece. “The process of negotiating returns policies, packaging, and even postage,” says e-service consultant David Hybels, “is a great indicator of how far online merchants have come on customer service.”

Hybels’ firm, Extraprise Advisors, Boston, recently compared the returns policies of 50 pure dot-com and click-and-mortar retailers, finding that online stores have work to do in making returns as easy for customers as it is to order. Most retail sites provided some information on their return policies, but much of it was loaded with fine print detailing the conditions and fees. More than one-third of pure dot-coms required consumers to pay for return shipping of damaged items versus 20% of click-and-mortar sites. And 26% overall gave shipping instructions so unclear that surveyors had to make phone calls for an explanation. On top of that, dot-coms were three times as likely as click-and-mortar retailers to levy a restocking fee.

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