Returns are a core part of the online retail proposition. Retailers understand that they must accept a higher rate of returns as a trade-off for providing customers with the confidence to buy items unseen.
The issue is that returns are expensive, and an increasing number of returns are set to take a significant toll on the margins of unprepared retailers, as a new online shopping trend is popularised.
I’m talking about try-before-you-buy (TBYB), a new shopping trend that enables customers to order multiple items before deciding what they’d like to keep. There is no up-front cost; shoppers directly pay for products they keep after a certain number of days – usually 30 days. They return unwanted items and are never charged.
There is no doubt that try-before-you-buy is an attractive offer for consumers, and retailers may covet the incremental sales and goodwill that it generates.
ASOS introduced its try-before-you-buy scheme late last year, and chief executive Nick Beighton highlighted the plan as enhancing the customer proposition when the retailer reported a 23 per cent rise in UK sales for the four months to 31st December.
Also, a recent report from Mintel highlighted that one in five young clothing consumers now buy fashion items from ASOS. The report continues that more than a third of all clothing shoppers would like the option to order clothes online but only pay once they decide to keep them, rising to half of the young people aged 16-24.
For fashion retailers to keep up with the juggernaut that is ASOS, they will have to consider launching similar try-before-you-buy services. Retailers outside of fashion also need to take heed as TBYB options are increasing in other sectors, with online businesses including Casper Mattresses and GhD launching similar services. This is no surprise, as almost one-fifth of shoppers across all age ranges say they would buy more items per month if ‘try before you buy’ was an option.
While the advantages of TBYB are clear, we at Brightpearl felt there were hidden dangers to these services that were not being discussed. We decided to look a little closer into this trend, researching the opinions of 200 retailers and 4,000 consumers, and found some unsettling insights.
Our study found that about a quarter on online retailers are expected to adopt the try-before-you-buy model over the coming year, and the cost of returns is set to triple as a result. With returns already costing UK retailers £60bn a year, this figure may skyrocket to £180bn due to the complexities of TBYB returns.
Our research also looked at the impact of TBYB on consumer behaviour, finding that three quarters would definitely or maybe buy more items if offered a try-before-you-buy option, with shoppers ordering on average four extra items each month. Some 87% would return up to seven purchases, with 85% of consumers still expecting retailers to provide free returns.
It’s no surprise then that more than half of retailers told us that their margins are already being strongly impacted by the process handling and packaging returns, and 70% said they are worried they will be squeezed further as TBYB intensifies.
There is no doubt that even the most prominent retailers find returns a problem. But the introduction of TBYB services as a way to keep up with the big players, like ASOS, could have the unfortunate effect of overwhelming retailers – many of which are already reaching crisis point – with a massive surge of intentional returns that may undermine their profits.
The predicted growth in returns suggests they are going to become a much more significant part of the online retail supply chain than most ever imagined. What can be done about it?
Capitalising on TBYB without cannibalising margins
Try-before-you-buy removes another barrier to purchase - potentially leading to uplifts in sales. However, retailers must be aware that their return rates will significantly increase, alongside their costs. For example, when you consider handling, transport, admin and possible repacking, the costs of returning an item into your supply chain could be triple that of delivering it.
But, the rapid rate of adoption of TBYB means online retailers can’t afford to sit on the fence. They need to make a decision soon on whether to adopt these services, especially as the big players already doing so. In my view, widespread adoption of TBYB will quickly be a retail formality, the key for retailers is how to capitalise on these services without cannibalising margins.
It’s not easy to do. More and more merchants are already being forced to recoup return costs to protect the bottom line, and this will only increase with the introduction of TBYB. 46.7% of retailers now say they charge for ecommerce returns in 2018, up from 39.1% the year before.
Placing charges on returns is one option, but it is at odds with the demands of customers. 9 out of 10 consumers want free returns, so the onus should be on finding a solution that allows retailers to capitalise on TBYB without punishing consumers.
Right now, the TBYB equation isn’t working in most retailers favour, and it won’t do without an investment in technology. Potential disaster awaits business owners that don’t have the right framework and solutions in place to manage returns. Consumers sending back many more items a month may prompt an unmanageable tsunami of profits and the logistical and financial implications could lead to significant problems.
However, despite these concerns, the vast majority of retailers are not making any moves to pre-emptively tackle the problem. Almost two-thirds of retailers are not deploying technology solutions to process returns. This is despite the complexity of managing them — the average returned purchase passing through seven people before it’s listed for resale.
To truly capitalise on TBYB, businesses must have active warehouse systems in place which ensure end-to-end visibility over the returns process, ideally from a single platform. This allows retailers to glean better information around customer returns, for example, information about items that have been kept or returned in the past, or enhanced insight into the performance of various product categories - which can help improve accuracy with inventory forecasting.
Centralizing returns data means retailers can process and pre-authorize returns, giving customers their refund faster. It also allows merchants to identify opportunistic fraudsters much earlier, leading to reduced costs.
Investment in back-office automation, for example, automated shipping, could also help to reduce the number of human errors as well as freeing warehouse workers from time-consuming administrative tasks, enabling them to focus on getting a product back out to market quicker.
I remain optimistic that TBYB is a great opportunity for retail. Organisations that have the systems and technology in place to meet this challenge can gain a competitive advantage and strengthen customer loyalty. Those that don’t could end up seeing their profit washed away by the returns tsunami.
The full “Try Before You Buy: A Returns Tsunami for Retail” report is available for download on Brightpearl’s website here.
Author: Derek O’Carroll, chief executive at Brightpearl
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