What on­line re­tail­ers hate about hol­i­day shop­ping

The Pak Banker - - OPINION - Adam Min­ter

For re­tail­ers, De­cem­ber isn't just the hol­i­day shop­ping sea­son. It's also hol­i­day re­turn sea­son, when con­sumers de­cide to send back all the stuff that didn't fit, work or meet ex­pec­ta­tions. It's an ex­pen­sive rit­ual. Ac­cord­ing to the Na­tional Re­tail Fed­er­a­tion, re­turns ac­count for around 8 per­cent of to­tal an­nual re­tail sales. On­line re­tail­ers face an even heav­ier bur­den, with re­turns av­er­ag­ing 25 per­cent of all goods pur­chased and as much as half of ap­parel. If those per­cent­ages hold through the 2017 hol­i­days, on­line re­tail­ers could face $32.1 bil­lion worth of re­turns on pro­jected hol­i­day­sea­son sales of $107 bil­lion, ac­cord­ing to the con­sult­ing firm CBRE.

That's a heavy ex­pense, and one rea­son that on­line re­tail­ers are prov­ing to be less prof­itable than the stores they are try­ing to re­place. In part, the prob­lem is that on­line re­tail­ers traded one set of ex­penses - store­front real es­tate - for costs that can turn out to be higher.

On­line re­tail's re­turn prob­lems date back to the early 2000s and the free-re­turn pol­icy in­tro­duced by the shoe mer­chant Zap­pos. It was a cus­tomer-pleas­ing move, let­ting cus­tomers or­der mul­ti­ple pairs of the same shoe in dif­fer­ent sizes and send­ing back all but the one that fit. In 2010, Zappo's chief ex­ec­u­tive Tony Hsieh re­vealed that re­turns ex­ceeded one-third of the com­pany's rev­enue. At a tra­di­tional shoe store, that would be a crip­pling ex­pense. At Zap­pos, which was ac­quired by Ama­zon in 2009, it was viewed as a tol­er­a­ble mar­ket­ing cost. The gam­bit helped shift cus­tomer ex­pec­ta­tions and cor­po­rate prac­tices. Ac­cord­ing to a 2016 UPS sur­vey on on­line re­tail cus­tomers, 60 per­cent now con­sider free ship­ping an es­sen­tial el­e­ment of the shop­ping ex­pe­ri­ence. As of 2015, roughly half of all on­line re­tail­ers, in­clud­ing Ama­zon, had free-re­turn poli­cies.

The ex­pense goes well be­yond free ship­ping. Once a prod­uct is re­turned, a re­tailer pays for it to be un­packed and as­sessed. Shoes and ap­parel worn only to try the fit might get an­other shot at full-price re­tail. But that's a small per­cent­age of ev­ery­thing that comes back used or dam­aged. Ac­cord­ing to Op­toro Inc., a Wash­ing­ton, D.C.based com­pany that helps re­tail­ers in­clud­ing Tar­get, Home De­pot and Best Buy man­age their re­turns, less than 10 per­cent of the mer­chan­dise it pro­cesses goes back to re­tail shelves. And ac­cord­ing to a re­cent sur­vey of 300 re­tail­ers, only 48 per­cent of what's re­turned can be resold at full price.

In­stead, com­pa­nies look for the op­tion that loses them the least money. For elec­tron­ics, that might mean rout­ing to a re­fur­bisher who cleans and fixes re­turned de­vices; for clothes, that might mean rout­ing to a Dol­lar Store; and for other items it might mean be­ing packed into a trailer and be­ing sold to a liq­uida­tor at auc­tion. Some re­tail­ers re­ceive as lit­tle as 15 cents on the dol­lar for things cus­tomers or­dered and didn't want. The bur­den of han­dling re­turns is one rea­son that ecom­merce com­pa­nies from Ama­zon to Alibaba are in­vest­ing in phys­i­cal stores. Ama­zon cus­tomers can now re­turn pack­ages to Ama­zonowned Whole Foods stores. For Ama­zon, that re­duces lo­gis­tics costs as­so­ci­ated with free re­turns, but also brings cus­tomers into stores where they're likely to shop.

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