The True and Hidden Costs of Product Returns

For retailers, managing product returns is becoming increasingly critical for maintaining profitability. The National Retail Federation reported that 14.5% of all retail sales, or $743 billion in merchandise, were returned in 2023. For e-commerce, return rates were even bleaker, ranging from 20-30%. To put it bluntly, retail profitability is increasingly being cannibalized by product returns. 

The issue has intensified as shoppers become accustomed to generous and free return policies, leading to customers purchasing multiple styles with the intention of returning a majority of the order. The traditional “try-on” room has morphed into bulk buying of items that are returned.

Retailers now find themselves in a struggle for margin expansion without sacrificing customer experience.

The True Cost of Returns

Processing these returns is not just a logistical headache but costly, with each return costing ~59% of the item’s original selling price. This financial impact has forced notable retailers, like H&M and Saks, to implement universal fees for all online returns. 

We breakdown the costs and process burdens of returns: 

‍Direct Costs:

• Reshipping Costs - every item that is returned costs the business an average of $10-20 per returned item. 
• Refunds and Replacement - not only is a sale lost, if a replacement is issued, the customer has cycled through two products for the price of one. 
• Reverse Logistics and Reprocessing Fees -  returned items incur warehouse and operational fees to receive, inspect, clean, and restock the returned product. 

Indirect Costs:

• Administrative and Storage Costs - processing returns requires time and resources, such as headcount to manage the return, restock the product, and communicate with the customer. 
• Discounted Resale or Recapture Rate - many items, once returned, need to be discounted to resell it, liquidated, or completely thrown away. We see the typical recapture rate (i.e. the reselling of returned inventory) to be ~40%.
• Opportunity Cost with Seasonality - customer preferences change quickly, especially with apparel seasonality, which leads to missed sales when specific sizes or items are out of stock. 

Let'stake an example of a $100 item that is returned. The estimated cost of returns is $59 (59% of the price of costs of returns will be the original sales price).This gives us $41, and assuming the product sells, there is likely a larger discount of 30% (net cost $12.30). The net of the resold item is $28.70, which is typically below the profitability target for retailers.

Return Abuse Accelerating the Costs of Returns 

Return abuse and fraud are exacerbating the issue. Of the $743 billion in returned merchandise in 2023, $101 billion was lost to fraudulent activities, accounting for an average of 13.7% of all returns. These abusive returns not only affect the bottom line but also force retailers to implement stricter return policies that negatively impact the customer experience, such as universal return fees.

At Yofi, we have seen that ~2% of customers are responsible for 20% of returns. These customers use various techniques to mask their intentions and identities to continue to abuse returns. This behavior leads to significant losses for retailers, with NRF estimating a loss of $13.70 for every $100 in returned merchandise.

Beyond the direct financial impact, these return abusers have forced retailers to completely change their entire return process, which increases operational costs and slows down fulfillment times, impacting overall customer satisfaction.

Conclusion

Returns are an unavoidable aspect of retail that directly impact profitability. With shifts in customer behaviors and expectations, retailers must adopt dynamic strategies to maintain a positive customer experience while mitigating abuse. The financial burden of returns is significant, driving the need for efficient and dynamic management practices to improve profitability and customer satisfaction. Addressing the complex returns costs is not just about reducing expenses - it’s a strategic imperative for maintaining competitive advantage and achieving long-term sustainability in a challenging retail landscape.