It’s amazing how a problem can fester for decades and suddenly make headlines.
The hidden gotcha of online sales is returns. According to Insider Intelligence, for every $1 billion in online sales in 2021, $166 million of those sales resulted in returns for refunds or credits.(1) For merchants, that’s a nightmare both in terms of logistics and accounting. They are paying double the shipping costs for no profits, and the returned item may have to be written off due to becoming out-of-season or due to physical condition when returned. It’s not like the old days when a sales clerk could look at an item and say, “sorry, we can’t accept this back.”
For micro merchants, high levels of returns could mean bankruptcy.
Returns aren’t evenly distributed across product categories. According to Statista, the rate of returns varies from 26% for clothing and 19% for shoes to 5% for DIY, garden, pet and stationary products.(2) Another source places the return rate for clothing at 41%.(3) The latter is much more in line with industry statistics I’ve seen in the past. The rate of returns for online sales is dramatically higher than the corresponding figure for sales through brick-and-mortar stores.(4)
Clothing has been a problem child for online shopping for the better part of two decades, for several reasons:
- Sizing, especially for women’s clothing, isn’t standardized. That makes selecting a product with the correct fit a challenge for online shopping.
- Consumers will return what doesn’t fit.
- Consumers may buy multiple sizes of the same item and return what they don’t need.
- The color may not match the picture.
- Obviously, there may be a defect of some kind.
- Consumers may buy something special for a single purpose use, and then return it after that use. Not particularly ethical, but it’s a known behavior.
- Consumers discovering after the fact that they can’t afford what they spent.
- How promptly the consumer returns the item and the condition in which it is returned will impact whether it can be put back into the sales inventory or not and at what price.
- Some items like underwear are supposed to be destroyed when returned regardless of whether they have been worn.
- Returns present inventory management issues. To be profitable, retailers need to walk a fine line between stocking what they need to sell and not over-stocking. Buyers don’t like to wait for product, but excess inventory incurs financing charges. Returns make it harder to calculate what merchants will need.
- Even when the online merchant is drop shipping from the supplier’s factory rather than taking possession of merchandise prior to sale, returns can play havoc with finances. Suppliers want prompt payment, but credit for returns may not be as quick. Then there’s shipping charges and fees from online hosting services.
The problems with returns explains why large, veteran online and mail retailers have chains of outlet stores. The small guys can’t afford that.
The first time I conducted a research project on online returns was circa 1998. So why is this a focus now? Apparently, returns increased during the pandemic. Whether that was due to increased online purchasing or to declines in income and lifestyles isn’t clear.
With the elimination of Covid assistance and increased inflation, many Americans are seeing a decline in financial well-being. At some point, that has to be reflected in buying behavior.