Hidden Costs of Holiday Returns can Wreak Havoc on Bottom Line
By Tom Rittman, VP of marketing, The Retail Equation
Retailers around the world are gearing up for the hustle and bustle of the busiest time of year. Experts are projecting consumers will spend $602 billion this holiday season. And with billions in sales, there’s bound to be billions in merchandise returns, which can cause retailers to lose a significant profit margin.
However, the monetary drain of these lost sales does not end there. Additional “hidden” losses accrue when you factor in the time employees spend processing returns, evaluating the item’s resale potential, and restocking the returns. When an item must be discounted or, even worse, discarded after a return, it further compounds the company’s losses. There are also the administrative expenses of accounting for returns and managing the entire return system. For major chains, the costs can reach into the millions of dollars annually.
Below are the top seven hidden costs of returns:
1. Labor time and cost. Besides the staffing of the customer service role at the return counter, there are other aspects of labor including the time spent assessing the item’s condition, making it ready for re-sale (cleaning, tagging, folding, packaging), and placing it back on the selling floor or dispositioning it for other processes.
2. Credit/debit or other transaction fees. A retailer may typically see credit card interchange refunded, but not necessarily their transaction fees for authorization and settlement. So while the retailer may get back the majority of what they paid in fees, it is not every penny nor is a return a free transaction to them.
3. Restocking with markdowns. Even if an item is returned in re-sellable condition, it may be past its prime selling time. This might relate to the seasonality of the fashion or the status of the current model of the item. In many cases, items in this semi-out-of-date situation are subject to markdown discounts to clear the inventory from the selling floor, lowering the margin on that returned item.
4. Disposition of a non-sellable item. In many cases, the merchandise returned must have some extra action performed to determine whether it can be resold. Often this falls into a retailer’s reverse logistics process. The item may need to be sent to an interim location for inspection and testing. It may need to be re-packaged. It may need some or all of its accessories and manuals replaced. It may need to be returned to vendor for credit. It may need to be disposed. In all cases, it is removed from the selling floor, eliminating the possibility for the revenue and margin from the purchase.
5. Administrative costs. Depending on the destination of the returned item – back to the selling floor or out the back door – there are inventory and logging requirements to account for the item’s status and location. While modern supply chain systems help, tracking returned merchandise still requires attention to detail.
6. Shrink. Return rates and shrink are strongly correlated. The higher the store’s return rate, the higher its shrink. Studies show if a retailer takes actions to better control returns, shrink can be reduced by a significant amount.
7. The customer experience. While not a measurable cost like those above, the retailer’s relationship with their customer in this potentially negative encounter is paramount and, in fact, trumps all other costs. A fast, friendly, and flexible return experience is worth the retailer’s investment to ensure best customers keep their trust, and their spending, in the store’s brand.
Tom Rittman is VP of marketing for The Retail Equation, a leader in optimizing retailers’ revenue and margin by shaping behavior in every customer transaction.
Doug McMillon versus Jeff Bezos
Walmart International president and CEO Doug McMillon isn’t due to replace current Wal-Mart Stores president and CEO Mike Duke until February, but when he does the most pressing matter on a long list of priorities will be executing the company’s digital vision.
Being the CEO of Walmart is a job unlike any other. Walmart president and CEO Mike Duke’s successor will need to manage all the challenges inherent in an exceedingly complex global enterprise of 11,000 stores and more than two million employees with annual sales poised to surpass $500 billion. Adding to the challenge is the fact that Walmart has taken the position that it will leverage its size to be an agent of change on a range of societal issues. Consequently, the next CEO has an additional set of nontraditional stakeholders to satisfy beyond investors who want profits and dividend growth, customers who expect quality products and low prices and employees who require fair wages, benefits and advancement opportunities.
While an abundance of challenges await Walmart’s next CEO, e-commerce is the single most and winning in a digital world promises to be the issue that defines Walmart’s next CEO. Duke and his predecessor Lee Scott have both expressed regret at various times regarding Walmart’s e-commerce efforts. Scott lamented not recognizing the digital opportunity sooner during a nine year tenure as CEO that ended in 2009, while Duke has expressed regret for not accelerating e-commerce efforts earlier during a tenure that will have spanned five year when it ends in 2014.
