Returns: The Bottom Line Bully
by Felton Lewis, IIII, Principal, Alliances and Business Development, NEWMINE
For many years, retailers have adopted the mindset that Merchandise Returns are just a cost of doing business. In order to create frictionless shopping experiences and compete with giants like Amazon, eCommerce retailers have taken a customer-centric approach to returns by making them fast, free, and easy. In fact, The Journal of Marketing found that retailers who offer free returns see customers spend up to 457% more than they did before initiating a free returns policy—an indication that a customer-centric approach is a competitive advantage for top line growth.
However, what’s good for the top line, isn’t always as good for bottom lines. As online and marketplace sales continue to grow, so do endless aisle sales via drop ship suppliers. While historic return rates for brick-and-mortar stores hovered around 8%, online return rates can skyrocket to 45% in some merchandise categories. Returns put strain on your reverse logistics as Distribution Center square footage or 3PL continue to expand, not to mention the monumental labor and transportation costs that returns processing incur. While many retailers don’t quantify the full cost of their returns, studies show that processing returns can cost 20%–65% of COGS.
Newmine has uncovered that on average, each returned product requires more than 7 different resources to process the return: from store associates, to carriers, to return to vendor or return to DC. In 2018, around $400 billion worth of inventory was returned to retailers. Combine this with the staggering reverse logistics costs, and retailers are seeing their bottom lines deteriorate. Despite these glaring issues, only 25% of retailers surveyed by Peerless Research Group reported they would change their returns handling process to course correct in the next 2 years.
JOIN THE RETURNS REDUCTION MOVEMENT!
Richard Branson once said that “Every great movement in the world starts with a tiny group of people who simply refuse to accept a situation.” When companies are in a comfortable place, they are less inclined to take bold steps to create change. Without disrupting the current order, retailers will continue to see returns increasingly bully and erode their bottom lines. Not only is Returns Reduction possible and the benefits tangible, unifying your corporate culture around Returns Reduction is an endeavor with sustainable benefits across the value chain:
- Improved EBITDA and Reduced OPEX – While a “Returns Reduction Movement” may seem to have expansive, unattainable goals, the fact is that moving the needle just a bit leads to big financial rewards. Newmine has found that a $1 M Returns Reduction delivers $0.5 M to the bottom line—money that can be invested back into the business on revenue growth initiatives.
- Enhanced Customer Experience – Returns Reduction also improves your customer experience and retention. Retailers don’t like to admit the amount of merchandise that comes back for reasons like “wrong item shipped” or “defective,” but these events occur more often than they would like. Not only is it a waste of OPEX, it’s a significant customer experience risk, as 80% of first-time shoppers who must return an item will never shop again with that retailer. Returns Reduction has a substantial positive impact on Customer Lifetime Value.
- Product Development Intelligence – Collecting and synthesizing return data, including quantified customer reviews and feedback, will offer insight into what customers are truly looking for. That ability to forecast will drive future product success.
SHOW YOUR RETURNS BULLY THE DOOR
The good news is RVCF members have the returns data, even if there is no single system of record for returns. In order to put a dent in your annual return rates, you will need both an aggregated and granular view of your returns data. The data is housed in business systems such as eCommerce, CRM, OM, WMS, and POS. Customer experience data is stored in reviews and on social media. The key to an effective Returns Reduction Movement starts with organizing all data into a single view to create a cohesive picture of customer returns. The next step is to leverage this data to achieve Returns Reduction through addressing four fundamental requirements:
- Root Cause Discovery: “Returns Reduction” means reducing both the number of avoidable returns and the cost of returns when they do happen. Returns Reduction is only possible once the data is collected and analyzed in one central system in order to discover the root cause of returns.
- Timeliness: Too often have businesses relied on a “post mortem” after each season to recognize the impact of returns. By addressing the problems in-season, and in near real time, you can prevent avoidable returns.
- Actionable: Your ability to reveal the Root Cause and focus on your highest priority products and categories will enable your team to effectively address the issues.
- Collaborative: Returns and their associated reasons are a direct byproduct of the entire organization. Any successful initiative will require two essential elements:
1) a “single version of the truth” for all returns and shared by all business users, and
2) a collaborative workflow mechanism to manage team alerts, support action, and measure success.
ENSURING YOUR RETURNS REDUCTION INITIATIVE IS SUCCESSFUL
We are pleased to be working with RVCF to spark a Returns Reduction Movement in 2019. In direct response to members’ comments, RVCF has commissioned a new Returns Reduction study to spotlight the challenges. Here are several guidelines to ensure your FY19 Return Reduction initiative is successful and delivers business value.
1) Shared Vision: Build your movement around a shared Returns Reduction vision and strategy that is communicated relentlessly throughout the business. Start with a two-year retrospective of your returns data for FY17-FY18 and identify a few of the largest returned items (lost sales revenue) where the need for change is clear.
2) Accountability: Hold sponsors, process owners, project managers, and team members accountable to deadlines and deliverables. Set up the forums to manage return initiatives and give them the right support and attention.
3) Right Stakeholders: Few, if any, organizations have a role titled “Chief Returns Officer.” In lieu of not having one executive that is responsible for the total lost revenue due to returns, we encourage our clients to assemble a cross-functional team including Merchandising, Digital, Marketing, Supply Chain, and Finance.
4) Tools and Skills: Give project managers, process owners, sponsors and team members Analytics and AI based tools. Spend time educating teams. Newmine’s flagship software, Chief Returns Officer™, is an AI-based Returns Reduction Platform that empowers teams with the analytics needed to reduce returns.
5) Processes, Metrics, and MBOs: In order to preserve the new improvements and reduction in return rates, establish and monitor “at risk” products, set return rate goals, and create return reduction MBOs. Every $1 M in reduced returns, contributes $0.5 M to the bottom line EBITDA.
Companies rarely take business improvements seriously until it threatens their survival. Organizations that have made the leap to omnichannel, while still maintaining high operating costs, are risking severe deterioration to their bottom lines. Further, without disruption in this area, new e-retailers will struggle to enter the market sustainably.
All innovative disruption requires some discomfort as companies forge a new strategic path. Given that every $1 M in returns equates to $0.5 M in EBITDA, can you afford not to change?
The NEWMINE team is like no other – uniquely focused on optimizing retail commerce and Returns Reduction. We are all accomplished professionals with deep retail strategy, operations, and IT systems skills honed by decades of in-the-trenches experience. We have helped some of the retail industry’s biggest brands transform their customer experience and enhance profitability. We are the developers of the only AI-powered returns reduction platform, Chief Returns Officer™.
YOUR EBIDTA OPPORTUNITY: http://www.newmine.com/returns-calculator
BUILD A STRONG DEFENSE AGAINST ONLINE RETURNS: http://www.newmine.com/how-to-reduce-customer-returns
 UPS - https://www.ups.com/us/en/services/knowledge-center/article.page?name=return-shoppers-by-rethinking-your-online-returns&kid=aa3b199e
 CNBC - https://www.cnbc.com/amp/2019/01/10/growing-online-sales-means-more-returns-and-trash-for-landfills.html
 PRG - https://scg-scmr.s3.amazonaws.com/pdfs/SCMR1805_Reverse%20Logistics%20PDF.pdf