Necessary Burden? Why eCommerce Returns are Proving to be a Billion-dollar Headache for the Industry

April 12, 2022 | By The Economic Times

Garima Capoor Nanda takes pride in co-founding and running an online venture, Plantables, that sells eco-friendly stationery such as calendars and wedding invitations made of seed papers. But handling return orders can sometimes threaten to run companies like hers into the ground.

“Whenever we receive a returned item, it is almost in an unusable condition,” says Nanda, 32, who started Plantables in December 2018. She explains that customers mostly don’t take the effort to properly pack a returning product. It is not really their responsibility, she says, but it affects their bottom line. The merchandise passes through several transit points before reaching the seller. Sometimes the product cannot be even resold because of damage during the return process.

Many entrepreneurs like her have been able to reach a national or even international market through e-commerce. The ability to order from anywhere, pay easily and get the product at home offers unmatched convenience. Once the safety issues around payment were addressed, a major hindrance for people to buy goods online was that they missed the “touch and feel” experience that they got from a brick-and-mortar store. E-commerce companies addressed that discomfort by allowing buyers to return purchased products as conveniently as they purchased these — with a click on the app. However, the same return policy that fuelled their sales has become a millstone around their necks. According to a report quoting RedSeer Management Consulting, the e-commerce industry in India clocked sales of $18.6 billion in 2017, but over 30% of this was reflected by returns and order cancellations. Now with Covid disruptions, the geopolitical turmoil and rising inflation hurting e-commerce companies like never before, these entities are looking to streamline operations and bring down some expenses.

Amazon India and Flipkart did not answer questions on what percent of sales or revenue is affected by returns in this period. RedSeer didn’t have the latest information about this. But experts at the internet-focussed consulting firm confirm that returns pose one of the biggest problems for online retailers. It uses up a major part of an online seller’s resources, yet it is a cost and no revenue is

made from it. A major part of the returns cost is borne by the merchants who listed the products concerned. Platforms like Amazon and Flipkart determine the cost merchants have to pay for returned orders based on the reason for return, they say.

“The return cost can typically range from Rs 50-150 for smaller items and up to Rs 500-600 for heavier shipments based on the logistics cost that the platform had to incur for delivery. On an average, for an order of Rs 1,000, merchants may pay up to 10-15% as cost because of returned orders,” RedSeer adds.

The average return rate in the e-commerce industry is nearly 18%, says Soham Chokshi, founder and CEO of logistics solutions provider Shipsy. An entity like online fashion store Zouk sees a return rate of 2.5%.

Kinds of returns
Returns are of two kinds: return to origin (RTO) and reverse pickup (RVP). When a shipment comes back without reaching the customer (customer unavailability, product damage, etc), it is RTO. When a customer receives a product but schedules a return after that, it is called RVP.

Among RTOs, one of the most challenging kinds of returns is cash on delivery (CoD). Merchants suffer a fair amount of loss because of CoD returns, says Atul Mehta, COO of logistics solution provider Shiprocket. “We see 20-30% of CoD orders getting returned without even getting delivered. It’s a direct cost for the merchant,” he says.

Sometimes customers reject or cancel orders even before it reaches them. In CoD, they have paid nothing and so lose nothing. But for merchants, such transactions are an additional cost burden.

Chokshi of Shipsy says sometimes consumers buy the same thing from two etailers to see which one delivers first. The order coming later is then cancelled
— and all this without even the customer making a payment first.

“CoD is also a very low involvement purchase as the customer has not taken that critical action of making a payment,” says Pradeep Krishnakumar, co-founder and COO of online fashion store Zouk.

Cost factor for merchants
Online retailers complain that CoD returns have another problem. When customers return a product without even receiving it, they remain unexposed to the brand. “The customer has not even seen the product. We can’t even showcase our product to them,” Krishnakumar says.

With forward and reverse shipping expenses ranging from 15 to 40% of the selling price, this is a completely loss-making proposition for them from all sides, he says.

Merchants also have to bear the expense if the product gets damaged in transit. This can happen more often than one thinks as customers returning products might not take care to wrap it properly — as Nanda explained it earlier.

