CBRE: reverse logistics drain profit from e-commerce

The hot e-commerce market is proving to be a double-edged sword, as retailers and shippers are pushed to devote more resources than ever to handling returns this holiday season, even as consumer spending is widely credited with propping up the wobbly manufacturing sector of the U.S. economy.

The relentless growth in the return of goods bought online illustrates a costly drawback to e-commerce's growth that the industry is working hard to contain, according to a report released today by real estate services and investment firm CBRE Group Inc.

The trend will likely prove to be expensive to retailers, since reverse logistics costs more than the original fulfillment. But CBRE laid the blame at the feet of e-commerce retailers themselves, saying they had "established an early and enduring practice" of waiving shipping costs on returned merchandise. Consumers now widely expect and use that free returns policy, as shown by sky-high estimates of online return rates—15 to 30%—in contrast to the mere 8% rate for merchandise bought in stores, CBRE said.

That contrast could get expensive fast, since the value of this season's returns of online purchases could add up to $41.6 billion, based on a forecast that total online sales in November and December will reach $138.5 billion, CBRE said.

Since the retail industry is so inefficient at handling returns, that volume of sales could lead to $50 billion of lost profit margin each year and more than 10 billion instances of needless shipments and merchandise touches in warehouses, according to Optoro, the Washington, D.C.-based retail tech firm that teamed with CBRE to produce the report.

"Returned merchandise has a massive impact on retailers' bottom lines, so the industry is keenly focused on developing new ways to reduce returns and better process those that do come in," John Morris, CBRE's executive managing director and Americas industrial & logistics leader, said in a release. "Much of that involves improvements at the point of sale. But a big part of it also entails efficiently processing returned merchandise, sometimes by establishing distribution capacity and procedures strictly for handling returns, and sometimes by outsourcing the process to third-party-logistics companies."

Making the reverse logistics process even more costly, the study found that distribution facilities handling returns need 15% to 20% more space than a traditional DC for outbound distribution because of the greater variation in the volume, dimensions, and final destination of returned goods.

Another complication is that merchandise categories depreciate at different rates when returned to a retailer. For example, a fashion apparel item can lose 20% to 50% of its value over eight to 16 weeks, while electronic goods lose only 4% to 8% of their value each month, Optoro found.

To reduce those mounting costs, the study also identified several options for reassigning  a return, including: restocking the merchandise in the store, selling it to discounters and resellers, donating it to charities, or destroying it. 

CBRE's @Egan2David: Returns of online purchases are a costly dilemma that retailers, shippers & customers must tackle: https://t.co/7d7iYcz8ll @business @CBREIndustrial

— CBRE Industrial & Logistics (@CBREIndustrial) December 18, 2019