Retailers coping with returns would do well to reflect on Leo Tolstoy’s famous opener to his novel, Anna Karenina: “All happy families are alike; each unhappy family is unhappy in its own way.” From a retailer’s perspective, all satisfied customers are alike, but each customer returning an item is likely to be unhappy for a widely diverse range of reasons. Increasingly, it’s crucial to know what those are. Taking a more detailed look at why returns happen and what are the options for dealing with them can reduce costs and increase customer satisfaction.

Traditionally, financial losses from returns have been considered a painful, but irreducible part of doing business. Now, however, the retail business faces an uncomfortable fact. "Our data shows that return rates in e-commerce are anywhere between two to eight times higher compared to purchases made in brick-and-mortar stores, but normally it’s about five times higher for the same item,” said Rob Zomok, president of Inmar Supply Chain Network. While e-commerce still represents only a minority of retail revenue, it is set to grow relentlessly, eventually accounting for the majority of consumer purchases in at least some categories. 

The bad news, therefore, is that returns are going to increase, not just in real terms, but as a proportion of sales. In the U.S. alone, Statista estimates return deliveries will cost $550 billion by 2020, 75.2% more than four years prior — and that number doesn’t include restocking expenses or inventory losses.

The good news, however, is that learning to handle returns more intelligently can become a competitive advantage and a boon to the bottom line. “I don’t view the trend as a problem, necessarily,” Zomok said. “It’s an opportunity in two ways: One is that there are ways to control costs and use the data from returns to help you reduce them over time and manage them more efficiently. That counts for both brick-and-mortar and e-tail. 

“But the second is in the case of pure e-tail, where you only get a set number of touch-points with a customer, all via a screen. In fact, half of a consumer’s experience could be the return process. If e-tailers fail to view that as a chance to deepen their relationship with the consumer, they’re missing half of the opportunity,” Zomok said. Retailers currently tend to collect only rudimentary information about reasons for return, at best — usually a choice of four or five boxes to tick.

One of the touch points could be a follow-up call or email with the customer, but most retailers fail to do so, Zomok says: “It could actually be a positive experience — imagine that!"

Overall, there are two main issues with returns. The first is making sure the process works smoothly from the consumer’s point of view, in order to minimize discouraging them from a further purchase. The second is figuring out how to maximize revenue from the returned items. At Walmart, there’s a keen awareness that improvements in one lead to improvements in the other. “We want to realize the value of the product and, at the same time, realize the value to the customer of getting returns right,” said Linne Fulcher, vice president of returns at Walmart.

A Key Customer Experience 

Customers rank free returns and exchanges as their No. 2 reason for making online purchases — second only to free shipping — and 96% say they would shop again with a retailer based on an “easy” or “very easy” return experience, according to a 2018 survey by post-purchase customer engagement platform Narvar.

The stakes are high, Fulcher says: “We can’t run the play we always ran.”  

Walmart has taken a fresh, end-to-end approach to returns, in order to figure out how to stay on top in the new environment. “We’re digging into the customer experience and what it takes to make a return,” Fulcher said. “We realized it was still like it was back in the mid-80s. We wanted to figure out: How do we make it faster? And, especially when you add e-commerce into the mix, what changes does that make?”

Retailers have been slow to realize that customers don’t want to have to treat a company’s online operations as different from its brick-and-mortar business. For a long time, it was impossible to return an online purchase to a physical store, and retailers even kept the respective supply chains totally separate. Smart retailers with both online and in-store capabilities have learned to knit the two together. Walmart’s approach has been to form a partnership between its US brick-and-mortar and dot.com operations, to work on returns as one big team across the enterprise. After only a short time, the results have been impressive enough that the international division has reached out and asked the team to work with them. 

“The biggest challenge is giving the customer a seamless feeling when they interact with us,” Fulcher said. “How do we prevent her from feeling like it’s Channel A versus Channel B? That’s our biggest focus. We’ve put systems in place so that you can bring even Walmart Marketplace returns into a store, giving the same returns experience as if you bought it in the store.” If customers are returning goods via parcel delivery, Walmart also offers speedy refunds (instead of the typical two weeks) and free shipping.

Liquidation Limits

The other piece of the puzzle is maximizing the value of a returned product. “Companies are handling returns the same way they always did — load ‘em up, ship ‘em back to a return service,” Fulcher said. “Liquidations give you pennies on the dollar. And this could be a perfectly fine, new product that you could still move; it was just undeliverable.” 

