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Recent growth in online shopping has triggered a new boom – in returns of unwanted goods back to retailers. Returns policies have become a new competitive battleground for retailers. Consumers want to be able to return goods quickly, easily and cheaply, but this can be very costly to retailers. Senior managers at the Henley Centre for Customer Management recently identified the growing cost of returns as something that kept them awake at night. Make returns policies too generous and retailers may win the sale, but the cost of returns will eat into profits. “Reverse e-retailing” is a growing challenge, but also presents opportunities.

How did returns become such a big issue?

UK consumers have traditionally had no general legal right to return goods to a retailer merely because they have changed their mind (as distinct from the goods being faulty). However, the rule of caveat emptor – let the buyer beware – has often been bettered by retailers who voluntarily give customers rights to return unwanted purchases. The theory is to remove a barrier to purchase at the point of sale - a buyer does not have to worry about the risk of a product being unsuitable, because they can take it back for a refund. Generally, retailers have also used generous returns policies to support a higher price position. Some offers have been very generous – Marks and Spencer for a long while had no time limit for returning unwanted goods, but by 2005, price competition from new, more efficient retailers meant it had to cut its costs, along with the generosity of its returns policy.

Returns in an online world

For online sales to consumers, the principle of caveat emptor is softened by statutory legislation. In the early days of online retailing, governments in Europe were keen to encourage its take up. In the UK, a legacy of this EU-derived thinking is the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. The underlying thinking was that consumers were in a weak position relative to the seller because they couldn’t directly examine their intended purchases and had to rely on the seller’s description. With some exceptions, the regulations therefore give consumers a statutory right within 14 days of receiving goods to cancel their purchase without giving a reason why, and a further 14 days to return the goods. The retailer must also refund the standard delivery charge that the customer has paid, and cannot require the customer to take a credit note.

As online shopping became more mainstream (reaching 21% of retail sales value in December 2019 and briefly peaking at 37% during lockdown in January 2021, according to ONS data), competition between online retailers has become fiercer. As with the previous evolution of in-store retailing, returns policy has become an important element of competitive positioning. Online retailers cannot keep their costs down by going below the minimum statutory return rights, but often offer more to win customers – typically more time to return goods, free returns and collection from home. This is important, because research consistently shows that for many categories of online purchases, typically two-thirds of consumers routinely check returns policies before buying.

Too easy to return online shopping?

Rising expectations of online shoppers give online retailers a headache. Even the statutory return requirements eat into profits, and being too generous could wipe them out completely.

Although it is hard to get accurate industry-wide figures, returns are becoming a big issue. Consultants KPMG estimated that it costs twice as much to handle inward returns as initial delivery to the customer. The UK Ecommerce Association estimated that around a quarter of fashion clothing bought online is returned, with the 16-34 age group most likely to return goods. A study by Barclaycard found that 30% of shoppers deliberately over-purchase and subsequently return unwanted items and 19% admitted to ordering multiple versions of the same item so they could make their mind up when they are delivered.

The pandemic appears to have changed shoppers’ attitudes to returns. A survey by the research agency Mintel found that 38% of UK online shoppers claimed that during the pandemic they had become more confident in returning online purchases. It appeared that "buy, try, return" had become embedded behaviour of younger shoppers and this approach had spread to previously more cautious older shoppers. Mintel's survey found that 49% of all UK online shoppers had returned goods in the previous year, rising to 60% for 16–34-year-olds.

New opportunities for 'reverse e-retailing'

A growing business sector of “returns intermediaries” has seen rising levels of online returns as an opportunity. It handles returns for multiple retailers at scale, more efficiently than individual retailers can do by handling the process themselves. A returns system needs to be efficient for many reasons. Working capital can be tied up in merchandise sitting in customers’ homes or awaiting processing in warehouses. Warehouse costs and the time taken to sort, check and categorise returns eat into margins. Legislation, and consumers’ changing expectations about putting returned goods back on sale have become more challenging. For seasonal or fashion related products, time taken to process goods and put them back on sale can miss the selling season, so they must be sold at a big end-of-season markdown.

An army of entrepreneurs and eBay retailers have emerged to buy up job lots of returned goods to sell on as used. For some low value products, such as cheap fashion clothing, it just isn’t worth trying to put them on sale again after returns processing costs are included. So, these are likely to be sent straight to landfill, with cost and environmental implications.

Are returns an opportunity for retailers?

What should online retailers do about expensive-to-serve “serial returners”, who repeatedly buy multiple items with the intention of only keeping one? Some retailers have terminated the accounts of such customers. A more subtle strategy is to make it more difficult for customers to return goods in the hope that they will return less, however, this may simply alienate otherwise loyal customers.

Other retailers have seen returns as an opportunity to adjust their business model and to adapt to what customers are willing to pay, so that serial returners can be profitable. It is a well-established principle of retailing that the more opportunities customers have to see goods, the more chances of them being bought. So, in this environment, competitive advantage would go to retailers who make their returns fast and efficient, with selling prices that allow enough margin for multiple returns.

Strategic choices

Investing in online retailing has for some time seemed like a one-way bet – without the costs of physical stores, online retailing could only grow in volume and profitability. So, it was an awkward awakening during 2021 when the online fashion retailers ASOS and Boohoo – previous Stock Market stars - reported lower than expected profits, the latter reporting that 40% of sales were returned, dragging its profits down.

One strategic solution is to reduce the cause of returns. Retailers are investing in providing more guidance to buyers on sizing and use improved visual imagery. That way, customers won’t get an unwanted surprise when they open their goods and see them for real.

Online retailers may be able to subsidise the cost of returns in the short-term as a means of growing market share, but this is not sustainable in the long-term. To be sustainable, they must match the benefits of easy returns with a price premium that customers are willing to pay.

At a time of uncertainty about the post-pandemic role of online versus in-store shopping, the rising cost of returns may even be a saviour for High Streets. High Street shops can be very efficient at bringing together buyers and sellers. Goods can be immediately inspected, so reducing the rate of returns. If they do need to be returned, the cost falls on the customer and not on the retailer’s profits. For retailers of high volume, low price-point goods, such as Primark, it becomes easy to understand why they have placed less strategic importance on online sales.

Professor Adrian Palmer

Head of Marketing & Reputation
Published 7 January 2022
Topics:
Leading insights