Retailers' Profitability Hinges on Quick Decisions to Restock, Liquidate or Scrap Returned Goods
Holiday season sales beget returns, but e-commerce sales more so says a new report by CBRE Group, Inc.
Based on that fact, CBRE Group, Inc. has released a report outlining the methods that retailers use to handle returns of e-commerce merchandise and recent improvements of those processes. Based on standard return rates for online sales, CBRE calculates that the total value of returned goods bought online this holiday season will range from $14 billion to nearly $29 billion.
Retailers' processes for handling online returns, called reverse logistics, have added importance as e-commerce continues to grow by double-digit percentage rates on a year-to-year basis. Research firm eMarketer predicts that online sales will increase by 17 percent this holiday season to $95 billion. The return rate for goods bought online typically ranges from 15 percent to 30 percent, due to online shopping habits such as buying multiple versions of a product and deciding later which to keep.
"We'll likely see retailers make progress this year in whittling their online return rates because they have more and better data from past seasons to predict what their customers will buy and keep," said Joe Dunlap, CBRE's Managing Director of Supply Chain Services. "Still, big volumes of returns are a fact of life in e-commerce, which leaves retailers with expensive decisions regarding whether to restock, liquidate or destroy returned merchandise."
Whether retailers can recapture any value from those returned goods depends on how quickly and effectively they determine within their reverse-logistics processes what to do with those returns. Restocking and reselling the returned merchandise recoups the most value, but many goods spoil or fall out of fashion before that can happen. Some retailers sell returned goods to liquidators for a lower-value but more certain sale than restocking for a potential sale. The final option is to send the merchandise to the landfill for a total loss.
Online retailers increasingly have two primary choices as return volumes grow. They can add dedicated facilities in their network exclusively for handling returns, which speeds the process and salvages more value from the merchandise. Or they can hire a third-party-logistics firm to handle it for them.
The latter option is growing in popularity. Such third-party firms, which now occupy a collective 700 million square feet of U.S. industrial space, are expanding at a pace of 3 percent to 5 percent annually, according to CBRE.
"Reverse logistics presents arguably the most complex set of challenges and opportunities faced by retailers amid the growth of e-commerce," said David Egan, CBRE's Head of Industrial & Logistics Research, the Americas. "Those that improve their handling of online returns, be it through adding reverse-logistics facilities or outsourcing the process, are closer to creating the seamless process required to win in the e-commerce marketplace."