‘Tis the season for free shipping, but it also means more returns.
An HRC Advisory study found that online returns were a big problem for 95 percent of retailers and as much as 30 percent of orders were sent back. Add free shipping to the mix and its likely returns will get even worse.
“Returns are creeping up as shipping costs are free,” said Farla Efros of HRC. Inbound Logistics found that reverse logistics costs for consumer goods were on average 8.1 percent of total sales. Efros said those costs have climbed to 10 percent of total sales. Retailers are being forced to build more and bigger fulfillment centers and returns are a key part of the chain.
“The returns have climbed in general over the last two years,” said Mike Lazar of TrueShip. He puts the blame squarely on Amazon and Zappos. Both offer free shipping returns and now other retailers are trying to match that in order to hold onto customers. However, the costs to compete with these retail giants might crush these smaller companies that have thin margins. Lazar said that it could cost as much as 8 to 12 percent of the sale and that directly impacts the bottom line.
Retailers though have adjusted the way they look at shipping and now consider it a marketing cost as opposed to an operational cost. In order to grab the customers, many have to offer the shipping. Unfortunately, if you aren’t an Amazon vendor or have a Zappos model, free shipping may backfire.
Lazar said that Amazon vendors do such a huge volume of business that they can absorb the returns. The benefits outweigh the costs. The Zappos model is built on the idea that customers are mostly trying on shoes and not actually buying everything they order. Returns at Zappos are as high as 40 percent, but they use a U.S. postal label that doesn’t cost the company unless it gets used.
The best-case scenario for a return is that the customer comes to a physical store with the return and buys more items — increasing the original sale. It’s even better if the rejected items can be returned to the stock at the physical store and resold.
Unfortunately, many products ordered online aren’t carried in physical stores and retailers are stuck with singular items that they can’t put on a shelf and end up shipping either back to the distribution center or paying to return to a vendor. Resulting in yet another shipping cost.
Apparel generally has a 70 percent margin, so when it is returned the shipping costs pull that figure closer to 60 percent. Throw in a markdown if the return isn’t timely and the margins can get reduced to just 20 percent.
Research firm IHL Group found that North American consumers return an estimated $246.3 billion worth of goods annually. Now that most can return items for free, that number is expected to skyrocket. To make matters worse, UPS and FedEx are increasing prices for the holidays. Retailers are beginning to learn just how expensive free can be.