To deal with returns, retailers need a deeper understanding of who returns, why, how often and when, and then the systems to act on it, writes Alex Kulinchenko, growth enablement director, retail at Intellias.
The retail industry first started talking about returns back in 2012, or rather a small number of start-up tech companies started talking about it, as they hoped to at least mitigate a problem that retailers themselves preferred to keep quiet about. This was hardly surprising given that they knew returns were eating into already pressured margins, but they didn’t really know by how much.
Fast forward to today, with UK shoppers now returning £7bn of purchases a year (Barclaycard), the cost of returns has still not been fully calculated. Even allowing for those that have contracted with point solution software providers to make some headway into the problem, most retailers still lack an all-encompassing cross-divisional returns strategy. And so, returns remain a burden on the balance sheet and meanwhile the numbers only go up.
Are returns reduction initiatives working?
There have been attempts to mitigate the problem through investment in circular schemes that see returned goods offered for sale second-hand. However, there is as yet no evidence that they offset lost margin, even allowing for the high cost of setting up and running these schemes. Or ‘Try before you Buy’ services, such as the programme recently announced by Rixo, may be attractive to customers but are not profitable and may influence customers to use as a short-term rental service. Both these schemes are also affected by the fact that up to 70% of products will never return to stock in the first place and so are not available for reuse.
And charging for returns, which is becoming more popular, is unlikely to come anywhere near to covering all potential losses; after all, the outward delivery cost cannot be recovered and the 28 days customers are legally allowed to take before returning goods reduces the chance that they can be put back on sale at full price.
Meanwhile, retailers’ costs keep climbing, given how they are now making returns easy for customers. Merchants say this is a direct cause of the rising serial returners trend and yet they have no choice but to comply because 54% of them also think the returns policy now influences customers’ decisions about where to shop.
Time for a rethink
A review of current processes may well be the start of rethinking the whole returns strategy. For instance, are serial returners loyal and high net worth customers or are they one-off buyers? Unless this information is known, it becomes impossible to create a sliding scale for treating each customer cohort appropriately, and to continue giving valuable customers an even better returns experience while discouraging the casual purchaser from taking advantage of over-generous returns policies.
And what about the smart customer who takes advantage of free delivery by buying a large order and then returning what they never needed in the first place? Or the growing number of people who buy partywear with no intention of keeping it after the party is over. Or those who are ‘outfitting’ purely for social media, where the soon-to-be returned garment never makes it past their grid on Instagram? But is this simply the fault of the retailer making it too easy to return and making the customer less committed to making a purchase upfront? When all aspects of returns are considered, it is clear they are a major margin killer, made even worse during a cost-of-living crisis where the customer is more price conscious and yet the retailer’s cost of service continues to rise due to inflation.
The answer is in the data
A major part of the answer lies in retailers’ hands, in the data that they already hold. They must have access to more granular returns data, to the level reported by PowerReviews, which looked into why consumers return and found that the top three reasons were: Item doesn’t fit, Item doesn’t match description, and Don’t like the item(s).
Armed with deep data, retailers can then develop software that can deliver value across the whole IT ecosystem, not just at single points of distress. Once retailers better understand customer preferences they can then get a much higher reduction in returns from point solutions that measure and profile body size, ensuring that, in a world of non-standard sizing, customers get the product that they want to wear and to keep. Retailers can complement this by providing personalised search and merchandising, filtering to display only relevant products, and improving description quality using Generative AI to tackle the problem of returns at source – at the point of product discovery.
These initiatives will then pay dividends on the logistics side, including the development of systems to handle returned stock that can’t be re-sold, reporting tools for third party delivery companies in order to speed up the returns process, and possibly a smart calculator that increases the price of certain items in recognition of their vulnerability to being returned.
The most effective route to value
A review of all the top statistical sources will always show that the problem of returns is becoming more burdensome. At the same time, retailers are competing not just with their existing direct competitors and category-agnostic marketplaces, like Amazon, but new entrants into their home territories that have the resources to buy their way into the market.
A successful result depends on partnering with a third party technology company that has domain expertise, the ability to develop cutting-edge, headless solutions that remove the cost and burden of building these capabilities in-house, and a willingness to work with existing apps where their capability can be enhanced rather than replaced.
Alex Kulinchenko, growth enablement director, retail at Intellias