In a retail environment where the pinnacle of customer service is a no-questions-asked return policy, the challenges of handling retail returns can become daunting. Customer returns typically used to fall almost exclusively into the categories of damaged or defective merchandise. However, as shoppers buy more frequently and retailers seek to engender more loyalty in those customers, the no-questions-asked approach has become commonplace — at the expense of common sense.
|Returns Handling Method||Average Loss of GSD*|
|Resold at store level||5% to 25%|
|Disposed in field per agreement with vendor||5% to 25%|
|Delivered directly from store to vendor||15% to 30%|
|Delivered back to DC||15% to 50%|
|Managed by a third-party reverse logistics consolidator||55% to 70%|
|Cycled to outlet/employee sale||60% to 95%|
|Donated to charity||85% to 100%|
|*Gross retail sales dollar recovery|
Over the years I have witnessed many returns nightmares besetting retailers. There was the haunted sofa-bed return requested of a big-ticket department store by an elderly lady in California. The poor victim claimed that the newly delivered sofa would quiver as she walked by. Finally, unable to contain itself, the sofa unfurled its bed and chased her across her apartment. Then there was the customer who wanted to return a pair of snow boots to a Northwestern sporting goods retailer, but could not provide the merchandise because, as he put it, “My dog ate the boots.”
Regardless of the reason, retail returns merchandise stocks have steadily grown in proportion to retail sales over the last three decades. Just what is it we’re supposed to do with all these non-damaged, non-defective returns? Do we bury the them in salt mines, batch them for launch into space, or simply inject them into the earth’s magma?
Seriously, retailers are almost always uncomfortable with their returns practices. Often treated, if not outright regarded, as the illegitimate stepchild of retail operations, returns often become a millstone around the neck of a retailer, draining profit dollars on false assumptions of benefits to be derived by carrying returns stock.
Obviously, retailers go to great lengths to ensure that their customers become repeat customers, and that makes good business sense. But contrary to popular belief, the refuse merchandise from this beneficial practice need not impart heavy profit losses. Keeping returned items in the store is common in the retail industry, and here is why: Often, the cost of operations in a retail profit-and-loss statement amounts to anywhere from 3% to 8% or more of sales. The unit cost of handling a product through a reverse logistics channel is normally three to four times that of the normal store-bound supply chain. An operating cost of 18% of margin to execute a return, coupled with an expense rate of 5% of sales to get the product on the shelf to begin with, makes for a 23% total logistics expense for the round trip.
This, of course, is well in excess of many retail profit margins, and unless the vendor gives a full credit for the cost purchases, the item ideally should not be cycled back to a distribution center. For this reason, the first goal of a return is to move it to a customer presentation position using the least costly method available. Certainly, return to shelf would be most preferable, but maximizing return-to-shelf stock is difficult or impossible to do in many consumer products categories. The table on page 8 shows some broad classifications of exit strategy, rank ordered by most margin-effective exit practice. Starting with the greatest sales dollar recovery, the listing proceeds to the least effective strategy in terms of gross (original price) retail sales dollar recovery (GSD).
Obviously, it pays more than one might think to keep a customer return at the store level. Unless a retailer has a bona fide agreement to recover full-cost purchase dollars from the vendor, frequently there is no compelling reason to reverse-handle returns. That is why the industry has continued to see less and less returns logistics activity. Perhaps one day, vendors will initiate centralized industry return channels that can resolve this predicament. After all, the ultimate responsibility for a return rests with the vendor unless the vendor can compensate the retailer somehow for accepting that responsibility. But until that happens, retailers will wrestle with this complex process — and perhaps resort to hiring exorcists.
Roger Cunningham is a partner at Atlanta-based distribution consulting firm DCB and Company. He can be reached at firstname.lastname@example.org.