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Customers Love Free Returns. Here's How Brands Are Navigating the Costs.

US consumers returned $369 billion worth of unwanted merchandise last year, a figure that’s likely to grow along with online shopping. Brands are getting creative with how they keep the cost of returns from spiralling out of control.
Matchesfashion.com packaging | Source: Matchesfashion.com
By
  • Chavie Lieber

NEW YORK, United States — Last year, when fashion e-commerce site Revolve filed for an initial public offering, the company reported net sales of $400 million in 2017, proof that its strategy of hiring influencers to pitch products from up-and-coming designers was a hit with consumers.

That same filing also pulled back the curtain on a less-flattering aspect of the direct-to-consumer business: Revolve customers returned $385 million worth of merchandise.

Though Revolve’s return rate is high, it’s hardly alone in facing this issue. According to software company Appriss Retail, US returns totalled $369 billion last year, or about 10 percent of total retail sales. And the problem is getting worse as more people shop online, where the return rate is nearly double that of in-store purchases, according to B-Stock Solutions, a liquidation inventory platform.

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For digital brands, returns present a quandary — their target customers grew up shopping online where they can buy and return at will, and expect free shipping in both directions. Costs are rising, but brands fear tightening their return policies will send customers into the arms of competitors.

The fact that most companies won't talk about how much they are struggling with online returns tells you how big of a problem it is

“The fact that most companies won’t talk about how much they are struggling with online returns tells you how big of a problem it is,” said Richard Kestenbaum, an analyst with Triangle Capital, a private investment banking firm. “The best way to avoid a cost like returns is to not have it in the first place. But with the adoption of e-commerce, the problem is growing, not shrinking.”

Rising Costs, Uncertain Returns

Nearly 90 percent of shoppers say the availability of free shipping and returns influences their purchase decisions, according to a study from the third-party logistics provider Dotcom Distribution. Most brands are still figuring out how to give customers what they want without bleeding cash.

Forking over the funds to pay for shipping and returns can push fledgling brands over the edge. In May 2016, for example, menswear company JackThreads began covering shipping costs both ways so that customers could try on clothes before buying them. The program had JackThreads burning through cash, and it shuttered a year later.

Shipping costs are just the start, however.

“Every time a package comes back, the warehouses charge you to unpack, to put it back and to then reship it,” said Chris Riccobono, the founder of men's apparel company Untuckit. “Our return rate is pretty low now, but when we first started six years ago, it was painful to see how much we had to cover for returns.”

Brands take an even bigger hit when returned products can’t be resold. Tommy John, which sells undergarments, shreds any opened returns for sanitary reasons, while bedding brand Boll & Branch either destroys returned linens that have been opened and used, or earmarks the unopened returns for sample sales and donations.

“For us, returns that come in are likely dead inventory,” said Scott Tannen, founder and chief executive of Boll & Branch. While Tannen said Boll & Branch has a low return rate because fit isn’t typically an issue for bedding, returns can reflect “a hell of a lot of money.”

For us, returns that come in are likely dead inventory

As brands are navigating this tricky part of the business, they are also dealing with the rise of return fraud. Last year, outdoors recreational company L.L. Bean had to change its legendary lifetime return policy to one year because it said customers were abusing its terms. Amazon and Sephora have banned shoppers who return too much. British fashion e-tailer Asos recently notified customers via email that it might "investigate and take action" on customers guilty of frequent returns.

“We lose a ton of money on shirts that have clearly been worn, and we can’t go back to the customer and confront them because they will go crazy on social media,” said Riccobono.

The Technology Solution

Brands are attempting to minimise returns by offering more information about their products online, including fit guides. At UnTuckit, the company site emphasises how each shirt style fits differently. Good American, the denim brand by Khloe Kardashian, has similar fit guides for its curvy shoppers.

Shipbob, an e-commerce fulfilment services provider, found that over 62 percent of returns happen because items aren’t exactly like their online description, and so being as coherent as possible can help with returns.

It's important to have a sizing chart that speaks to everyone, and also to have imagery that's accurate.

“It’s important to have a sizing chart that speaks to everyone, and also to have imagery that’s accurate,” Riccobono said.

Brands are also changing how they handle returns to reduce their cost, from centralised collection points to optimising where they send unwanted merchandise that can’t be resold.

Target, Jet.com, Under Armour and Best Buy work with Optoro, which uses machine learning to determine the path returns should take, whether it’s back onto store shelves, to an outlet store, a charity or the landfill.

Sharing the Costs

Companies are finding new ways to share the cost of returns with consumers. Everlane charges customers for returns that are sent by mail, as do companies like Anthropologie, Free People, ThredUp and Land’s End.

