Executive Briefings

How the Returns Process Can Be a 'Ticking Time Bomb' for Multichannel Retailers

A conversation with Tom Enright, research director of Gartner.

How the Returns Process Can Be a ‘Ticking Time Bomb’ for Multichannel Retailers

When it comes to handling online orders, it's hard enough for retailers to fulfill the forward part of their supply chains. Even more challenging is the returns portion. Many consumers are accustomed to using e-commerce sites as virtual fitting rooms – ordering a quantity of product, then returning whatever doesn't fit or satisfy their needs. What’s more, they expect to be able to do this for free. Retailers compound the problem by failing clearly to inform buyers about their returns policy, which for many remains an afterthought. In this interview, conducted at Gartner's Supply Chain Executive Summit in Phoenix, Ariz., Enright talks about the firm's recent client survey on returns, and offers advice as to how this practice can be efficiently managed as part of a "full-circle" approach to supply-chain management.

Q: You just completed a report entitled “The Ticking Time Bomb of Multichannel Retailing.” How did you approach this study?

A: Enright: We surveyed about 300 companies late last year. Most were retailers, but there were also consumer product companies who had a direct-to-consumer or dotcom channel. We asked them a bunch of questions about multichannel retailing in general: What’s happening out there? What are you doing? What kinds of things are you seeing?

When we looked at the statistics related to returns, we found some worrying signs. For example, only one in two retailers was reselling returned products at full price. And returns policies were almost anti-consumer – they’re trying to suppress the volume of returns. Yet one of the biggest reasons that consumers abandon carts online is they don’t like the retailer’s shipping or returns policies. So there’s something of a conflict between the way retailers are trying to suppress returns, and the desire of consumers for favorable returns policies as a reward for being loyal to those retailers.

Q: That’s always been an issue with catalog merchandising. The problem, I guess, is made even more complex by the huge volumes that are involved in e-commerce transactions.

A: Enright: Absolutely. If you look at the clothing area, all online shopping has done is move the fitting room from the store to consumers’ homes. They’re ordering four items online, then sending three back. And if a retailer’s policy doesn’t allow them to do that free of charge, they’ll find a retailer who does.

Q: Doesn’t a free-returns policy encourage that behavior, and result in higher costs for the retailer?

A: Enright: To some degree. But they’re getting additional revenue from the sales in the first place. The net effect is of benefit to them.

Q: What do you mean by a “ticking time bomb”?

A: Enright: It refers to the interrelationship of a number of events. If you want to increase the volume of sales, you need a flexible and attractive returns policy. However, that generates additional returns. So you need to go to the next step, improving your reverse logistics processes, so that you can resell the additional returns at full price. If you do just one part of it, then nothing really changes. The ticking time bomb element is that unless the retailer can offer a holistic process, both internally and externally, then the consumer will go elsewhere.

Q: So a free-returns policy is just as important as free shipping, as a ticket for admission to the world of e-commerce?

A: Enright: Yes. Nearly two-thirds of consumers will review the retailer’s returns policy before they buy anything. The days of being surprised by a returns policy when you want to send something back are rapidly disappearing. Consumers are educating themselves before they even check out.

Q: How have your clients achieved success in making returns policies work?

A: Enright: One of the things they do is avoid having a blanket policy that applies to all consumers. We know that a very small percentage of consumers generate a disproportionate amount of returns volumes. We also know that a relatively small amount of the assortment generates a large amount of the returns. So they focus on the consumers and products that are responsible for most of the returns. They might say, you are a very loyal consumer, therefore I’m going to give you a more flexible returns policy, to ensure that I can retain the dollars that you’re spending with me.

It’s not just about making returns flexible. You have to deal with the reasons they happen in the first place. The main reason why people return product has to do with “It wasn’t quite what I thought it was going to be.” You need to use processes such as master data management and product information management to give the online consumers accurate information about the products they’re ordering.

Q: When a retailer identifies particular customers as heavy users of the returns process, are there ways in which they can target those individuals, to offset their impact on the bottom line?

A: Enright: There are. If you look at the percentage of consumers who generate the most returns, some might be very loyal, and others might be occasional shoppers who return a lot of the things they order. One tactic might be to give everybody three or four free returns a year. Most consumers would never return that volume, so that will be an attractive policy to them. But those who plan to return fifty products a year will be put off by it. Many retailers don’t want to say this, but there are some consumers they don’t want, because they cost a lot of net margin at the end of the day.

