The Business of Free Returns

Online shopping has created the luxury of purchasing and trying on clothes from the comfort of your own home. In 2019, online shopping reached new heights with the Commerce Department reporting that online retail sales grossly outnumbered those of brick-and-mortar merchandise stores for the first time in history. Amazon, a prominent leader in the online shopping industry, tremendously helped online sales reach this milestone. On Amazon’s website, consumers do not have to factor in the cost of shipping or returning purchases—a major selling point for many online shoppers. However, between taking on the costs of shipping/packaging and the detrimental effects to the environment, offering free returns can either help or hinder a company’s success. 

 

 

Free return policies cause people to overorder, resulting in companies with misleading estimates of profit margin. According to Elizabeth Segran at Fast Company, 38% of customers do not replace or exchange the items they return, resulting in a large percentage of shoppers ordering things just to try on, and often deciding to return more items than they are keeping (guilty as charged!). So we know that customers take advantage of free returns, but the question that remains is are such return policies helping or hurting these companies in the long-run? 

“Free” returns cost companies a lot more than one may think: to be exact, free returns will cost companies about $550 billion in 2020. As mentioned before, Amazon has been an innovator in the free-return industry; they alone spent $27.7 billion on shipping in 2018. Nordstrom, Kate Spade, Tiffany & Co., Reformation, Ray-Ban, and Revolve are just a few of the many online stores that offer free shipping and returns. These retailers want to keep up with the big competition, that being Amazon, and offering free returns appears to be the answer. However, this model may need to be restructured. Revolve, a big name in online shopping, spent $34 million in 2018 on SG&A (shipping, general, and administrating costs), which was their second largest expense behind marketing. In comparison, Aritzia, another online retailer, charges an $8 return fee, making their SG&A cost a smaller percentage in relation to their total expenses when compared on the same scale as Revolve. However, it is important to note that the dollar amount spent by Artizia still outweighed Revolve when looking at 2018 financial reportings due to Artizia’s brick-and-mortar presence and greater overall scale.    

The excessive amounts of shipping and returning also greatly affects the environment, something we can’t put a price on: “US returns alone create 5 billion pounds of landfill waste and 15 million tons of carbon emissions annually, equivalent to the amount of trash produced by 5 million people in a year, according to Optoro.” Not only does the mass production of cardboard boxes, shipping labels, and plastic wrap hurt the environment, but the transportation of products all over the world results in irreversible damage to our environment. 

The New York Times published “The Importance of a Good Return Policy,” which revealed that 91% of polled consumers said a store’s return policy greatly weighs in on whether

or not they decide to purchase. While offering free returns costs companies billions, return fees drive away potential customers. More established retailers might be able to afford a slight decline in customers whereas a smaller or newer retailer would need to build up their reputation with consumers before charging return fees. Personally, I would be more likely to buy a product from a website with free and easy returns. Free returns may be an emerging competitive advantage but it will be telling if the increased awareness of the detrimental environmental costs of returns will make people less likely to be online over-ordering addicts.

 

Sources:

https://www.fastcompany.com/90455787/jonathan-adler-tan-france-recharge-on-the-road, https://www.voguebusiness.com/consumers/returns-rising-costs-retail-environmental, https://archive.nytimes.com/www.nytimes.com/allbusiness/AB4353479_primary.html

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