They risk a backlash, especially when so many rivals offer the same services for free.

According to a study from Shipbob, 83 percent of shoppers abandon purchases when they discover there are restocking fees, and 75 percent won’t complete an order if they have to pay for returns. Everlane is regularly dragged on social media for its return policy.

“Basically, I paid $6 to try on and see their clothes. HARD PASS IN THE FUTURE,” one Reddit user wrote about Everlane.

Other brands are trying to get ahead of return costs by having customers drop items off in stores. In April, Narvar, a software provider that helps manage retailers' e-commerce operations, rolled out a service where consumers can return products from Fashion Nova, Urban Outfitters and other brands to about 8,000 Walgreens and Nordstrom locations. In a separate program, Amazon customers can return products to Kohl's department stores.

If your return rate is high and you can't sustain it, you don't have a good business

Many online brands have partnered with Happy Returns, which operates over 300 “return bars” in malls and other locations where shoppers can drop off unwanted purchases. Merchandise from companies like Parachute, Eloquii and Tradesy are sent back to Happy Returns hubs, and then to the individual brands, decreasing each client’s cost per return and streamlining the returns process.

For brick-and-mortar retailers, providing a convenient spot for returns — even from rival brands — gets customers in the door. For digital startups, these services can be a game changer, leaving the trickier aspects of “reverse logistics” to third parties.

“When you’re a small company and don’t have an economy of scale, partnering with someone who actually has plans and solutions is efficient,” said Heather Howard, vice president of operations and people at direct-to-consumer footwear company Rothy’s, which uses Happy Returns. “The world of reverse logistics has been ignored because we are all focusing on how to get products in people’s hands instead of how to get them out.”

Embracing the Inevitable

Brands need to make sure that the costs of shipping and returns are factored into their pricing structure from the get-go.

This was an important lesson for Harper Wilde, an e-commerce bra company that covers the costs of shipping and returns in order to offer a Warby Parker-like try-on-at-home service. Co-founder Jane Fisher tells BoF that one of the first pieces of financial advice she got was to make sure her product prices covered the costs of her shipping model.

“We built a business around free home try-ons, and it is so costly … but because it’s inherent to our business model, the costs have to be baked,” Fisher said. “Companies might say they have free shipping, but it’s really covered by the customers and is just presented in a more palatable way. It’s an understanding of consumer psychology.”

We are always thinking in terms of the long-term value of a customer

This strategy is no secret - there's even a Drake meme - but Tannen, of Boll & Branch said that the perks of online shopping are only sustainable if brands factor in their cost first.

“If your return rate is high and you can’t sustain it, you don’t have a good business,” Tannen said. “You need to understand your overall product costs and margins.”

This is, in part, why Everlane says it charges a restocking fee.

"We are rooted in transparency, which means providing the best price for our customer and keeping our margins as low as possible," Kimberley Smith, Everlane's general manager of apparel said. "Because of this, we charge a restocking fee only when a customer returns an item, instead of baking this charge into the retail cost of all of our products which most retailers do."

Some products tend to have higher return rates than others — apparel and shoes have among the highest, at 30 to 40 percent, according to estimates from eMarketer — and forecasting can make all the difference.

“The brands that don’t take category return rates into consideration either won’t be around in 10 years or will have to raise endless amounts of money to be sustainable,” said Tom Patterson, the founder of Tommy John.

Brands are finding an upside to returns too.

At Birdies, a direct-to-consumer footwear company, the brand’s Heron slippers were experiencing a high rate of return. After reviewing customer feedback, the company determined the shoe was too narrow and tweaked the design so its fit was true to size, said Marisa Sharkey, Birdies co-founder and president

“With returns data, you can make small changes to product that really make a difference,” she said. “We have testing and models, but really, aggregating the data helps us apply the changes we want to address.”

At the end of the day, some companies consider a generous return policy a marketing expense.

“We are always thinking in terms of the long-term value of a customer,” said Riccobono, of Untuckit. “We might spend $12 on an order because we paid $6 for shipping and $6 for a return, but that’s probably cheaper than acquiring them through marketing. And we don’t mind paying for it because we believe that guy is going to be coming back for the next ten years.”

Fisher of Harper Wilde agreed.

“It takes so much for a company to get in front of someone and actually get them to buy something and you’ve already paid for all of that,” Fisher said. “A repeat customer is much more valuable than a one-off and so we are paying for her returns because we are betting she is going to come back. The whole idea is that we aren’t going to spend more money to have to buy her again.”

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