More recently, the company has attempted to make up for lost time. During the past 18 months, Walmart appointed Neil Ashe as president and CEO of Global eCommerce, completed multiple acquisition of innovative companies that brought new talent and fresh thinking from the digital world. Major initiatives such as development of a new search engine were pursued and the e-commerce unit went on a hiring spree. Investments in e-commerce this year will impact Walmart’s earnings per share to the tune of 10 cents and Ashe is now a regular participant in the company’s quarterly conference calls where he recaps digital efforts.
The flurry of recent activity means Duke’s successor will have an e-commerce base on which to build. Walmart currently fares better than any of its old line brick and mortar competitors. Walmart.com typically ranks among the top 25 most frequently visited U.S. Web sites each month as tracked by comScore Media Metrix and the company has projected online sales this year will total $10 billion. Further evidence of Walmart’s heightened commitment to e-commerce and multichannel integration is likely to be evident during the upcoming holiday season which promises to be the most digital ever.
Even with the progress to date, there is a sense that Walmart is only scratching the surface with e-commerce while Amazon.com maintains breakneck growth, enters new categories and rapidly expands distribution capabilities to accommodate faster deliveries. Meanwhile, Walmart remains the most brick and mortar of the brick and mortar retailers. Its 11,000 stores encompass nearly 1.1 billion square feet, or roughly 38 square miles of selling space, 15 million square miles than the 23 square mile land mass of Manhattan.
Walmart’s vision – largely unrealized to date – is to leverage that expansive collection of physical assets to deliver a uniquely Walmart multichannel experience that can’t be replicated by competitors. Doing so will allow the company to drive global growth by gaining share of wallet with existing customers and attracting new ones to the fold. It will be up to Walmart’s next CEO to capitalize on new growth possibilities and ensure the company’s physical presence becomes an even more valuable asset rather than a liability.
This article first appeared in the fall edition of Walmart Supplier News and has been modified slightly as it appeared prior to the McMillon’s appointment as CEO.
Walmart dominated the airwaves during November
Walmart chief marketing and merchandising officer Duncan Mac Naughton told investors during an October meeting that the retailer would have the largest share of voice during the holiday season and that was certainly evident during November, according to data released this week from Kantar Media Ad Intelligence and Placed.
Walmart spent $57 million on television ads November 3-27 which enabled it to attract 34% of all visits to retail stores from November 28 through December 1. The investment was worth it as Walmart was able to achieve the lowest cost per visitor share point of any retailer at $1.7 million. And even though it spend roughly twice as much on TVs ads as the next closest retailer (Target) it had three times the traffic of its rival. Target spent an estimated $28 million on advertising November 3-7 which netted it nearly 12% of retail traffic during Thanksgiving weekend, giving it a cost per visitor share point of $2.4 million.
Kantar and Place arrived at those figures by merging their respective data on advertising expenditures and in-store visitor counts to create the cost per visitor share point metric as a means to evaluate and compare results achieved by the top national retail chains over the four-day Thanksgiving weekend. The firms tabulated retailers’ ad spending on broadcast and cable TV for the period of November 3 –27 and integrated that information with data Placed gathered from its opt-in panel of smartphone-enabled consumers to track their locations and the retail stores they visited from Thanksgiving Day through the following Sunday.
While Walmart and Target fared well, at the other end of the spectrum, was Sears which spent $13.7 million per visitor share point, more than eight times the rate that Walmart achieved. Home Depot and Lowes spent nearly identical amounts on TV advertising leading up to Thanksgiving weekend, but Home Depot had a sizable advantage in visitors to its stores. As a result, it cost Home Depot $2.9 million per visitor share point versus $4 million for Lowes.
Consumer electronics are always a popular item on consumer’s shopping list for Black Friday deals and this is reflected in the figures for Best Buy. It had a 6.2% share of all visitors over the holiday weekend, third best among all retailers nationwide. With a $25 million TV budget pre-Thanksgiving, Best Buy spent $4 million per share point. Radio Shack, with smaller stores and a less abundant selection of electronics products compared to Best Buy, spent $9 million on TV advertising and had a 0.8% share of total visitors, for an effective rate of $11.3 million per visitor share point.
Home Depot, Sears and Walmart each started Black Friday ad promotions further in advance than competitors and by Sunday November 24, each of these retailers were promoting Black Friday sales events in their TV commercials. But in the four days preceding Thanksgiving, the proportion of TV spending mentioning Black Friday ranged from more than 90% at Macy’s, Sears and Walmart to less than 20% at Lowes, Kmart and Target.