Return to sender

It's December. That means we're in the midst of the biggest retail period of the year—the holiday shopping frenzy. Part of that will be an avalanche of goods purchased online. The National Retail Federation estimates that there will be over $117 billion worth of e-commerce sales during the holidays. That's about 10 percent more than in the same period last year.

But as a recent story I wrote on reverse logistics explains, as much as 25 percent of these goods will be returned. Returns are higher for merchandise bought online than for items bought in stores, largely because items ordered online cannot be touched and examined. Clothing and shoes cannot be tried on, prompting many customers to order an item in several sizes and then return all except the one with the proper fit.

Many of these orders not only were shipped to the customer for free but may also be returned for free. It's what we have come to expect as consumers. Amazon.com and other leading retailers have made online shopping easy, and the customer rules. If the customer wants free shipping, then free shipping it is.

But how sustainable is that model? Until recently, Amazon was far from a profitable business. Many retail investors are not as patient as those who backed Amazon.

In preparing the article on reverse logistics, I spoke to Bob Lieb, a professor of supply chain management at Northeastern University. Lieb has long studied the industry and had some interesting observations on the current state of the online supply chain, especially as it concerns returns.

He says he remembers the events that led up to the bursting of the original dot-com bubble of the late 1990s. "It's really déjà vu going on with e-commerce," he says. "What killed many of the original dot-coms was returns. With free shipping and free returns, many had 70 percent returns, and it killed them," Lieb recalls. "It's not smart for dot-coms to go down that path."

As the saying goes, nothing is free, including "free" shipping and "free" returns. Those costs have to be absorbed somewhere in the business, further cutting into thin margins. To survive, dot-coms will have to offset their free shipping and returns costs by smart supply chain management. But not every business will achieve the necessary level of performance. As Lieb puts it: "Just because you put an 'e' in front of a name does not make it a viable business."

It will be interesting to see if free shipping and free returns are sustainable practices going forward. If not, how many of today's dot-coms will see their bubble burst just as their pioneering predecessors did?