How Returns Impact the Profitability and Sustainability of Retail Businesses

How Returns Impact the Profitability and Sustainability of Retail Businesses

Returns significantly impact the profitability and sustainability of retail businesses. Not only does a return result in lost revenue, but it also multiplies a retailer’s carbon footprint, leaving our planet to absorb the costs. Returns can also have a negative impact on customer loyalty and customer lifetime value.

With return rates outpacing revenues for 91% of all retailers, optimizing returns management has become the only option for running a successful retail business.

The IHL Group, a global retail research and advisory firm, recently released a report on the latest stats and trends of ecommerce retail returns. Below, we delve deep into the key findings of that report and explore strategies to reduce returns costs and build a more sustainable returns management process.

Why Should Merchants Focus on Returns Management?

Retailers get religion on returns |  IHL Group Report
Summary on the IHL Group report on retail trends

The global returns industry reached $1.8 trillion in 2022, more than doubling in less than 10 years.

The instability from this rapid growth keeps merchants from retaining profits and damages the environment in the process.

According to industry research, Food, Drug, Convenience, and Mass Merchants lose an additional 5 points of margin for every return when the returns process is not optimized, while Department and Specialty Stores lose about 6 points of margin on every return.

Online apparel sales generally see a return rate of more than 50%, with some segments, such as women’s dresses purchased online, having a return rate as high as 90%. This means that at least 1 more point of margin is lost due to the added costs of handling and storing items alone, as well as the costs of scheduling and adding additional employees, often at increased pay rates.

The returns process also incurs additional costs, such as the labor cost of processing the return, restocking the item, and shipping it back to the merchant, manufacturer, or liquidator. These costs can add up quickly, further eroding the profitability of retail businesses.

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Moreover, return fraud is a massive problem for merchants, estimated to be nearly $85 billion in North America alone, according to the NRF and Appriss Retail. In essence, returns can create chaos in the operations of retailers, leading to additional costs and potential losses due to fraud.

However, all hope is not lost. Merchants have the power to take control of their returns. When handled correctly, this costly part of conducting business can be turned into an opportunity to retain profits, optimize future ordering, and enhance the customer experience.

Preparing for Future Ecommerce Returns

Merchants can use various strategies to manage returns and reduce the associated costs. This requires them to consider the returns process before the customer initiates an RMA.

Best practices include planning for what a return would look like for every product vertical or category. You should know what products are expected to be purchased, and how many of those sales are anticipated returns.

Building this strategy becomes easier when you have a collection of data from previous returns. Collecting returns data gives you access to information on each return, allowing you to discover patterns in customer behavior, product performance, returns reasons, etc. These insights can then be applied to make better business decisions.

How to Optimize Your Returns Management

Optimizing your returns management process requires you to look at how things are currently run. More than 60% of returns are caused by the merchant, meaning most returns are highly preventable and completely in the merchant’s control.

Although you’d assume more merchants would take returns seriously, most of them don’t have any person, team, or department responsible for reducing and managing returns. Building a successful returns management system becomes extremely difficult when nobody’s tasked with the responsibility of doing so.

Merchants should start by asking themselves a few questions:

  • What does your policy look like?
  • How do you plan to mitigate returns fraud?
  • What’s your process for collecting data on returns?
  • Who’s in charge of making decisions regarding returns management?

All of these are important things to consider when upgrading how you manage your returns.

The Environmental Impact of Returns

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In today’s business landscape, companies are increasingly being held accountable for their sustainability efforts, not only in their communications with customers but also with shareholders, potential investors, and government entities.

To be taken seriously in their environmental sustainability progress, merchants must address the impact of returns on the environment. Sustainable returns management can help reduce the environmental impact of returns and demonstrate a commitment to sustainability.

The NRF estimates that 16.5% of all items sold are eventually returned. This number increases to over 50% for online sales in the apparel segment.

This means that a significant amount of excess raw resources are consumed in the production of items that end up being returned. Not to mention, the number of resources that are wasted in the reverse logistics process.

From extra gas emissions caused by shipping, to disposing of products that can’t be resold, to repackaging any products that go back on the shelves, each return leaves a massive carbon footprint.

Mitigating returns means reducing the harm caused to the environment, ultimately making your business more sustainable.

Concluding the IHL Group Retail Returns Report

In conclusion, returns can have a significant impact on the profitability of a retail business, with returns rates often outpacing revenues for many retailers.

By implementing effective strategies such as better quality control measures, leveraging technology, offering generous return policies, and addressing return fraud, merchants can optimize the RMA process and reduce the associated costs.

Read the full report to dive deeper into the current returns industry landscape.

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