Return Rendezvous: Mastering the Maze of Returns and Retail Partnerships

‘Tis the season to be jolly, but if you’ve recently done any online shopping, you’ve probably realized that unless you order by a specific date, you won’t receive it in time —which won’t make for much jolliness. Nevertheless, we all know that many of these items, as well as some purchases made during the post-holiday, markdown season, will be returned. 

But this year, retailers are setting a new trend where free returns are less common or less straightforward. Is this a new equilibrium? Is it necessarily good for retailers and bad for consumers? The answer is, as usual, not that simple. 

Holiday Shopping and Returns (Consumer Side)

In a world where online shopping reigns supreme, especially during the holiday season, retailers and consumers face the increasing complexities of product returns. 

However, it’s crucial to first understand the intertwining relationship between holiday shopping (a time marked by significant consumer spending and gifting) and the inherent, subsequent increase in product returns. This phenomenon is increasingly observed in the digital age, where online shopping has become a mainstay of holiday consumer behavior.

In recent years, and especially in 2023, there has been a notable shift in shopping habits, with a significant portion of consumers (62%) opting primarily for online shopping during the holiday season. 

This preference is backed by convenience and a wide array of choices, but also results in a higher likelihood of returns. The average American makes eight returns per year for varying reasons, including issues with style or size, damages, defects, or because they simply disliked the product —a common practice is “bracketing,” where you buy two sizes and return one (or both if neither fits). 

Additionally, return policies impact consumer behavior substantially, with nearly three-quarters of Americans (71%) saying that return policies impact their decision to buy from a company, and 60% saying they would reconsider purchasing from a store that charges for mailed returns. This sentiment highlights the importance of consumer-friendly return policies in driving sales and maintaining customer loyalty. 

Interestingly, nearly half of Americans feel guilty about returning gifts from loved ones, and this emotional aspect adds another layer to the dynamics of holiday returns.

The Origin and Economics of Returns (Retailer Side)

The realm of e-commerce has witnessed a burgeoning trend in product returns, a phenomenon with deep-seated origins and significant economic implications. Notably, the average return rate for e-commerce stores is approximately 18.5%. 

The high rate of returns presents logistical challenges and financial burdens. The expense of handling returns is on the rise. For a $50 item, the average cost can now reach 66% of its sale price, a serious increase from 59% in 2020, according to CBRE. This includes customer care, transportation, processing, discount loss, and liquidation costs (as shown in the figure below). Items like laptops, tablets, and cell phones, being of higher value, incur the most significant costs in reverse logistics on a per-unit basis.

The increase in return costs is exacerbated by a lack of economies of scale in the return process. Each return requires individual handling, from customer service to transportation and processing, making the system inherently inefficient. Unlike mass distribution, where costs per unit decrease with scale, returns maintain high costs per item due to their individualized nature. This inefficiency is a significant challenge for retailers, particularly as the volume and value of returned items continue to grow.

Naturally, this has prompted e-commerce platforms to explore solutions to mitigate these challenges. 

In fact, Axios reports a shift in e-commerce, with over 40% of retailers now charging return fees. Following a pandemic-driven surge in online shopping, which increased return rates from 10.6% to 16.5% between 2020 and 2022, and cost retailers over $800 billion, it seems that the free-return era is coming to an end. Experts anticipate an increase in “tiered returns,” where free returns are offered to loyal customers but others are charged. And while it’s a sensible strategy for retailers, they risk alienating customers accustomed to free returns, making careful policy communication critcal. This shift includes brands like American Eagle and Zara, and according to the article, it’s attributed to high return costs —around $165 million per $1 billion in sales. 

But the reality is that eliminating returns completely will be extremely hard, especially in a competitive world.

But today’s article isn’t about how many of these returned products are never resold but instead end up in landfills; today’s article is about how to make the operations of handling returns more efficient. 

Amazon Trying to Strike the Right Balance 

Amazon is among those who incur extreme costs due to returns. According to a recent article in The Information:

“Taming the returns beast represents one of Amazon’s biggest opportunities to curb runaway logistics costs, which more than doubled between 2019 and 2022 to $84.3 billion. Sending items back to Amazon is almost always significantly more expensive for the company than getting them to a customer in the first place, according to people who have worked on returns at Amazon, so any improvements to the process can pay dividends.”

Amazon’s strategy to balance return costs and customer satisfaction includes steps that fall into three buckets: 

Reducing Returns

Amazon is implementing machine learning tools to provide better size recommendations, aiming to reduce the frequency of returns due to fit-related issues. By improving the accuracy of product information, Amazon seeks to decrease the overall volume of returns. Amazon has also started charging for certain returns, reducing their likelihood. 