Chokshi says damage, which can happen in either forward or return, can be a heavy cost to bear. While established brands and e-commerce platforms have a strong logistics network to seamlessly process returns and damage, smaller brands depend on third-party logistics companies. “Most leading third-party logistics companies have reverse pickup offerings. But the major challenge is

doing quality checks at the doorstep. Let’s say that you ordered five pairs of jeans, can you ensure that is the exact same pair of jeans that is being returned?” he asks.

E-commerce sellers say the return rate is the highest for apparel because of reasons such as size mismatch, not liking the colour or the outfit after trying it out. “For categories like furniture, it is a big problem. When you order something of these sizes, return requests can be hard to process. Still, a lot of the companies have very friendly return policies to maintain customer loyalty,” he says.

After going through all this, how do the sellers treat the returned products? Not all can be sold again.

RedSeer says that returned products in case of RTO orders are brought back to warehouses or directly shipped back to the merchants. For RVP orders, a quality check decides if the product should be restocked, refurbished or destroyed. About 65-70% of RVP goods go back to the sales shelf.

Merchants also have to bear the opportunity cost of returns in e-commerce. In an RTO order, it takes close to 2 weeks for the product to reach the merchant. It could be a month for RVP orders as the product goes through an additional quality check before it gets relisted. The cost of dead inventory can be killing, especially during a crisis.

For a company like Plantables, which uses meticulous packaging for its fragile items, Nanda explains that 70% of the returned items are unusable.

Necessary burden

Despite all these challenges, e-commerce players can’t do away with return policies. Mehta says brands often see higher customer conversion rates because of flexible return policies. When customers see return options are available, they become more confident of ordering the product.

An easy returns policy is a key decision criterion in a shoppers’ journey, says Rajnish Gupta, Vice-President & Head for India and Sub-Continent Business, Zebra Technologies, which makes, among others, mobile computing devices for last-mile delivery partners.

According to Zebra’s 14th Annual Global Shopper Study, 72% of shoppers prefer retailers to offer easy returns. The study also reports that 86% of decision-makers (+9% y-o-y) and 67% of store associates (+18% y-o-y) agree that accepting and managing returns of online orders is a significant challenge to their organisation. The study by Zebra was out in November 2021. It covered 5,000 respondents across North America, Latin America, Europe and Asia-Pacific (including India).

Finding a balance between providing easy returns and a seamless system to process such transactions is now becoming important for e-commerce players. Experts say companies should have a clear returns policy with no vague points or loopholes. “The timing of return and its proper verification is important. Not everyone can be as lenient as an Amazon,” Chokshi says. More technology solutions can also address some issues.

Data to the rescue

Chokshi explains by listing three major categories as reasons for return — product related, logistics issue, and customer behaviour. “When the reason is product related, we can use solutions such as augmented reality to allow a customer to try out products. It works really well. Photographs are also getting more and more enriched, the specifications, details are getting more and more nuanced and, therefore, the buyer knows exactly what they’re getting,” he says. Have a seamless communication system in place so that the customer gets updates about the product’s journey. This can be enabled through the right logistic partners. “For example, if you are not present at home to receive the order, you can get an automated call to confirm that you are indeed away and perhaps the logistics firm can see if they can change the delivery address,” he says.

Data can be handy to deal with abusive customers. Companies have enough information to identify customers who habitually misuse return policies. These people can be charged for multiple return requests or unfair return practices.

Data can also help flag high-risk orders in the CoD mode. Another factor that can help reduce return rates is faster delivery. “A CoD order delivered in two days has a 40% lower probability of getting rejected than an order reaching in a week,” Shiprocket’s Mehta says.

RedSeer says etailers have been using artificial intelligence and machine learning techniques to identify and reflag geographies and customers with higher return rates. Based on an algorithm’s results, return policies and COD options are redesigned for certain categories.

“The world that is emerging from the global pandemic has changed forever, and the retail sector is no exception,” says Gupta of Zebra Technologies. “It is paramount that retailers introduce apt technology solutions to build everlasting customer loyalty by making the shopping experience more flexible, convenient and enjoyable, while managing costs and operational efficiency.”

For online sellers, sales and returns are yet to click well together.



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