Returns volume and costs continue to plague retailers across all sectors. During the third quarter of last year, 99% of survey respondents told RLA that product returns processing volumes either stayed the same or increased. At the same time, 58% said that returns processing costs and volume rose. Worse, 70% of retailers expected expenses to continue growing in 2022. And while 2022 survey data has yet to be released, it’s logical to conclude these retailers were right. Marred by rising freight fees, labor costs, and inflation, retailers are undoubtedly spending more than ever processing returns. In an industry with an average net profit margin of only 4%, every dollar matters.
Under such tight margins, calculating the value-add of processing returns is extraordinarily difficult to measure. Some returns may not be worth freight, labor, repair, or remarketing fees–not to mention accessorizing, repackaging, and storage costs. Fortunately, there are ways retailers can recover costs and minimize net losses. The key is to use data to identify products with the highest velocity and recovery potential utilizing returns software and other returns management solutions. Equipped with this information, retailers can identify items worth touching and determine how to handle items that don’t justify the costs.
Maximizing Recovery Profits in reCommerce: Understanding Returns Management and Product Category Dynamics
Product category plays a massive role in velocity and recovery potential because product types require different levels of reverse processing costs, customer demand, and market value. Product category also determines which items are ineligible for resale.
Open food, cosmetics, baby products, and skincare products are not resold due to liability risks. For this reason, brick and mortar stores must consider ways to safely and inexpensively dispose of these items. Online brands might consider creative returns management strategies like keep-it options for returnless refunds.
Beyond ineligible categories, retailers must make other distinctions based on which items will be hardest to sell. Our reCommerce experience shows that personalized items yield some of the lowest recoveries. For example, Jane and John Doe’s unique Seashell Green paint is difficult to resell to the next homebuyer in line. As a result, other custom items like paint bales, engraved jewelry, and monogrammed picture frames typically don’t warrant the cost of touching them.
Apparel is another category that retailers struggle to find value because demand ebbs and flows with the season. Additionally, the recovery potential typically doesn’t justify returns costs. Our data shows retailers only recover 50% (on average) of each clothing item’s retail value and can spend up to 55% in labor and freight.
Conversely, our data show electronics and furniture (while expensive to transport) sell faster and at higher margins. That’s because smartphones, tablets, office furniture, and patio sets uphold tremendous secondary market demand, particularly the latest models. As a result, retailers can recover 66% (on average) of an electronic’s retail value and up to 72% for furniture. Plus, the average item value on electronics and furniture is higher than clothing. A shirt might resell for $12, while the average video console garners nearly $500 in recovered revenue.
Product Returns Management and Processing: Understanding Seasonality
Seasonality is a strong factor in returns management. The time of year determines demand and resale value for many categories. Spring is the best season to resell home goods because it’s the most popular time to start home improvement projects. With warmer weather, Americans look to remodel their kitchens, buy new patio furniture, repair roofs, and upgrade HVAC units.
The winter holiday and Super Bowl seasons are the best times to rapidly resell TVs because demand is extraordinarily high. NRF’s 2020 Super Bowl survey showed customers planned to spend $1.5B on TVs for the big game. Our eCommerce sales data shows that TV sales spiked by 30% in January, in the weeks leading up to the main event. At an average recovery of 83% per big screen, resellers must do everything possible to reposition TV sales during this peak buying season.
By understanding the seasonality of their business at the product level, retailers can determine precisely which items can garner the most immediate demand for the highest price. They can also better strategize how to handle out-of-season returns. For example, does it make sense to pay to store patio furniture for next season’s Spring rush? If not, retailers can make calculated choices to immediately liquidate, donate or recycle these items. Return software and returns management services or reverse logistics services can significantly help with streamlining this process from decision making and disposition to refurbishment and resale.
Effective Returns Management Processing: Reconciliation Determined by Product Condition
Brand new (unopened), like new, and damaged. These terms loosely cover various returned product conditions– distinguishing between them is essential for determining velocity and recovery potential.
Brand new returns are pristine, unopened, and ready for a quick turnaround. Brick and mortar stores can immediately reshelve these items. As long as the products are still in season, they can be reticketed for full retail value. Online brands must still pay shipping and repackaging costs to reposition brand new returns, but they avoid additional labor and added packaging expenses that open-box items require.
