Pile Up
More concerned with getting goods out the door, many e-retailers have overlooked the likelihood of merchandise coming back.
By Mary Wagner
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.
A quarterly survey of 50 top retail Web sites by the E-tailing Group, a Chicago-based consulting firm, turned up similar findings. Only 10% of the merchants provided returns information on the shipping label, something most catalogers do. And most required customers to pay return shipping charges themselves.
Bright spots, black marks
But other Internet merchants have adopted friendlier policies, according to Extraprise. “Companies able to look beyond the transaction, and focus on service and building long-term relationships, are likely to thrive in the next phase of e-commerce,” says Hybels. Nordstrom earned high marks for waiving the costs of return shipping if customers bought the item using its credit card, as did L.L. Bean. J. Crew won praise for its policy that customers who ship returns from their home must pay a processing charge, while those who bring returns to one of its stores incur no such costs, giving shoppers another reason to visit the stores and perhaps buy something else.
Others in the survey were singled out for less than customer-friendly returns policies. Sears and Wal-Mart were criticized for requiring their Web site customers to call a local store to determine whether it carries a particular product before it can be returned there. And Best Buy was chided for applying different return policies for goods purchased through different channels. Goods purchased online, for instance, can’t be returned to a Best Buy store.
Return policies are the most visible part of reverse logistics to the consumer. But once returned goods have left the consumer’s doorstep, they’ve only just begun a long journey. Say a consumer has decided to return a toaster purchased online. First, she must get authorization to return the toaster—ideally from the Web site and without having to contact a call center. Then the toaster must be handed off to a shipper. Back at the retailer’s processing point, staffers evaluate the toaster and sort it into one of several channels of disposition. That may mean sending it back to the supplier, depending on its agreement with the retailer. It may mean restocking the item, if it’s in perfect condition, or sending it on to secondary markets if the in-store option isn’t available.
State of denial?
Not surprisingly, return logistics tend to be stickier for online retailers than for catalogers or physical stores. In their relatively short lives, many Web merchants have concentrated so much on outward-bound fulfillment and acquiring customers that few have spent equal time on the reverse flow or on keeping their customers. “Retailers in denial over their returns problem need to wake up,” McCullough says. “One out of every 10 products sold will be returned.”
Industry sources say longtime brick-and-mortar retailers have learned that doing a good job on the backend means that returns don’t have to siphon off profits. Rogers offers a dramatic example from a physical retailer he won’t identify, other than to say it’s one of the country’s top five. The company’s decision to put more effort into reverse logistics in the mid-1990s produced near-immediate results. “The first year they really started managing their asset recovery, it accounted for 25% of their bottom line profit,” he says. “So this can be a profit drain or a profit center, depending on how it’s handled.”
In another example, Genco has been processing holiday returns for a top e-retailer since January. The merchant recently added several new product lines and planned to discard any returned merchandise. But Genco went to work on more attractive options. Though results won’t be final until this summer, Genco aims to recoup up to 110% of the value of on any returns negotiated with the supplier. In a twist, the extra 10% comes from handling fees assessed to none other than the supplier.
Even when suppliers won’t take back merchandise, retailers still can recover 20 to 80% of the value, depending on the condition of the goods and how they’re resold, says Don Ziegler, director of e-commerce business development at Genco. In fact, when goods can’t be returned to the supplier or to inventory, there’s a growing secondary market, ranging from outlet stores that stock their shelves with returns, to dollar stores and aggregators that buy returns in bulk to sell here or abroad.
Some secondary market solutions are new and Web-enabled, and a few old-timers are getting renewed attention. Most take a detour around the landfill. Rogers and others say a surprising number of merchants don’t evaluate returns for restocking or resale by others. They simply toss otherwise salvageable goods, fearing the costs of handling returns. Yet if properly handled, returns processing can be a better solution than sending goods to landfills at prices of $1,500 to $3,000 per dumpster.
“There are lots of outlets for recovered goods, and there didn’t used to be,” says Rogers. “For online retailers, it’s probably worth dealing with companies that know this area. There are third-parties who for a commission will broker the goods for you in the secondary market.”
Task masters
Other retailers are learning to bundle their logistics. To handle returns from the customer’s door to the final destination, retailers often use several vendors to sort, refurbish, reshelf and mark goods for liquidation.
