How Retailers Can Have ‘Many Happy Returns’
Holiday season 2017 has wrapped up, and early reports indicate there was a bow on top for retailers this year. As all presents have been opened, consumers have started heading back to the store or post office to return unwanted gifts and other merchandise, and now the question is whether an influx of returns, especially if not handled in the right way, might unravel that bow for retailers.
It’s predicted that U.S. consumers will return 13% of purchases this holiday season. Managing the flood of returns effectively and in a cost-efficient way will be critical to closing out a jolly holiday season, but it won’t be easy. Returns, and especially online returns, can wreak havoc on bottom lines.
How can retailers avoid a looming logistical mess this year?
The three types of returns, and their cost to retailers
Basically, there are three options retailers can offer to consumers regarding returns: return to the store, return to a distribution center (DC) or return to a third-party logistics (3PL) company. These three channels have varying costs and processing times to handle a return.
Returns in-store are usually the cheapest option for retailers, with a $3 variable cost per return, according to AlixPartners estimates. It’s also offers retailers same-day product processing for resale, the quickest of all options. Plus, it seems to be what online customers want, with 60% of online shoppers preferring to return items to a store when given a chance according to one survey.
But relying entirely on store returns isn’t optimal all the time. Processing returns eats up a lot of store-personnel resources and takes away from their actually selling. It also can have a big impact on resale margins because items that customers return — such as items which that particular store didn’t originally sell — often wind up lumped on the sale rack. In-store returns can also have a negative impact on customer experience, especially if a return transaction takes a long time or is unpleasant.
Then there’s the return-to-DC option. According to our research, this channel is generally twice as costly to retailers per return than the in-store channel, with a $6 average cost per return. Plus, when an item is returned to a DC, it takes about four days until it’s available for resale, according to our research.
While returns to a DC allow stores to focus on their core business of selling, there are staffing-cost downsides to using DCs. Retailers bear the burden of flexing up or down on staff at DCs during any selling season — and that can be a tough challenge, especially during the holidays. No retailer wants to be drowning in thousands of return packages when it would rather be gearing up for the next selling season.
The final option is to, effectively, pass the buck on returns and have shoppers return by mail to a 3PL. That option can offer fewer headaches, but can also mean more bucks literally get passed out of the retailer’s cash register. According to our research, this approach costs retailers an average variable cost of $8 per return — and generally takes six days before a product is available for resale.
Still, depending on the situation, 3PLs can seem like a big, red “easy button” for retailers because the option offers the most flexibility for retailers and the least distraction, despite the higher cost and processing time. Using 3PLs is easy for customers too — all they have to do is box up the sweaters they don’t want and send them to a 3PL. The 3PL can quickly check to make sure the products are in good shape, sort them, and send them to the retailer for resale.
Take a hybrid approach to returns
Processing returns may be a pain, but there are ways for it to cause less heartburn — not to mention also a great opportunity to increase sales and build a loyal customer base. To avoid post-holiday indigestion, we recommend taking a hybrid approach that combines the best of in-store returns and 3PL-type returns. That approach includes:
1. Make the return process easy and painless for shoppers. That means retailers should think about offering policies like zero shipping fees for returns, which should be budgeted into the returns cost model.
2. In general, use the in-store return model, but make sure sales associates are well-trained, easily accessible to consumers and using simple workflows to manage returns. Since about 70% of shoppers buy something else when returning their stuff in a store, retailers may even want to incentivize store returns by offering a special discount or perk.
3. Use 3PLs to scale up around major selling seasons — and use them, rather than retailers’ own DCs, for online returns. Many, if not most, of our clients who use 3PLs say this frees up resources to focus on what they are best at: selling. However, make sure the 3PLs deliver up to the brand’s standards.
Bottom line: Not being too rigid about one returns option vs. another, or tied to what was used in the past, can help retailers have more “many happy returns” in the future.
Alexa Driansky is a senior VP in the retail practice at AlixPartners LLP, the global consulting firm.
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