return to sender

Online shoppers return an estimated 25 percent of goods purchased via the Internet. How well merchants handle those returns will likely determine their future.

By -- Logistics Management, 5/1/2000

U.S. consumers are receiving-and returning-goods purchased online in droves. During the 1999 holiday season, about 25 percent of all online purchases were returned, representing one billion dollars' worth of merchandise, according to Stacie S. McCullough, senior analyst at Forrester Research Inc., in Cambridge, Mass. Other estimates peg that return rate at 30 percent or more.

That's a higher rate of returns than traditional retail stores experience, says Stephen Goldsmith, director of marketing for EXE Technologies Inc., a supplier of distribution information systems in Dallas. Goldsmith calls returns processing "the sleeping giant" of the online retail world. Returns management may be treated as an afterthought in many businesses, he says, but ultimately, the ability to handle returns effectively will prove to be a differentiator for online companies.

Rachel Lev, vice president of marketing for Yantra Corp., an Acton, Mass.-based provider of e-commerce software, agrees with that assessment. "We think returns are one of the critical elements to the growth of e-commerce," she says. Without a customer-focused returned-goods strategy, she believes, online retailers will not be able to capture a significant share of store or commercial traffic.

Effective returns management also represents a critical customer-retention tool for online retailers, says David J. Roussain, vice president of electronic commerce marketing at FedEx Corp. in Memphis, Tenn. An e-tailer that has a superior mechanism for recovery from service failures can convert customer dissatisfaction into loyalty, he says. For that reason, Roussain advises e-tailers to think of returns management as "potentially the final step in the selling process."

Managing the returns process also can have a significant impact on an online retailer's bottom line-which is another reason why managers can't afford to ignore the subject. For online retailers, Roussain reports, the returns process may in fact represent "the biggest single controllable cost they have."

No matter what kind of a return rate an e-tailer may have, managing returns has to be part of its upfront strategy, adds Mohamed Amer, vice president of retail solutions for software provider Viewlocity.com. "Make sure that your physical partners, systems support, and carriers are able to handle that," he says. "Returns are your face to the customer."

Different Expectations

Although it's clear that the way an e-tailer handles returns is vital to its success, many online merchants model their returns policies and strategies on their own experience in returning products to suppliers rather than tailoring them to consumers' needs, says Bob Hutchinson, managing director of consulting firm KPMG LLP's consumer markets supply chain solutions practice. For example, when dealing with online customers, cycle times for handling returns must be much shorter than they are for, say, catalog companies. Furthermore, e-tailers must have accurate information that is visible to customers and allows for "self-help," an important element to online shoppers.

"Customers expect very high visibility of transactions today," agrees FedEx's Roussain. They also expect the return to be credited to their account immediately, he says, and they want to know the exact status of their account.

Goldsmith believes that the higher volume of returns is another key difference between online and traditional retailing. "In the traditional environment, managers might want to handle returns manually. You can't do that in the e-commerce environment, with return rates of up to 30 percent. If you're at that level," he says, "the returns piece becomes a huge part [of your operation], and you have to shift your focus."

Points to Ponder

For online retailers, there are a number of factors to consider when developing a returns process that will satisfy the new breed of customer. They include the following:

- Ease of doing business. Whether they mean to or not, many online retailers make it difficult for customers to return products, burying returns information on their Web sites, requiring customers to obtain a Returned Merchandise Authorization (RMA), and charging restocking fees. Most Internet retailers are focused on brand and attracting customers, says Forrester's McCullough, but not on retaining customers through after-sales service.

One exception to that rule is Road Runner Sports, a company that sells running shoes via catalog and over the Internet. Road Runner, which offers a 60-day unconditional guarantee to members of its "Run America Club" (other customers can return unworn merchandise within 30 days), makes it easy for customers to return items by including a shipping label for returns with every order. In many cases, a customer can return a product in the same bag in which it was shipped.

Even though it makes things simple for customers, Road Runner's return rates are low-16.7 percent for catalog sales and 14.0 percent for Internet sales, notes Chief Operating Officer Bill Neff. The online return rate is lower than the industry norm, Neff says, because the company has the ability to provide better information more quickly over the Internet. "We can change information such as sizing at the drop of a hat," he says.

- Quick issuance of credit. Online retailers must have "a very timely response to crediting their customers," says Bruce Hammond, executive vice president of reverse-logistics company ReTurn Inc. in Wayzata, Minn. "The consumer is looking for confirmation that something is happening immediately."

- Getting product back into stock. Because the returns rate is so high, online retailers can't afford to have rejected items remain off the warehouse shelves for long. "If you know that 30 percent of your items are going to be returned," says Patrick Sedlak, vice president of Sedlak Management Consultants in Richfield, Ohio, "you want to get those items back into a sell position ... as quickly as possible, instead of carrying the inventory into the next season or out of season."

