This holiday season, retailers’ returns headache is getting worse.

Propelled by expected increase in year-over-year sales this holiday, returns management platform Optoro projects that $173 billion worth of goods will be returned between November and January, compared to an estimate of $135 billion during the same period last year. The costs of processing all those returns has gone up, too: In 2023, the average cost per item for retailers to procure and process returns rose 22 percent, to $33, over 2022, according to returns software firm Narvar.

At the same time, holiday season sales growth will be slower than last year as cash-strapped consumers hold out for steeper discounts — or pull back on spending altogether. The US National Retail Federation forecasts holiday retail sales to grow as much as 4 percent year-over-year in 2023, to about $960 billion, against a 5 percent year-over-year increase in 2022 and 14 percent growth in 2021.

To manage the growing glut of returns and their associated expenses — brands are investing in returns management strategies. This year, fast-fashion giants like Zara and H&M have introduced fees to discourage online returns, while digitally-native start-ups with smaller customer bases are deploying tactics that won’t incite a drop-off in shopping activity. Those include incentives to exchange (rather than return) a product, improving warehouse restocking processes and offering unique perks to frequent customers that shop at full price.

Experts say the holiday season will test the efficiency of these methods.

“There should be techniques that you might use throughout the course of the shopper journey throughout the year,” said Ray Marciano, managing director and retail lead at Accenture Song, the creative, design and marketing technology division of Accenture. “Starting in January and February, [retailers should think] ‘How do I drive improvements now for the next holiday season?’”

The Prevention Method

With brands expecting an uptick in return rates during the holidays, they are trying to find ways to improve their highest return rates.

Los Angeles-based denim brand Pistola, for example, anticipates its return rate will increase as much as 10 percent during this holiday season and is making real-time updates to its product descriptions.

Pistola analyses the returns of each style it carries to determine what sizing issue — too big, too short or too long — is most frequent. It will then rewrite product descriptions to clarify the intended fit of those styles, such as advising customers to size down when buying its $168 Lexi jeans, an item meant to be baggy and sit lower on the waist.

When fit issues are more specific, Pistola makes permanent adjustments. Its popular $168 Grover jumpsuit is supposed to have a more relaxed fit but many customers were displeased with its large drop crotch, resulting in a 25 percent return rate, above 20 percent for other jumpsuit styles. In April, the company raised the the jumpsuit’s rise to make it less baggy in the crotch area; the item’s return rate has since come down to 18 percent, said Pistola founder and creative director Grace Na.

Another shift brands are considering is setting up warehouse operations to allow for faster restocks during peak shopping seasons.

During London-based womenswear brand Boden’s peak sales periods — the second and fourth quarters — the company has been moving some of the team at its US and UK distribution centres from packing new orders to processing returns, which includes inspecting, steaming and repackaging goods. The brand also tries to avoid hiring and training temporary staff during the final quarter of the year, which could lead to mistakes and drag down productivity, Paul O’Leary, Boden’s chief operating officer said.

“Have a static, reliable, great, well-trained team and then use them to the best of their ability,” he added.

It’s already having an impact: Boden, which generates more than $100 million in annual sales, projects its return rate from July until the end of December will see a year-over-year decrease of 1 percent.

Prioritising Customer Loyalty

Still, for some companies, return costs are worth it, even as they grow, because they view a generous return policy as key to customer retention.

Apparel brand AYR generates more than 60 percent of its sales from repeat customers; 90 percent of those purchases are at full price. Founder and chief executive Maggie Winter attributes that retention in part to the company’s 30-day free return policy.

The brand’s recent experiments with changing its policy solidified its stance. When AYR introduced a $5 shipping fee for one day in November, the amount of revenue it lost was six times higher than what it saved on shipping, Winter said.

“Free shipping and free returns are still important,” she added. “We’d rather give up the costs to ship and return for valuable customers.”