Transforming Reverse Logistics: A Necessity for Future Retail Success

After the fallout of the holiday shopping season, the start of the new year brings extra attention to reverse logistics, which undoubtedly remains a pressing concern across the supply chain that is pushing up costs and resulting in more wasted product.

Reverse logistics has gotten too prominent to ignore, with America’s largest package delivery firm, UPS, acquiring returns management platform Happy Returns from PayPal in 2023. On top of that, the National Retail Federation (NRF) scooped up the Reverse Logistics Association, in a significant signal that retail views reverse logistics as an imperative to future business success.

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Both deals came amid an onslaught of returns throughout 2023 that further applied pressure to supply chains. According to data from the NRF and retail fraud protection platform Appriss Retail, total returns for retail amounted to $743 billion in merchandise last year. As a percentage of sales, the total return rate for 2023 was 14.5 percent.

Tom Enright, a research vice president in the consumer retail team at Gartner, said this percentage was lower than he expected but noted that this was an indicator that retailers are likely taking more progressive actions against returns, like investing in fit technology for apparel — or in the case of Amazon, sometimes notifying consumers that products have a high rate of returns.

“The most recent holiday was probably the first time in maybe ever that retailers were really concerned about return levels,” Enright said. “For many years, everyone associated returns with just the price of growing an online business. ‘Returns will increase as my e-commerce business grows. That’s life.’”

Returns remain a thorn in the side of businesses, namely because forward logistics is more mature — and simplified — than the reverse logistics flow.

“The reverse flow doesn’t necessarily follow the same physical flow that got you the item,” said Douglas Kent, executive vice president of corporate and strategic alliances at Association for Supply Chain Management (ASCM). “If you place an order and it came from a warehouse in Ohio, but you didn’t like what you got, you’re now being directed to a centralized distribution center somewhere else. When that good arrives at the new warehouse, they also have to have the capability to disposition that receipt of your return.”

Kent noted that warehousing professionals in particular now have to determine what to do with each individual item based on an increasing amount of possible reasons to return a product.

Getting in Front of Returns Before They Start

Prevention and processing are two key areas of the reverse logistics ecosystem that every business should be proficient in, but according to Enright, Gartner isn’t seeing enough companies optimizing the prevention side.

Enright and Ryan Kelly, vice president of e-commerce and digital marketing at FedEx, shared the belief that companies must get a better grasp of their customer to react better to each return.

Kelly suggested that more businesses can opt to tie in returns with their loyalty programs. In some instances, he said retailers should identify some buyers as “known customers” before even giving them the ability to make a return.

“Think about the lifetime value of that customer,” said Kelly. “Think about all the ways you can look at their order history and say, ‘Is this a serial returns abuser? Is this somebody I know, and have they bought from me before?’” Kelly also recommends more merchants allow shoppers to keep an item as a “goodwill gesture” to your good customers.

From there, this enables retailers to better customize their return policy based on specific customers.

The more information that can be collected about — and given to — the consumer, the better, says NRF executive director of research Mark Mathews.

“That’s really the key here. You want to reduce the amount of returns that are easier to process. If you think about it, the low-hanging fruit here is getting the consumer what they need, right?” Mathews said. “The worst thing in the world is sending them something that they just aren’t interested in in the first place.”

Enright urges more businesses to rethink their use of “reason codes” within their returns management software to optimize the insight that they get on returned merchandise. These codes serve as identifiers as to why a shopper makes a return but are often blanket statements that don’t necessarily apply to every product.

“You’re giving people reasons that they would never take, such as ‘I’m sending back a pair of socks and one of the reasons may be a part missing, or the product doesn’t work,” Enright explained. “If the reason codes were more dynamic and more appropriate to the products in the order, you’d be able to go a bit deeper as to why the product’s been sent back. Some companies have a single reason code that says too big or too small, which doesn’t tell you anything.”

Enright pointed out that more retailers in 2023 have been aggressive with charging for returns, noting that the average extra fee consumers spent per return is just shy of $7. In the apparel world alone, Abercrombie & Fitch, H&M, Macy’s, Zara, J.Crew and Uniqlo have enacted returns fees for customers.

“I personally don’t think this is a great move, because it’s a blanket approach regardless as to why the return is happening,” said Enright. “Can you imagine if something was delivered to you and it was damaged, and you have to pay to return it?”

Returns Management Remains Decentralized 

The challenges in developing a successful returns ecosystem are vast, with 60 percent of retailers saying that the inventory that has been returned cannot be resold. The same percentage cited the high costs to repackage and restock the goods, according to a recent survey from e-commerce fulfillment provider Radial.

Both of these concerns, coincidentally, involve the company taking a financial hit, leading into the third-largest challenge for retailers — maintaining healthy margins. Of the 150 retailers surveyed, 43 percent say returns management poses a challenge to maintaining healthy profit margins.

In an example of the complexities of the forward vs. reverse logistics paradigm, the NRF/Appriss report gave insight into where companies manage reverse logistics operations, highlighting a lack of consistency — and centralization — across the board.

Nearly half (44.2 percent) of companies manage reverse logistics via allocated space within their distribution centers, while 30.2 percent say they let individual stores take care of the process.

Another 23.3 percent say they use a third-party solution provider to assist with reverse logistics, while 16.3 percent operate their own dedicated reverse logistics center.

This decentralization spreads to the staff tasked with overseeing the returns processes as well. Nearly 41.9 percent of retailers said that in-store returns and mail-in returns are not managed by the same department, compared to 32.6 percent of retailers that combined both under one roof.

“Every business is looking at this in a way that is most suited to their own reality and their own customer base,” said Mathews. “Some businesses have a much higher degree of online sales, and they’re going to look at this differently from a business that sees more in-store returns because they have a wider store footprint. I don’t think there’s a one-size-fits-all solution to this.”

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