Road Runner Sports subscribes to that philosophy. The company receives and processes returns in its own warehouse near San Diego, which allows the company to make returned goods available for resale quickly. According to COO Neff, 84 percent of returned items go right back into stock.

- Integration of returns systems with other functions. "We are finding that our customers are asking for greater and greater integration of the returns system into their systems," says Roussain of FedEx. For that reason, FedEx is developing ways to integrate its own product-returns software with online retailers' ordering systems. "This would allow the information on the screen that pertains to the customer's orders to be automatically entered into the returns system electronically," he says.

- Handling returns through multiple channels. "Click-and-mortar" companies have to decide whether to allow consumers who purchased products online to return them to a retail store. Although it's convenient for customers, doing so can pose some real challenges for the merchant. "Accounting systems at the store won't show this stream of merchandise," points out Sedlak. This means the retailers run the risk of having a "bubble of inventory" moving around that the inventory systems cannot see.

- Disposition of returned goods. What happens to all of that returned merchandise? Companies that specialize in the disposal of returned goods already exist, but Roussain predicts that demand for such services will increase. As the market for asset disposition grows, new companies like The Return Store, which plans to establish up to 2,000 locations across the United States, have begun cropping up. Consumers will be able to bring their purchases to The Return Store rather than pack and ship them to the retailer themselves. According to the company, credit card processing will be taken care of on the spot. The Return Store plans to begin field testing this spring, and company executives expect it will be fully operational by fall.

Is Outsourcing Best?

Although it seems likely that many online retailers will turn to returned-goods specialists for help, observers disagree on whether outsourcing is the best way to handle returns. Viewlocity's Amer, for example, believes that the complex nature of returns management means that whoever manages a company's order fulfillment should also handle returns. Yantra's Lev thinks that returns are so critical that logistics managers should handle them in-house. Most Internet-based companies have a very fragmented distribution chain built around internal warehouses, drop-ship suppliers, and, in some cases, various kinds of third-party providers, she says. "If you go the route of outsourcing [returns], everything will come back to a central facility, which adds another step, a lot of costs, and a time lag."

On the other hand, Hutchinson counters, returns are "a very specialized and messy process and operation, requiring specialized knowledge and technology." Handling them in-house, therefore, can be disruptive to the rest of an organization's operations. If handling returns isn't considered a core competence, he suggests, then it is worth taking a look at outsourcing, but retailers need to be careful about which provider they select. "Not every third-party logistics provider can do this work."

In Sedlak's opinion, finding the right returns solution depends on the vertical market a retailer is in. If a specific market typically experiences a high rate of returns, then "do-it-yourself" is likely to be the best option because the retailer can get inventory back in stock quickly in order to resell it. Outsourcing can work well in other cases, though, particularly for retailers of hard goods that can be sent to a returns center for inspection, rebuilding, and repackaging for resale.

One company that found outsourcing to be the right solution is i-Vendor, an online fulfillment company that serves Web-based retailers. The company works with a number of distributors that fill orders placed by the retailers' customers. According to David Meyers, i-Vendor's manager of fulfillment services, working with multiple distributors added too much complexity to the returns process, largely because the distributors had different returns policies and practices. "We are adding new product lines all the time," Meyers says. "If we have to customize our returns process [for each one], that creates a lot of work on the back end for us." That variation also led to delays of up to four weeks in processing returns.

Meyers was charged with developing a consistent approach to managing returns. One of his first steps was to standardize the distributors' returns policies. For that to be effective, he also had to standardize procedures for the physical handling of returned goods. He ruled out an in-house fulfillment center because of the cost and time required for setting it up. Instead, he decided to outsource returns management, eventually selecting ReTurn Inc. After a successful trial program last year, the companies are now implementing the first phase of their returns program.

Take the Consumer's Point of View

Returns touch many areas in an organization: marketing, customer service, finance, and operations. Although logistics professionals often don't have the final say when it comes to returns strategies, they should play a significant role in developing them, advises John J. Tracy of Tracy-Hayden Associates Inc., a South Orange, N.J., consultant who specializes in fulfillment. It's especially important that they not wait for a problem to come to them.

Logistics managers can do that, he says, by looking at returns management from the other side of the fence. "Log onto your company's Web site and act as a consumer. Try to get instructions on how to handle returns. Find out how easy it is to navigate.how easy it is to understand," he advises. He also urges logistics professionals to visit their competitors' Web sites and compare those returns policies with those of their own companies.

"Maybe logistics managers don't have the authority or right to change the returns system," Tracy says. "But they need to be armed with information to begin the process of change if it's required."

Returns Policy Tips Online Buying Decisions