Q: Is it possible to follow the example of Amazon.com’s Amazon Prime service, where you would pay a certain amount of money then get free returns over the course of a year? Or do customers object to the idea of charging anything for returns?

A: Enright: There’s a lot of backlash to that point of view. One of the things we see happening in the future – maybe two or three years away – is the idea of retailers collaborating on having a subscription around returns. It would be similar to Amazon Prime, but with multiple retailers subscribing to it. But there’s still a lot of pushback from consumers around anything having to do with paying for returns.

Q: What about the physical side? What best practices are you seeing, from companies that are doing a good job of getting items back quickly for resale?

A: Enright: Most supply chains are built as a pipe from supplier to market, and they can cope with a certain amount of returns coming back the other way. When the volume gets too big, it affects their ability to launch product in the first place. If you view your supply chain as a circle, then you’ve given yourself a fighting chance of making it happen. But in order to do that, all of the disciplines around handling a return need to be just as robust as those around getting the product to the buyer in the first place. The days of last week’s returns languishing in the corner of the stockroom until somebody’s got some time to push them back to the D.C. have got to disappear. They’re costing time and money in terms of reselling the product.

We do see a correlation between retailers who are very good at handling returns, and their decision to outsource some or all of that process to a third party. Clothing, in particular, often needs to be steamed, hung and re-ticketed. Most retailers don’t have those facilities on site. That’s where a third party might come in, essentially to act as a manufacturer to some degree, in preparing those products for resale.

Q: I imagine it’s quite different if you’re selling apparel versus consumer electronics, where the reason for the return might be perceived or actual defects in the product.

A: Enright: It is, and it slows the whole process down. We’re not saying you should be able to resell a hundred percent of everything you get back, but for those retailers who know that returns are problematic, it’s even more important to provide the information accurately the first time around, so that the consumer doesn’t have a reason to send it back. Defects are going to happen, repairs are going to be needed. It’s the ones that don’t require that process that retailers need to focus on.

Resource Link:
Gartner

When it comes to handling online orders, it's hard enough for retailers to fulfill the forward part of their supply chains. Even more challenging is the returns portion. Many consumers are accustomed to using e-commerce sites as virtual fitting rooms – ordering a quantity of product, then returning whatever doesn't fit or satisfy their needs. What’s more, they expect to be able to do this for free. Retailers compound the problem by failing clearly to inform buyers about their returns policy, which for many remains an afterthought. In this interview, conducted at Gartner's Supply Chain Executive Summit in Phoenix, Ariz., Enright talks about the firm's recent client survey on returns, and offers advice as to how this practice can be efficiently managed as part of a "full-circle" approach to supply-chain management.

Q: You just completed a report entitled “The Ticking Time Bomb of Multichannel Retailing.” How did you approach this study?

A: Enright: We surveyed about 300 companies late last year. Most were retailers, but there were also consumer product companies who had a direct-to-consumer or dotcom channel. We asked them a bunch of questions about multichannel retailing in general: What’s happening out there? What are you doing? What kinds of things are you seeing?

When we looked at the statistics related to returns, we found some worrying signs. For example, only one in two retailers was reselling returned products at full price. And returns policies were almost anti-consumer – they’re trying to suppress the volume of returns. Yet one of the biggest reasons that consumers abandon carts online is they don’t like the retailer’s shipping or returns policies. So there’s something of a conflict between the way retailers are trying to suppress returns, and the desire of consumers for favorable returns policies as a reward for being loyal to those retailers.

Q: That’s always been an issue with catalog merchandising. The problem, I guess, is made even more complex by the huge volumes that are involved in e-commerce transactions.

A: Enright: Absolutely. If you look at the clothing area, all online shopping has done is move the fitting room from the store to consumers’ homes. They’re ordering four items online, then sending three back. And if a retailer’s policy doesn’t allow them to do that free of charge, they’ll find a retailer who does.

Q: Doesn’t a free-returns policy encourage that behavior, and result in higher costs for the retailer?