Reducing the Cost of Returns

The company is introducing fees for certain return methods and has established partnerships with retailers like Staples. This approach aims to lower the logistical expenses associated with processing returns while still offering convenient options to customers.

Creating Value Through Partnerships

Amazon’s partnerships with physical stores like Staples and Kohl’s for return handling create mutual benefits as they reduce Amazon’s return costs but also increase foot traffic and potential sales for the partner stores, transforming the return process into a value-creating ecosystem.

These measures aim to streamline returns, reduce financial burdens, and maintain customer loyalty. Focusing on the last two buckets, The Information exhibits the following table summarizing Amazon’s return options:

For some of these, the value is clear: if you return a product to Whole Foods, which is owned by Amazon, the customer is the one incurring the cost of the first step in the reverse logistics supply chain. Amazon also gains economies of scale by delivering the items from Whole Foods to its sorting center, where they can now aim for a full truckload. Amazon is also benefiting from a customer at Whole Foods who may want to purchase groceries. As Amazon is struggling in the grocery realm, any such purchase is beneficial. A customer may also like the fact that they can just drop the item at Whole Foods without the need to pack it and wait for UPS or drive to the UPS store (which is much less of an interesting destination for most people). 

However, in terms of convenience, UPS may be preferable by many since there are over 10,000 UPS Stores compared to Whole Foods which only has 500 locations in the U.S., Amazon Fresh 44, and Amazon Go 22. 

So you might be surprised to see Amazon allowing free returns at Kohl and Staples on the list. But what drives these partnerships, and are they as smart as they seem? 

Assessing the Value of Partnerships

Looking at these partnerships both empirically and theoretically has been the focus of Leela Nageswaran. ​​The paper Value of Online-Off-line Return Partnership to Off-line Retailers investigates the economic benefits of partnerships between online retailers and offline stores for product returns. 

The research utilized proprietary datasets from Happy Returns and a major offline retail partner, covering store returns, transactions in offline and online channels, and macroeconomic data for each store location. The study aimed to determine whether and to what extent such return partnerships between online and offline retailers create additional value for offline retail partners.

The authors use a panel difference-in-differences model to analyze the data, focusing on the impact of introducing the return service at offline retail stores on their performance and customer behavior.

The study’s results revealed that the return partnership led to a 5.1% increase in unique customers and a 4.8% increase in items sold per customer in offline stores. Online channels saw a 1.7% increase in unique customers and a 0.8% increase in items sold per customer. Overall, the partnership resulted in a net revenue increase of 4.5% in offline stores and 1.9% in online channels, underscoring the significant financial benefits of such collaborations.

The partnership attracted new customers and changed the shopping patterns of existing customers, especially in the offline channel. The study highlights the potential for offline retailers to gain from online-offline return partnerships. It suggests that these partnerships can drive customer traffic and sales, benefiting both online and offline retail sectors. 

The partnership between online and physical stores for returns is a win-win because it saves online retailers shipping costs and drives more customers to physical stores, potentially increasing their sales. Customers also benefit from the convenience of more accessible return options. This synergy creates a positive outcome for both types of retailers and enhances customer experience.

So, what’s the future of these partnerships? You have to look a little closer at the type of products sold in the online and offline chain. 

In the paper Offline Returns for Online Retailers via Partnership, which utilizes a game theoretical model, Leela shows the following result:

“We find that store and online retailers who offer differentiated products have incentives to partner, as in the case of the return partnership between Everlane and Cost Plus World Market (formed via Happy Returns—a service provider that connects online retailers with store retailers). In this case, the online retailer’s benefit from the cost savings achieved by consolidating shipments of returned items from stores outweighs the loss associated with a high return rate. 

We show that, contrary to initial intuition, return partnerships may also feature retailers who offer similar products as in the case of Amazon-Kohl’s. In this case, online customers’ migration to offline returns ensures a store retailer’s incentive to partner. However, it limits the incentive of an online retailer when the added convenience of an offline return induces more returns of online purchases. Thus, we caution that with limited differentiation in product offerings, store visits should not be too convenient for a partnership to form.”

In other words, I can see how Kohl’s is benefitting. If returning to Kohl’s and Staples is too convenient, Amazon might be worse off in the long run. 

As we wrap up, it’s evident that the world of online shopping and returns is in flux. Retailers, grappling with the high cost and inefficiencies of returns, are rethinking policies. This trend, marked by a move away from free returns, signals a new equilibrium in e-commerce. Amazon's strategic adaptations — leveraging technology for better-fit predictions and forming partnerships for efficient return handling — point toward a future where the return process is more balanced yet remains a complex puzzle. Perhaps in the future, we’ll master the art of perfect online purchases, but until then, it seems we’ll keep playing the “will it fit, will it not” holiday guessing game.