In the July-August 2017 issue of LP Magazine, I wrote an article titled “Brick-and-Mortar Is Not Dead; Amazon Just Proved It.” That statement continues to hold true. But when I read business publications or mingle at industry events, I still notice a lot of doom and gloom about the supposed retail apocalypse of store closing, tighter margins, and staff cutbacks. This fear of and focus on the threat from online retailers, like Amazon, might be distracting brick-and-mortar retailers from a different kind of a threat coming from within.
Ponder this: the average return rate at physical retail locations is between 3 and 9 percent, whereas for online retailers, it is between 12 and 30 percent. Let me take a wild guess: your organization either has an online channel or plans to build one soon. Do you see what’s coming your loss prevention team’s way?
Amazon is clearly concerned about returns, as evidenced by its recent announcement of a partnership with Kohl’s. This should come as no surprise since returns are one area where e-commerce-only retailers might be at a disadvantage. They sell the product at a lower margin because, in theory, they have lower overhead. A returned item might eat up more than the margin, causing a loss. If the overall return rate is between 12 and 30 percent, as it appears to be in e-commerce, you can see the scale of the problem.
Online retailers have another disadvantage from the logistics standpoint. They have to absorb the cost of shipping the item back to the facility, sorting, and repacking, and endure a higher chance of damage. Plus there is a delayed reintroduction of the product back to the inventory if it isn’t damaged. On top of all this, if the process is even slightly inconvenient, customers are just a click away from hundreds of other places to shop.
How Big Is the Return Problem for Brick-and-Mortar Retailers?
Over the years, traditional chains have created generous return policies with the intent of providing outstanding customer service. Some even had no limits on returns-a customer could return anything, anytime. This led to abuses, which accelerated when traditional retailers also started having online presences. As a result, in the past three years we saw more and more retailers starting to restrict returns. But restrictive return policies discourage honest shoppers, so this now becomes a balancing act.
As it turns out, a lot of your customers’ shopping habits are directly related to your return policy. There is a significant marketing advantage to be able to say, “We trust our customers, so we will take anything back.” This helps sales. At the same time, this kind of policy may influence the customer to buy several sizes to try at home. This increases returns and your costs. Some retailers who have both physical and online presences have introduced restocking fees on just online returns. But restocking fees do not encourage good customers to shop again. In a recent survey, almost 80 percent of shoppers said if the return process is simple, they will buy again-meaning that if it isn’t, they won’t. No doubt, the balancing act is becoming more and more challenging.
Implement a Returns Management Process
It helps to have some sort of a returns management process. There are a few third-party resources that can help you manage your returns by using advanced data analytics and systems. What we must not forget is the fraud aspect of online returns. “Almost 10 percent of online returns are fraud,” according to Tom Rittman, vice president of marketing at Appriss Retail. If you think of how difficult it is to manage a fraudulent return problem in a brick-and-mortar environment, imagine how difficult it will be when you start having to deal with a flood of online returns.
Policy alone is not the answer. History and data show that restrictive policies can discourage more good customers than bad ones. However, using advanced analytics and data to make returns decisions has proven effective in reducing customer friction. Imagine a world where you could identify a fraudulent refund or abusive customer behavior with over 95 percent accuracy. This can be done today with the right technology. Not to mention, the right analytics suite can also take all the other data points in your store and combine them with your return data to help you build a better customer model. This is where it might be worthwhile to focus some attention and energy.
As the e-commerce percent of sales grows in your organization, so will the refund problem. Instead of worrying about the “retail apocalypse,” refocus on this. The percentage of returns is one advantage you currently have over the likes of Amazon. By preempting the spike in return fraud at your organization, you can keep that one advantage and stay competitive.
Tom’s column regularly appears on every issue of LP Magazine. To subscribe to the printed version of the magazine and enjoy other great content visit losspreventionmedia.com