A: Enright: To some degree. But they’re getting additional revenue from the sales in the first place. The net effect is of benefit to them.

Q: What do you mean by a “ticking time bomb”?

A: Enright: It refers to the interrelationship of a number of events. If you want to increase the volume of sales, you need a flexible and attractive returns policy. However, that generates additional returns. So you need to go to the next step, improving your reverse logistics processes, so that you can resell the additional returns at full price. If you do just one part of it, then nothing really changes. The ticking time bomb element is that unless the retailer can offer a holistic process, both internally and externally, then the consumer will go elsewhere.

Q: So a free-returns policy is just as important as free shipping, as a ticket for admission to the world of e-commerce?

A: Enright: Yes. Nearly two-thirds of consumers will review the retailer’s returns policy before they buy anything. The days of being surprised by a returns policy when you want to send something back are rapidly disappearing. Consumers are educating themselves before they even check out.

Q: How have your clients achieved success in making returns policies work?

A: Enright: One of the things they do is avoid having a blanket policy that applies to all consumers. We know that a very small percentage of consumers generate a disproportionate amount of returns volumes. We also know that a relatively small amount of the assortment generates a large amount of the returns. So they focus on the consumers and products that are responsible for most of the returns. They might say, you are a very loyal consumer, therefore I’m going to give you a more flexible returns policy, to ensure that I can retain the dollars that you’re spending with me.

It’s not just about making returns flexible. You have to deal with the reasons they happen in the first place. The main reason why people return product has to do with “It wasn’t quite what I thought it was going to be.” You need to use processes such as master data management and product information management to give the online consumers accurate information about the products they’re ordering.

Q: When a retailer identifies particular customers as heavy users of the returns process, are there ways in which they can target those individuals, to offset their impact on the bottom line?

A: Enright: There are. If you look at the percentage of consumers who generate the most returns, some might be very loyal, and others might be occasional shoppers who return a lot of the things they order. One tactic might be to give everybody three or four free returns a year. Most consumers would never return that volume, so that will be an attractive policy to them. But those who plan to return fifty products a year will be put off by it. Many retailers don’t want to say this, but there are some consumers they don’t want, because they cost a lot of net margin at the end of the day.

Q: Is it possible to follow the example of Amazon.com’s Amazon Prime service, where you would pay a certain amount of money then get free returns over the course of a year? Or do customers object to the idea of charging anything for returns?

A: Enright: There’s a lot of backlash to that point of view. One of the things we see happening in the future – maybe two or three years away – is the idea of retailers collaborating on having a subscription around returns. It would be similar to Amazon Prime, but with multiple retailers subscribing to it. But there’s still a lot of pushback from consumers around anything having to do with paying for returns.

Q: What about the physical side? What best practices are you seeing, from companies that are doing a good job of getting items back quickly for resale?

A: Enright: Most supply chains are built as a pipe from supplier to market, and they can cope with a certain amount of returns coming back the other way. When the volume gets too big, it affects their ability to launch product in the first place. If you view your supply chain as a circle, then you’ve given yourself a fighting chance of making it happen. But in order to do that, all of the disciplines around handling a return need to be just as robust as those around getting the product to the buyer in the first place. The days of last week’s returns languishing in the corner of the stockroom until somebody’s got some time to push them back to the D.C. have got to disappear. They’re costing time and money in terms of reselling the product.

We do see a correlation between retailers who are very good at handling returns, and their decision to outsource some or all of that process to a third party. Clothing, in particular, often needs to be steamed, hung and re-ticketed. Most retailers don’t have those facilities on site. That’s where a third party might come in, essentially to act as a manufacturer to some degree, in preparing those products for resale.

Q: I imagine it’s quite different if you’re selling apparel versus consumer electronics, where the reason for the return might be perceived or actual defects in the product.

A: Enright: It is, and it slows the whole process down. We’re not saying you should be able to resell a hundred percent of everything you get back, but for those retailers who know that returns are problematic, it’s even more important to provide the information accurately the first time around, so that the consumer doesn’t have a reason to send it back. Defects are going to happen, repairs are going to be needed. It’s the ones that don’t require that process that retailers need to focus on.

Resource Link:
Gartner

How the Returns Process Can Be a ‘Ticking Time Bomb’ for Multichannel Retailers