Returns Are a Headache for Retailers as Shipping Costs Rise

Consumers Are Returning Items More Often

Over the past few years, retailers have observed steady increases in the combined value of post-holiday returns. B-Stock Solutions, a company that helps liquidate these returns for companies like Best Buy (BBY) and Walmart (WMT), estimates that there have been over $112 billion worth of returns this year, up from $95 billion in 2019. Industry analysts attribute this to retailers offering extended return windows and the continued growth of online shopping.

Retail consultants report that online sales are two to three times more likely to result in returns than brick-and-mortar purchases. In fact, 18% of all online sales are currently returned, up by nearly 10 percentage points since 2019, according to the National Retail Federation. In some cases, these returns are not even worth it for retailers, given increased parcel costs from providers like UPS (UPS) and FedEx (FDX).

Parcel Costs and Extended Windows Add to the Issue

Business consultant AlixPartners says that increased costs associated with returning goods bought online is giving rise to so-called “returnless refunds,” as both UPS and FedEx expect their service costs to rise an average of 5.9% this year. For lower-margin or consumable goods, many returns flat-out don’t make sense, and estimates say the value of these “returnless refunds” could top $4.4 billion for 2021.

Extended return windows complicate matters even more for retailers. Companies have traditionally allowed post-holiday returns beyond 30 days, but the pandemic has pushed things well past that point. As such, Walmart (WMT), Target (TGT), Bed Bath & Beyond (BBBY), and Macy’s (M) are all permitting returns within a 90-day window. These policies make things more difficult for retailers. For example, products such as winter clothing returned in the springtime would have to be resold at a seasonal discount.

Omicron Could Play a Part

The continued spread of the Omicron variant and rising coronavirus case numbers could further exacerbate retailer headaches when it comes to returns. Shoppers who worry about getting sick may shy away from in-store returns, compounding shipping challenges. Retailers are responding to the pandemic and continued growth of online shopping by looking for ways to cut down on returns altogether.

One such example is Drapr, a virtual-fitting room technology that Gap (GPS) purchased last year. Likewise, a Saks.com algorithm helps customers choose their size when buying an unfamiliar brand by referring to sizing information from brands they already own.

Reselling platforms are also growing in scope. Companies such as Shopify (SHOP) and Poshmark (POSH) allow retailers to sell returned or excess inventory for higher prices. Overall, retailers face diminished long-term profit margins as consumer returns run rampant. Even when the pandemic subsides, innovation will be key to overcoming issues in the age of online shopping.

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