Spike in holiday returns highlights waste, inefficiency in reverse logistics

Americans will return up to $41.6 billion in online holiday merchandise this year, according to a forecast from real estate services giant CBRE Services Inc. (NYSE:CBRE) and technology firm Optoro.

The figure highlights what has become a year-round problem with returns, namely that retailers forfeit about $50 billion a year in profit because they are so inefficient in handling them, the companies said. Each year there are more than 10 billion instances of unnecessary shipments and warehouse touches due to the retail industry’s inability to manage the problem, the companies said in the report, which was published late Dec. 19.

Last year’s holiday returns forecast was $37 billion, CBRE said.

Compounding retail’s dilemma is that consumers, already conditioned to expect deliveries without directly paying for them, now demand the same entitlement for returns. Amazon.com, Inc. (NASDAQ:AMZN), for example, is offering free shipping on holiday returns via 18,000 access points, including pickups by delivery partner UPS Inc. (NYSE:UPS) and drop-offs — with no bag required — at UPS Store retail locations. 

UPS, for its part, said in November that it expected to handle 1.6 million daily returns during the per-Christmas week, which ended Dec. 20. The company declined to confirm its estimate on Dec. 20 ahead of releasing its fourth-quarter results next month. UPS said it stands by its estimate that return volumes will peak Jan. 2 at 1.9 million items, a 28% increase over its 2018 holiday peak.

To arrive at its estimate, CBRE applied the standard range of 15% to 30% for online returns to this year’s U.S. holiday retail sales figure, estimated by data provider Digital Commerce 360 to be $138.5 billion. The average return rate for store-bought merchandise is about 8%. The online return rate is much higher due in part to the “free shipping” enticement, which allows consumers to order multiple versions of the same item and return as many as they choose without any cost consequences. Unlike store-bought merchandise, merchandise ordered online cannot be sampled before its purchased. 

In addition, while store-bought items that are typically returned to where they were bought, online orders generally do not return to the warehouse from where they were picked and packed. Goods can be returned anywhere in the retailer’s system. A product may be restocked in a store, sold to discounters, donated to charity or simply thrown away. In any case, product depreciation plays a role in a retailer’s strategy. High-value electronics depreciate at a much faster clip than wearing apparel.

Available distribution center capacity is also an issue. Facilities handling returns need 15% to 20% more space than a traditional outbound distribution center because the volume, dimensions and final destinations of returned goods is inconsistent and varied, according to CBRE data. Many centers handle both forward and reverse logistics, but such co-location may be less tenable as returns volume continues to grow.

Companies are trying to combat the problem in a myriad of ways. One of the more popular approaches is to allow consumers to return parcels to a retail location even if they didn’t buy the merchandise there. Amazon customers can return parcels for free to any store operated by retailer Kohl’s Corp. (NYSE:KSS). This strategy, known as “buy online return in store (BORIS),” consolidates returns in one location and eliminates the need for Amazon to dispatch a driver and vehicle to pick up parcels at residences. It also provides Kohl’s with additional foot traffic that it might not otherwise get.

The ability to effectively handle returns can yield large benefits. Joe Hsu, Optoro’s senior director of solutions, said that its research showed that 97% of customers are more likely to shop again at a retailer where they had a positive returns experience.