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Record US online spending on Black Friday provided a rare bright spot for retailers. There is more to come. Consumers are expected to spend $240.8bn on internet shopping this holiday season, an 8.4 per cent increase from the same period the previous year, according to Adobe Analytics.
But there is a downside to the ease with which Americans can fill up their digital carts these days: the deluge of merchandise returns. It has become a multibillion-dollar problem for the retail industry. Investors should take note.
Online purchases have long had higher return rates than sales at bricks-and-mortar stores. When you cannot try on or see a product in person before buying, you are more likely to change your mind about your purchase.
Americans returned 17.3 per cent of their online purchases last year compared with just 10 per cent of purchases made in-store, according to the National Retail Federation. Returns accounted for $743bn — or 14.5 per cent — of the $5.13tn of retail sales reported in 2023. That is up from 8.8 per cent of total retail sales in 2012.
For retailers that have seen their margins eroded by the continuing arms race in free shipping, being on the hook to foot the bill for processing the mountain of unwanted, used or damaged goods only compounds their pain. A returned item may no longer be sellable by the time a customer returns it. This means the item ends up in the discount bin, hurting profits. All this makes returns unpredictable and hard to account for on a company’s balance sheet.
This is especially true with clothing, where shoppers tend to order an item in different sizes and colours and return the ones they don’t like. There is even a word for it: “bracketing”. For some online apparel retailers, returns now average 40 per cent of sales.
To cut return costs, which can sometimes be more than the item itself, some retailers have reinstated fees or shrunk their refund windows. Others such as Target or Chewy are simply telling customers to keep or donate the items they want to return. Amazon has added a “frequently returned item” label to some of its listings. Retailers are also investing in technology and hiring third parties such as B-Stock to help speed up resales.
They need all the help they can get. The economics of US online retailing — where customers expect free shipping and easy returns — are tough. The growth in internet shopping is here to stay. Retailers that can keep their return rate low will have an edge.
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