Retail Returns
December 22, 2024
As we approach the final stretch of this year and the ensuing end of the holiday season, I’ve noticed a small cluster of random packages in a corner of my living room. Santa didn’t get lost. These are e-commerce purchases that didn’t quite live up to expectations. Maybe the quality was subpar or sizing or color was off. Some of these items will be donated, some will be boxed up and sent off by mail or UPS/FedEx, and some will be returned in person to physical stores of the online retailer. In short, we, like many other households who do much of their shopping online, have quite a few returns. In the US, retail returns are estimated to be nearly 17% of total sales for 2024 (see chart below).
eCommerce has been wonderful in general for consumers and retailers, and has been fundamental in retail growth over the past several years. To demonstrate just how meaningful eCommerce is, Walmart, the world’s largest retailer, reported a 27% increase in eCommerce in its latest quarterly report compared to the last year. That is no small feat.
One of the reasons that eCommerce has continued its torrid growth is because of the ease of returns which give consumers peace of mind when trying new products. In the US, many retailers offer free returns for 30-60 days. While not as widespread in Europe, consumer protection laws often allow a “cooling off” period of about 2 weeks in which a customer can change his/her mind about a purchase.
Focusing on the retailers, there are pros and cons to flexible return policies.
Pros
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Increased Customer Satisfaction and Loyalty: Customers are more likely to buy products from a store that has a no-hassle return policy than a store selling similar products that doesn’t have such policy.
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Boosts Sales Volume: Easy returns makes customers less hesitant to make a purchase and may encourage more frequent and/or impulse purchases.
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Trust and Transparency: Easy returns, particularly for lesser known retailers or brands, help instill the sense that the retailer stands by their product.
Cons
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Increased Operational Costs: The cost of shipping, handling and restocking products can escalate quickly and eat into margin
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Risk of Abuse: Some customers may use the product before returning it, return empty boxes or junk, or be part of an international crime ring
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Environmental Impact: Return packaging, shipping fuel, and possibly needing to dispose of the product entirely, all have big environmental implications.
As a consumer, easy returns have been great for purchasing confidence. But as an investor, easy returns are not so clear cut. The risk of fraud and operational expenses has to be weighed against actual revenue and margin growth from increased eCommerce sales. At Somar, we spend a lot of time looking at consumer behavior. Since we look at comparable retailers across geographies, we can monitor how policies such as ease of return and resulting operational efficiency (or inefficiency) affect revenue and margins. It’s just one of the areas we look at when we consider which companies to invest in and which to steer clear of.
Wishing you happy holidays and a great 2025!