Like new products are items that customers have opened, used, worn, or otherwise touched, but still in highly favorable condition. We call them “like-new” because they appear that way to the naked eye, but retailers typically can’t recover 100% profit margins on these items. For instance, even though a toy is untouched, the box it came in might be damaged, requiring the retailer to replace the external packaging or mark down the item. For electronic items, even an open box in perfect condition requires processing costs that diminish its’ recovery potential. Additionally, retailers must data-wipe all electronics for privacy protection, adding more labor and shipping expenses along the way. As a result, retailers must discern whether it’s worth touching like-new products. Often, that decision will depend on category, seasonality, and, most notably, whether the retailer has an effective returns management strategy or partner to help.
Damaged items that are beyond economical repair are the most undesirable returns because the costs (or inability to) to repair, refurbish, repack and ship often outweigh their resale value. Rather than spending time and resources touching these items, retailers must consider consolidating and liquidating them instead. While liquidation yields lower recoveries, the value proposition makes sense to avoid exorbitant freight and repair costs.
The latest Samsung smart TV can resell for thousands of dollars, so it makes sense to replace a missing power cord for a nominal fee. But if the TV has a cracked screen which is far more costly to replace, it does not make sense to invest the labor and parts required for repair.
Enhancing Reverse Logistics: Returns Management and Refurbishment Solutions
When returns show signs of wear-and-tear or malfunction, retailers have a few options: incentivize the customer to keep the items by offering a discount, throw them away, liquidate them at pennies on the dollar, or recondition and refurbish the items to recover profits and promote sustainability. Occasionally, returnless refunds make sense, especially for seasonal, low-value items. However, perennial products like consumer tech require a sound refurbishment strategy that is typically best provided by a credible returns management service provider.
Unfortunately, most retailers do not have the desire or resources to tackle refurbishment and other reverse logistics services independently. The process needs to be carried out by trained technicians and compliant with governmental standards.Reverse logistics services involve more than simply swapping out a pair of batteries. For example, suppose an electronics refurbisher doesn’t thoroughly wipe the data from a smart device. In that case, the retailer may inadvertently sell a phone with someone's private information leaving them liable for damages. One mishap can cost a retailer millions in legal fees and brand reputation.
That’s why it is critical to partner with a refurbishment provider who understands regulations and has the proper certifications to restore distressed products to like-new condition. Without best-in-class refurbishment capabilities, retailers may have no other option but to liquidate or dispose of these potentially high-value items.
Product Returns Management: Reducing Processing Costs
Products can be in-season, brand-new, and high-margin–still, they might be more expensive to process than their resale price can justify. That’s why retailers need to calculate all processing costs against their projected recovery before they decide to process a return. For example, freight is one of the priciest areas of returns processing. So if a retailer’s returns management service center is located across the country from where the $50 return takes place, they might reconsider the need to transport that item.
Reverse lifecycle costs include:
- Freight
- Warehousing
- Processing
- Labor
- Repair
- Repackaging
- Remarketing Services
Typically, retailers don’t have multiple returns centers, staff, or experience to process product returns and unwanted items efficiently. That’s why nearly a quarter of all returns become trash every year and why organizations of all sizes–from small online sellers to enterprise retailers and manufacturers –must consider partnering with end-to-end returns management providers or reverse logistics service providers that can optimize returns at every touchpoint. From the initial return request to shipping, receiving, sorting, returning to vendors, refurbishing, and reselling on the secondary market, returns management experts can help retailers achieve higher recoveries and faster velocity with innovative returns software and solutions.
The Bottom Line
Most retailers consider reverse supply chain logistics and product returns management a cost center rather than an opportunity to recover lost profits so they understandably focus on new sales to drive revenue instead. Yet, as returns continue rising, asset recovery is one of the most significant sources of savings that companies can benefit from. Those who can devise and deploy a returns management strategy to identify which returns are worth touching, and partner with the proper reverse supply chain management provider to manage the lifecycle efficiently, will see millions of dollars in recouped costs added to their bottom lines.
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