Hidden Costs Of Holiday Returns Can Wreak Havoc On The Bottomline

Seven Surprising Ways Retailers are Losing Money at the Return Counter

Retailers around the world are gearing up for the hustle and bustle of the busiest time of year. Experts are projecting consumers will spend $602B this holiday season. And with billions in sales, there’s bound to be billions in merchandise returns, which can cause retailers to lose a significant profit margin.

However, the monetary drain of these lost sales does not end there. Additional “hidden” losses accrue when you factor in the time employees spend processing returns, evaluating the item’s resale potential, and restocking the returns. When an item must be discounted or, even worse, discarded after a return, it further compounds the company’s losses. There are also the administrative expenses of accounting for returns and managing the entire return system. For major chains, the costs can reach into the millions of dollars annually. Below are the top seven hidden costs of returns:

1.      Labor time and cost. Besides the staffing of the customer service role at the return counter, there are other aspects of labor including the time spent assessing the item’s condition, making it ready for re-sale (cleaning, tagging, folding, packaging), and placing it back on the selling floor or dispositioning it for other processes.
2.      Credit/debit or other transaction fees. A retailer may typically see credit card interchange refunded, but not necessarily their transaction fees for authorization and settlement. So while the retailer may get back the majority of what they paid in fees, it is not every penny nor is a return a free transaction to them.
3.      Restocking with markdowns. Even if an item is returned in re-sellable condition, it may be past its prime selling time.  This might relate to the seasonality of the fashion or the status of the current model of the item.  In many cases, items in this semi-out-of-date situation are subject to markdown discounts to clear the inventory from the selling floor, lowering the margin on that returned item.
4.      Disposition of a non-sellable item.  In many cases, the merchandise returned must have some extra action performed to determine whether it can be resold. Often this falls into a retailer’s reverse logistics process.  The item may need to be sent to an interim location for inspection and testing.  It may need to be re-packaged.  It may need some or all of its accessories and manuals replaced.  It may need to be returned to vendor for credit.  It may need to be disposed.  In all cases, it is removed from the selling floor, eliminating the possibility for the revenue and margin from the purchase.
5.      Administrative costs.  Depending on the destination of the returned item – back to the selling floor or out the back door – there are inventory and logging requirements to account for the item’s status and location.  While modern supply chain systems help, tracking returned merchandise still requires attention to detail.
6.      Shrink.  Return rates and shrink are strongly correlated.  The higher the store’s return rate, the higher its shrink.  Studies show if a retailer takes actions to better control returns, shrink can be reduced by a significant amount.
7.      The Customer Experience.  While not a measurable cost like those above, the retailer’s relationship with their customer in this potentially negative encounter is paramount and, in fact, trumps all other costs.  A fast, friendly, and flexible return experience is worth the retailer’s investment to ensure best customers keep their trust, and their spending, in the store’s brand.

The Retail Equation’s experience indicates that an individual consumer with a long-term pattern of return rates greater than 30 percent may negatively affect a retailer’s operating profit. In addition, as a retailer’s gross margins fall, the breakeven return rate also falls. The obvious implication is that profitability is directly connected to return rate and the total cost of returns should not be overlooked as the holiday season and peak return time period approaches. Smart return management leads to even smarter consumer relationship management, which leads to happy customers and a merrier bottom line this holiday.

About Tom Rittman:
Tom Rittman is vice president of marketing for The Retail Equation, the leader in optimizing retailers’ revenue and margin by shaping behavior in every customer transaction. The company’s solutions use predictive analytics to turn each individual shopper visit into a more profitable experience. This yields immediate financial payback, increasing store comps by as much as 2 percent, with significant return on investment. The Software-as-a-Service applications operate in more than 27,000 stores in North America, supporting a diverse retail base of specialty apparel, footwear, hard goods, department, big box, auto parts and more. For more information, visit www.theretailequation.com.