A model like Return Exchange’s, currently in beta testing with about 10 customers, makes return logistics simpler for online retailers by combing multiple functions. The company even developed software to authorize customer returns online, by building a database for returns history to reward good customers with prompt authorization or delay credit for suspicious returns. The complexity of the task is leading to specialization.
Many fulfillment contractors will handle returns as part of the logistics continuum, but some consultants contend that a single distribution center can’t adequately support goods flowing in both directions. Some firms are developing dedicated facilities that separate the two. Genco, which already has fulfillment warehouse and distributions centers throughout the country, expects to complete its two returns-only e-commerce centers this year, with as many as six other regional centers to follow.
Finally, there’s the gavel solution. The Internet has made an already-big secondary market for returns and overstocks even bigger. Retailers are liquidating returns with direct-to-consumer sales on auction sites such as eBay as well as through specialized auction sites. The Return Exchange model recovers added value for retailers by taking goods from the merchant and auctioning them directly to consumers through its own or other auction sites. In traditional distribution channels, liquidated merchandise typically must change hands several times—with a mark-up each time—before reaching the consumer. The direct-to-consumer auctions thus snare value for the retailer that would otherwise be shared through the distribution chain.
As e-merchants come under increasing pressure to build the bottom line, marketing and fulfillment may get the lion’s share of attention. Returns processing, though hardly sexy stuff, is an overlooked source of cash, Bianco and others say. “Our challenge,” he adds, “is to get Internet retailers to understand that this is a way to get rid of headaches and increase margins.”
OK, where do you want ’em?
Devising a returns policy that keeps customers happy without draining resources can be difficult enough, but Web retailers that solve the problem still must decide what to do with the merchandise once the customer sends it back. The messy, inconvenient reality of returned goods often has little place in the business plans of many e-retail startups. But those lacking an effective system soon may see their desktops doubling as warehouse space for returned merchandise—and the costs mounting.
Brick-and-mortar retailers use a four-step process to sort and dispose of returned goods once they’re received. Rather than letting goods pile up on the conference room floor, e-retailers with no brick-and-mortar channel must find a way to economically outsource the same functions if they hope to recapture any value in returned merchandise.
—Inspecting: The warehouse equivalent of emergency-room triage, this separates returns into those in shape to go directly back into the sales channel, those that need to be restored first, and those that should be liquidated.
—Refurbishing: A little steaming may restore an unworn, returned jacket to top condition, allowing it to be sold for what it is: new. But even if the returned merchandise is headed for a secondary market, retailers can recoup more value if tops and bottoms match and all the product’s parts or pieces are intact.
—Restocking: With no brick-and-mortar store in which to reshelf or rehang returned goods, agreements with suppliers concerning returns become critical. If the product can’t be returned to the supplier’s inventory, the retailer will need to find a secondary outlet to get it back in the commerce flow.
—Dumping: Some stores depend on other retailers’ returns for their own inventory. Auction sites offer retailers a way to dispose of still-usable merchandise that they can’t resell. When other markets can’t be found for returns—or when handling and processing costs exceed the anticipated recapture of value—the best destination may be the landfill.
Reverse logistics 101
How can retailers and manufacturers recoup top dollar from returned goods? Where are the secondary market outlets for recovered goods? Can one distribution center handle forward and backward logistics equally well?
These questions, long simmering among brick-and-mortar retailers, are moving toward the front burner as the Web accelerates the growth of commerce. Reverse logistics is increasingly recognized as potential competitive tool—not merely a back-office function. The topic has even spawned its own think tank, the Reverse Logistics Executive Council, headquartered at the University of Nevada business school in Reno.
The not-for-profit consortium of retailers, manufacturers and academicians has taken on reverse logistics to identify best practices that reduce costs. Recent reports on reverse logistics in the consumer electronics and apparel industries can be downloaded from the group’s Web site at www.rlec.org; as can an entire book on the subject, Going Backwards: Reverse Logistics Trends and Practices.
“The biggest challenge facing online retailers in the area of returns is just getting them to pay attention to it,” says council director Dale Rogers. “They’re starting to—because clearly it’s a big cost.” Reverse logistics, he adds, represents about 0.5% of the nation’s GDP. “The opportunity for third-party providers that want to manage that process for online retailers is huge.”
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