Why consumers will pay for the mess of online returns

Why consumers will pay for the mess of online returns

One of the foundations of online shopping has been free returns, but not anymore.

After years of subsidizing them, several retailers are charging customers to return unwanted items. It’s a risky move because buyers have become accustomed to buying an item in multiple sizes and colors and returning the one that doesn’t fit for free.

The list of retailers cutting back includes Zara, Abercrombie & Fitch and Boohoo. In the US, the number of large retailers charging a return fee has risen from 31 percent to 40 percent this year, according to research by Narvar, a logistics software company.

“I expect others to follow suit,” said Honor Strachan, an analyst at research and consulting firm GlobalData Plc. “It only takes one and the others will think, ‘Well, if Zara can do it, so can we.'”

The pullback in returns comes after the e-commerce sector has spent the past two decades removing costs from supply chains and customer service. But returns had barely been touched, leaving them as one of the few places with a lot of room to cut costs. They are expensive because of the labor involved in getting them shipped back, inspected and posted for resale.

Investors are also demanding that online businesses increase profitability (or be profitable) in a shift away from a relentless focus on growth.

The pandemic also played a role, causing an increase in online shopping – which has since slowed – as the masses stayed away from brick-and-mortar stores. That meant more returns, and the Covid-19 disruptions created a glut of inventory in categories like apparel, which is expected to increase discounts and the potential for shoppers to return items when they see better deals.

An unstable economic environment this Christmas shopping season has added to the pressure.

Consumers experiencing the highest inflation in four decades are more thrifty, increasing the chances of second-guessing a purchase and returning it, according to Amit Sharma, CEO and founder of Narvar. Higher costs for transport, energy and labor have made returns even more expensive, which increases the effort for chains to change behaviour.

“That’s the big question: How do we reset expectations?” said Sharma, who previously held senior roles at Apple and Walmart. “Everyone loses money on shipping and returns.”

Online retailers realized early on that they needed to gain customers’ trust before they would hand over their credit card number to a website and buy a product they hadn’t seen in person. Free returns helped make consumers comfortable. An early adopter was shoe retailer Zappos, now owned by Amazon, which allowed customers to order multiple sizes and return what didn’t fit without additional fees.

The industry followed suit, and now it will be difficult to wean the masses from free returns. The practice of buying multiple items online to try on at home – now known as bracketing – increased during the pandemic as fitting rooms were closed. About two-thirds of American shoppers engage in the practice, according to a survey this year by Narvar.

Social media platforms such as TikTok and YouTube have made bracketing more popular thanks to so-called “try on haul” videos where followers are asked to comment on whether the buyer should keep or return their purchased items.

Return fraud, with tactics such as returning a counterfeit item, is also on the rise. In the United States, about 10 percent of the $761 billion in returns on all purchases last year were fake, according to research by the National Retail Federation, an industry group. And online purchases have a higher return of almost 21 percent, up from 18.1 percent in 2020.

Retailers are increasingly seeing returns as a threat to their businesses. ThredUp, recently said that return rates are increasing, causing a $3 million hit to sales in the most recent quarter. And the online resale platform charges $1.99 for what it calls a “restocking fee” if a customer returns an item.

Earlier this year, London-based Asos cut its annual guidance, saying a significant increase in returns in the UK and Europe hurt sales. It added that rising yields combined with inflation have a “disproportionate impact on profitability”, but said it would keep yields free for customers.

Chains use a variety of tactics to reduce the financial blow. Some shorten the amount of time a shopper has to return an item. Bath & Body Works said it will not allow returns or exchanges for products that show “excessive wear,” a notable switch from the personal care brand that has famously allowed customers to return used products.

One approach used with low-value items by retailers such as Amazon and Target is to refund a return but let the customer keep the item. In this case, the retailer calculates that it will save money to avoid the costly process of trying to resell a returned item. It’s a strategy that’s catching on, with the number of merchants using the tactic jumping 1,700 percent in the first half of 2022, according to Narvar.

Of course, these tactics don’t address the main reason so many online purchases are returned: fit. The industry has tried to use technology like augmented reality to help customers make better choices with virtual wardrobes, but these tools have not been widely adopted despite many investments.

“Sizing is a big problem to solve in e-commerce, especially with clothing,” said Katia Walsh, head of strategy and artificial intelligence at Levi Strauss & Co. “It’s something businesses need to address, and we’re doing our best to do that.”

By Allison Smith and Katie Linsell

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