February 2, 2001, 12:00 AM

A new way to handle e-returns is growing in Lillian Vernon`s laboratory

Lillian Vernon’s experiment with returns to neighborhood mail centers could change the way e-retailers treat returns--and make returns more efficient.

Sure, the Christmas carols are over by Dec. 26. But in retail, it’s still weeks before the Fat Lady sings. A flood of returns trails the holiday shopping blitz as surely as tax day arrives on April 15th, and a look at the season’s sales performance isn’t complete unless returns are part of the picture.

Though the volume of returns swells with the higher volume of shopping that marks the fourth quarter, the problem of returns is an ongoing one for retailers. And nowhere is it more problematic than online. “There are so many virtual companies with no brick-and-mortar stores. Where can you take merchandise back to?” says Shannon Hauser, CEO of Returns Online, which provides turnkey returns-handling services for web merchants. “When you buy something on the Internet, you may not have the faintest idea of where it’s actually coming from.” Even veteran catalogers and brick-and-mortar players with returns-handling operations nailed find new challenges in expanding to the online channel. Web sales increase demand on order tracking and merchandise disposition systems, and Internet time has raised customers’ expectations that their accounts should be credited for returns right away.

A new offering launched by direct merchant Lillian Vernon Corp. in the last week of December is aiming to take on these challenges and more. Lillian Vernon customers in the Dallas-Fort Worth area who want to return merchandise can take the item into any of more than 100 designated neighborhood mail centers.

Network members include third-party mail centers such as Eagle Postal Centers, Associated Mail & Parcel Centers, and other local and independently owned centers. Participating centers started by accessing Lillian Vernon’s database online to credit the customers’ account in as little as 24 hours. Later, the centers were to receive the option of installing dedicated software to streamline the process further. All participating mail centers offer Lillian Vernon customers lower shipping rates on their returns, under a group deal negotiated by Lillian Vernon.

Rye, N.Y.-based Lillian Vernon regards the effort as a test and so far, the company is mum on how it’s working. Lillian Vernon has been on the web since 1995 and now offers the top-selling 1,300 of its 6,000-plus SKUs online. With a long history in direct marketing, it already had a system in place for handling returns, says David Hochberg, vice president of public affairs and Lillian Vernon’s son. “We’ve been doing this for 50 years. We’ve got the infrastructure, people and procedures to process returns in a cost-effective manner. The issue for us is customer convenience,” he says. “If you’re selling remote to your customers, you want to offer them as much convenience and as many options as possible.”

But even if the returns operation runs like a well-oiled machine, retailers are always happy to deliver equal service at less cost. Hochberg says that when the company evaluates the program in March, it will look not only at how many customers used the service, but whether it reduced Lillian Vernon’s cost of processing returns. And Hochberg’s company won’t be the only one eager to see the results.

A major test

The program is also a major test in the retail arena for its creator, logistics services vendor Newgistics. The Austin, Texas, company has bundled software, shipping and merchandise disposition solutions for e-returns in a turnkey program called ReturnValet, which it hopes to roll out to other markets and retailers this year. Newgistics provides the database and software to track merchandise returns and credit, while the local network of mail centers provides drop-off locations. Program partners USF Processors, a US Freightways subsidiary, and R. R. Donnelley Logistics provide warehousing and distribution and local hauling services.

Lillian Vernon won’t say how much it spends on processing returns. But Newgistics says the system could save retail customers from 10% to 25%. Potential savings represent a range rather than a hard and fast figure because many e-retailers don’t know what they’re spending on returns. Return rates online vary among product categories, largely mirroring those for catalogs. “Books and CDs aren’t returned very often, but apparel is 20% and above,” estimates David Schatsky, an analyst with Jupiter Research, New York. Although return rates approximate those in the offline world, e-retailers may be paying more per returned item because, newer to the game, they haven’t racked up the experience to inform streamlining. “The logistics game is all about refining processes over time,” Schatsky says. “If you’ve been selling online for only a few years, you really haven’t hit your stride in terms of optimizing performance. A lot of online retailers don’t have a handle on their fulfillment costs in general, especially those that do it in-house.”

“We’ve gotten cost estimates from as low as $10 per item to $50 dollars per item,” says Hauser, whose clients include several major multi-channel retailers. Returns Online has developed a formula that factors in fixed and variable costs ranging from wage rates to shipping and utility charges to help retailers determine what returns are costing them. “It can be a huge piece of profitability,” she says.

In fact, by 2003, merchants will spend about $9 billion a year to process an estimated $11.5 billion in returned goods purchased online, according to Forrester Research, Cambridge, Mass. Jupiter offers another perspective on the ultimate cost of e-returns. A total of 42% of online shoppers surveyed said they’d increase online purchases and 46% of browsers said they’d buy if returns were easier. The bottom line: poorly handled e-returns processing not only eats into budgets on the cost side, but also limits revenue growth by putting off shoppers.

Newgistics’ service seeks to reduce retailers’ returns cost through consolidating returns. “We aggregate the returned items in a box at the mail centers. They’re picked up from once a day to once a week depending on volume by Donnelley trucks that make a pass through the Dallas area, like a milk run, and brought to USF Processors,” says a Newgistics spokeswoman.

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