August 12, 2002, 12:00 AM

Dealing with returns

Even returned merchandise comes with a silver lining.

Returns have been regarded by online retailers as an unwanted headache, and all too frequently, an expensive one. Gartner Inc.’s Gartner G2 Retail Services Group estimates that returns are costing retailers anywhere from 0.2% to as much as 25% of sales. Forrester Research has estimated that next year, retailers will spend $9 billion to process some $11.5 billion in returned goods purchased online.

And then there’s the uncalculated cost of lost sales. In a Jupiter Research survey, 42% of online shoppers and 46% of browsers said they’d increase online purchases if returns were easier. That means that poorly handled e-returns processing not only eats into budgets on the cost side, but limits growth on the revenue side by discouraging online buying.

Retailers are, more than ever, on the lookout for ways to take out costs wherever they can to improve margins-and returns are fertile ground. That dynamic has created a profitable business for returns processing vendors willing to solve the problem on retailers’ behalf.

It’s no small task. Unlike other aspects of Internet retailing that can be managed entirely online, returns processing spans the physical and virtual worlds. Since solutions providers must have a foot in both camps, they’ve banded together from various places in the industry in partnerships and alliances to create end-to-end solutions that blend the web’s data processing capacities with the manual processing required to move packages from point A to point B.

Soup to nuts

Newgistics Inc., Spiegel-Hermes General Service LLC, USFreightways Corp.’s USF Processors and R.R. Donnelly Logistics, for example, provide an end-to-end solution under the ReturnValet brand. For Eddie Bauer, Lillian Vernon and others, ReturnValet provides a bundled credit processing, warehousing, distribution and logistics package that gets returned merchandise to where it can be disposed of most efficiently. Returns Online Inc. offers similar e-returns processing services through a series of partnerships and alliances, as do The Return Exchange Inc. and others.

While those solutions are aimed at squeezing cost out of processing, the returned goods arena also has given rise to another increasingly popular type of vendor alliance aimed squarely at getting more on the dollar for e-returns by reselling goods at other sites. Returns processors and technology developers with software to launch auctions online have partnered to build a brisk secondary marketplace for returned goods on eBay and similar sites.

Returns Online, for example, has partnered with auction management services provider Dealtree Corp. to launch online auctions of returned goods. Reverse logistics provider Genco Distribution System has provided returned and surplus merchandise for online auction under partnerships with auction services companies Auctionworks and Slingshot Solutions, in which Genco has a 35% stake. Like-new goods are marketed online under one brand; more distressed merchandise is clearly identified as such and offered under a different brand. Similarly, ReturnBuy, partially owned by eBay, launches online auctions for returned and surplus goods under three brands, depending on the condition of merchandise.

A competitive advantage

The auctions scoop out more on the dollar for retailers than other means of liquidation; as high as 78% on the original cost of goods for certain product categories such as consumer electronics, says Genco, though it’s a lower figure for other types of products. Across the board, online auctions can recover for retailers an average three times what they would if the same goods were sold for salvage, Genco estimates.

Need will likely continue to spark creative invention such as the logistics and auction-focused partnerships that have sprung up so far to address e-returns, for as online purchasing grows, so will the volume of returns. The biggest shift in thinking that will support innovative solutions is already occurring among the most forward-thinking e-retailers, analysts say. That’s the realization that at the end of the day, returns aren’t really a problem so much as a competitive opportunity to distinguish oneself from the rest of the retailer pack with the kind of customer service that makes returns painless for online shoppers.

“Three years ago some companies began experimenting with making returns less difficult. They saw not a substantial increase in returns but a substantial increase in sales,” says David Ellin, senior vice president of sales and marketing at outsourced fulfillment and returns management company Innotrac Corp. “They learned that if you made it easier to return items, customers trusted the retailer more.”

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