The secondary market for returned goods, or products that have otherwise fallen out of the mainstream retail sales environment, has exploded in the last few years. Zac Rogers, an operations and supply chain professor at Colorado State University, estimated that post-retail sales, which includes returns and overstock items, are growing at an estimated 7.5% a year, reaching $560 billion for 2018. According to online retail news site, Retail Dive, nine of the top 10 U.S. retailers are selling returned and overstock goods via their own B2B liquidation marketplaces, and there are now more Nordstrom Rack stores than regular Nordstrom locations. 

“There are ways to use the data to reduce costs over time and to handle returns more efficiently,” Zomok said. “The data you capture during a return is different from the data on a recall, and it can be very useful in improving your business processes. In some cases, you may not even want to reduce returns if, say, you’re Warby Parker, where it’s part of the business model. But you need to make the returns process more efficient by reducing the number of touches and getting it back where it needs to go the quickest.”

Using a third-party data-driven technology-enabled services company that’s specialized in digging into the data can really make a difference, he said. “A lot of business platforms, even the large ones like Oracle, don’t give you the granular visibility on returns you truly need to drive the business.” 

“Better returns management means having the intelligence to know why things are being returned and diligently doing something about it,” Fulcher said. “We cannot continue to let these figures grow unabated. The idea is to sell stuff and to keep it sold. Considering that, you’d have thought we in the retail space would have put more thought into it.” 

Walmart is developing a model that helps the retailer take the best decision path for what to do with returns, preferably avoiding liquidation. “We figure out how to get the most value out of a returned item,” Fulcher said. “Even if it’s subpar, you get the most value on any product by keeping it as far upstream as you can. It may not get back in the store, but if I start transporting it down to reverse logistics, I’ll never make good; it’s just a question of how to get the most value out of the end of the product’s lifecycle. So it’s about what do you do with the product wisely.”

A data-smart, more holistic approach to returns can deliver immediate reductions in return rates of 5% — with further gains over time, Zomok says. 

“We also see improvements in choosing the best dispositions of returns that are not going to go back into their primary market, and we work with retailers to get as much as 40% higher recovery rate for those goods. That comes from using the data, and the visibility retailers can get through the data; insight that their own home-grown platforms don’t provide, which they need in order to truly improve the business,” he said.

And retailers need to get more detailed insight into options and costs, Fulcher says.

“Instead of putting a returned item on a truck to the returns center, you might be better donating it from the store and getting the tax benefit,” he said. “We also take account of sustainability. Nobody wants to throw things away, but we look at costs to ship items back downstream and identify ways to run recycling, donation and/or disposal programs from store level.”

Often what works best for the customer works best for the retailer.

“We can offer the customer a deal — they can get a rebate for an item with a scuff mark on it, so we don’t need to send it to the liquidator, keeping it out of the supply chain.” The secondary market is so huge in part because consumers love the discounts offered at liquidation outlets. “Let’s give that bargain to our customer.” Fulcher said. 

Putting It Together    

Overall, the real magic happens when retailers combine a better customer experience with a more intelligent way of monetizing returns.

“The best return for a customer is the one she never has to make because we helped her choose the best product for her needs, and it worked when she got it home,” Fulcher said. Obviously, that’s better for the retailer, too. 

Problems with product quality or inadequate packaging that lead to damage in transit, for example, can go unidentified for months.

“Retailers and manufacturers have gotten really sloppy about quality issues. In clothing, I will never solve the issue of the customer who buys a medium and a large so they can try them on at home for the best size. But that’s not where I need to start,” Fulcher said. “What if you bring back a product because it broke two weeks after you bought it, or you couldn’t figure out how to choose the right item in the first place?” He cites products such as mini-blinds and TV wall brackets, which require careful measurement, as having high return rates. “We’re putting effort into understanding why items are returned, and applying diligence to helping the customer buy the products that meets their needs. We’re also pushing on suppliers to fix poor quality, or we’ll just stop stocking their products.”

Ultimately, there’s a need for greater visibility into an increasingly complex retail environment, Zomok says.

“Many e-tailers are trying to market their goods across many platforms, including their own website, eBay, Amazon, and Walmart marketplace, and then trying to manage returns across several platforms,” he said. “It can become very complicated, and currently I’m seeing almost nobody who has one pane of glass through which to look at all of that returns activity. That’s going to be very important in the future.”

Fulcher says his team at Walmart has gotten really good at knowing the cost of every step of returning a product, including receiving it in store, sending it to a liquidator, transporting it elsewhere for disposal or recycling, or offering a customer a discount. All of this adds up to a better customer experience and smaller losses from returns.

“Now, I can give you better options as a customer,” he said. “I want to delight you in a way that’s also cost-effective to me.”