Today's consumers love the convenience of online shopping, but it often takes them a few attempts to find the perfect fit. Retailers have a solution for that. To ensure a "frictionless" online shopping experience, they promise hassle-free returns. Shoes too small? Return them. Pants too long? Return them. Sweater too tight? Return it.
And return they do. Today's shoppers do not hesitate to send back items that don't meet their expectations—whether it's a question of fit, quality, damage during shipping, or a host of other reasons. By all accounts, the e-commerce returns rate today runs well into the double digits, with some estimates putting it at 30, 40, or even 50 percent.
All this creates big headaches for retailers. That's partly due to the way they're set up. The sophisticated automated systems they've designed for processing high volumes of outgoing orders typically don't run as well when shifted into reverse. And inefficient processes are just the half of it. There's also the added labor, time-consuming worker training, the need to discount inventory, and additional handling and shipping fees.
To get a better understanding of how companies are meeting the challenges of reverse logistics in omnichannel commerce, DC Velocity and ARC Advisory Group, a Dedham, Mass.-based technology research firm, teamed up to conduct our fifth annual survey on retail fulfillment practices. (See sidebar for more on our study.) Respondents answered 35 questions on their companies' approach to meeting current challenges in omnichannel commerce and their plans for the future. Included in those questions were eight that centered specifically on respondents' returns practices. This article will concentrate largely on the findings from that section of the survey.
PAIN WITHOUT GAIN?
Conventional wisdom says that while "going omnichannel" helps keep customers happy, it's a notoriously tough way to make a profit. Retailers are well aware of that. When we asked respondents why they participated in omnichannel commerce, the top three reasons were to increase sales (63 percent), increase market share (57 percent), and improve customer loyalty (47 percent). Coming in a distant fourth was to increase margins. (See Exhibit 1.)
And the cost of returns only adds to the pain. When shoppers return merchandise, a complex, labor-intensive process is set in motion. At the very least, someone has to collect, evaluate, and sort the returns, deciding whether each item should be put back on the retail shelf; returned to a DC for cleaning, refurbishing, and/or repackaging; sold to a clearance reseller; or recycled. The process requires time, training, and money—three resources that are in short supply in any retail organization.
As for who actually performs the work, that varies from retailer to retailer. Our study found that the majority (64 percent) of respondents have opted for the DIY approach, processing returns themselves using in-house labor. But not all of them choose to go it alone. A sizeable percentage (40 percent) said they contracted with a third-party logistics service provider (3PL). Still others said they arranged for returned items to be sent directly to the manufacturer or a clearance reseller. (See Exhibit 2.)
Despite the considerable expense involved, retailers are disinclined to pass those costs on to customers. When survey-takers were asked what types of fees they collected to recover supply chain costs, the top two responses were fees for expedited delivery (55 percent) and fees for delivery in general (41 percent). Far fewer were willing to take this route for returns: Less than a third (30 percent) said they charged customers for returns shipment, and only 20 percent charged fees for returns processing. (See Exhibit 3.)
That raises the question of how all this affects profitability. As it turns out, many respondents had only limited insight into the matter. When asked about their ability to track returns-related costs, far less than half (42 percent) of respondents said they were able to measure the full financial impact of returns. Another 32 percent said they had only a general idea of that impact, while 27 percent admitted that they could only guess at the financial impact of returns or could not measure it at all. (See Exhibit 4.)
ASSEMBLING THE OMNICHANNEL MOSAIC
As for why many retailers struggle with the economics of returns management, part of the explanation may lie in the complexity of the omnichannel model itself. To begin with, "omnichannel" means different things to different players, with each individual retailer offering a different mix of service options. For instance, when survey respondents were asked what omnichannel capabilities they supported, the answers ranged from "order at store, fulfill from warehouse" to "order at one store, fulfill from another store." (See Exhibit 5.)
Another complicating factor is the number of players involved. In an omnichannel world, by definition, transactions aren't confined to a single conduit. Where once a retailer might have required that items bought in a store be returned to that same location, the field is wide open today. For instance, nearly half of respondents (45 percent) now allow customers to return merchandise bought in a store to a DC or processing center. As the number of players grows, so does the likelihood of complications.
These challenges are hardly unique to reverse logistics. Retailers struggle with the same difficulties in the order fulfillment end of their operations. To get a fuller picture of how they're dealing with the online shopping piece of the omnichannel puzzle, the survey also asked respondents a few questions about their fulfillment practices and strategies.
As for how retailers currently fulfill e-commerce orders, the results indicated that the industry has yet to settle on a standard approach. While the largest share of respondents, 60 percent, fill orders through a traditional DC that also handles e-commerce orders, that was by no means universal practice. Another 37 percent said items were shipped directly from the manufacturer or supplier, 32 percent said orders were filled from a store, and 25 percent used a Web-only DC.
Digging a little deeper into store-based fulfillment practices, the survey asked respondents how they handled e-commerce orders fulfilled through a brick-and-mortar store. Responses included picking orders at the store and holding them for customer pickup (65 percent), picking orders and shipping them from the store (also 65 percent), and shipping orders from the DC to the store for customer pickup (45 percent). As for where they pick store orders, 78 percent said they selected items from store shelves, and 50 percent from the stockroom. (Survey participants were allowed to select multiple responses.)
Regardless of how those orders are picked, statistics suggest that a significant percentage of them will be returned. What that means for retailers is clear: Returns management is fast becoming a high-stakes endeavor—and how they handle it could dictate whether they thrive or merely survive in the brave new world of omnichannel.
This year's omnichannel study was conducted by ARC Advisory Group in conjunction with DC Velocity. ARC analyst Chris Cunnane oversaw the research and compiled the results.
The study explored the details of DC operations that support omnichannel initiatives as well as how companies are handling the challenge of reverse logistics and returns. The findings reported here are based on 142 responses. Respondents included logistics professionals from a variety of industry verticals, who submitted answers during July and August 2017.
As for the demographic breakdown, the majority (56 percent) of respondents sold goods through a combination of direct and indirect sales channels. Another 31 percent sold merchandise through direct retail only, and the remaining 13 percent through indirect sales channels only.
A report containing a more detailed examination of the omnichannel survey results is available from ARC for a fee. Get information on the report.
Read the other part of our special report on omnichannel distribution, "Convenience drives buying trends in an omnichannel world."