Retailers are stuck with a growing pile of unsold inventory as shoppers reprioritize their buying needs amid relentless inflation. Coupled with ongoing supply chain bottlenecks, this surplus merchandise stacked high in warehouses and back rooms is costing retailers more money to store.
Adding to this storage backlog — and causing additional headaches for retailers — are an accumulation of product returns. This pain point is pushing some sellers to charge return fees to discourage customers from asking for their money back, and some have resorted to charging consumers a restocking fee to cover the nuisance and increasing costs of product returns.
This means it might be relatively easy for consumers to get the items they want but a lot harder to send them back this upcoming holiday shopping season, according to Marcus Shen, CEO of B-Stock, an online auction for liquidation, returns, and overstock.
“Rather than free shipping, it seems retailers are more concerned right now about putting in the right returns policy, and more and more of them are looking at adding restocking fees,” he told the E-Commerce Times.
Merchants who resist the pay-to-return strategy may only have recourse in selling their surplus to a developing cottage industry of secondary markets. These platforms are an option for retailers to help manage excess inventory and returns more cost-effectively.
Last year, millions of items were sold across re-commerce auction platforms. This non-used product glut of returned goods keeps merchandise in market.
Strict Business Calculations
Brands and retailers have been continually experimenting and innovating in the area of customer returns, according to Shen.
The returns process can be quite costly for retailers, so much so that in some cases, particularly low-price point items, the total cost to process the return is greater than the cost of letting the shopper keep the item.
“Retailers have already incurred cost and are working on low margins to deliver the product to the customer. The rising costs of shipping a return to a warehouse, handling the product in the warehouse, reselling it, and shipping it to a liquidator at a fraction of the original retail price, suggest the reason is highly economic in nature,” he said.
That notion of getting something for nothing often delights shoppers and can keep them as loyal customers, suggested Shen. Walmart and Target along with Amazon have experimented with this approach.
The economic decision is based on sophisticated calculations retailers must make on every order. Item category, condition, demand, and shipping costs need to be weighed before a decision to let the shopper keep the product can be made.
“Amazon is one of the more sophisticated retailers with regards to logistics. Their system can make real-time decisions on the cost versus the benefit of determining if a product should be returned or kept. Artificial intelligence is enabling this process and is extensively used by the world’s largest retailers,” added Shen.
The restocking fee policy for e-commerce retailers is not new, but re-emerging. A growing list of successful brands are charging consumers for refunds, noted.
To date, the trend has emerged across the apparel category with brands such as Abercrombie & Fitch, American Eagle Outfitters, and J. Crew. It appears that the trend of charging restocking fees is limited to those retailers who have physical stores rather than products sold exclusively online, according to Shen.
Liquidation Sites Gain Popularity
The secondary market for retailers has existed for decades. Given the current trend of increasing returns, the more innovative retailers are investing in new returns solutions.
Secondary markets can be a better option for merchants to accept a return and resell the product in bulk, offered Shen.
Retailers traditionally have used legacy, informal, manual “jobber” and “liquidator” solutions. They cultivate relationships with third parties offering to purchase the merchandise at a significant discount to retail value.
“Alternatively, and with increasing frequency, retailers are adopting e-commerce to move returned inventory more effectively and efficiently. Platforms like B-Stock have hundreds of thousands of online buyers who compete for the goods, as opposed to relying on a few offline liquidation buyers,” Shen explained.
He added that this competition comes in the form of bidding on inventory, which drives the final price typically much higher than the legacy method of negotiating and coordinating over phone calls and emails.
“Both of these options have the potential to be more economical for retailers than letting customers keep the merchandise. With shipping costs at historical highs, [however,] the cost of returning merchandise and shipping it again to a buyer in bulk may drive more retailers to experiment with allowing consumers to keep the merchandise,” he observed.
Costs, Buyer Behavior Fueling Fees
The rising costs of returns is driving the restocking fee penalty on consumers. As many as 50% or 60% of returned goods are often unsellable, according to Nikki Baird. vice president of strategy at Aptos, a global retail technology provider.
“Online clothing retailer Zara seems to have taken the lead with the restocking fee,” she told the E-Commerce Times. “They were the first one I saw making an announcement of the new policy. I do not remember who else has followed suit, but I know that others have,” she noted.
The pandemic surge of e-commerce set the stage for the return policy change. Some of it was consumers ordering multiple sizes to turn their homes into fitting rooms in the absence of being able to go to a store to try things on, she explained.
Excessive returns were already becoming the culprit prior to the pandemic. Apply pandemic accelerators to the trend, and you have a real problem for retailers.
“Return rates, especially in apparel, have been quoted as high as 35% to 40%, and too much of what is returned is just not re-sellable either,” noted Baird.
Merchants cannot resell apparel for several reasons. The condition of the item is one. By the time the retailer gets it back and processes it for sale again, the item is totally out of season and often outside of the clearance or markdown cadence, according to Baird.
Marketers call the practice of ordering multiple sizes or colors of the same item “webrooming” or “bracketing.” Retailers and brands are talking about the increasing costs of handling returns so much that charging customers to return unwanted items is inevitable.
“A restocking fee is something of the blunt instrument solution. I suspect over time retailers will move to something based on, for example, loyalty tier or a limited number of free returns before they start charging a fee,” said Baird.
That could take the form of getting two free bracketing type returns a year. After that shoppers would be charged, she added.
Restocking fees have existed as a viable strategy in previous years. In fact, electronics vendors have been the most aggressive about imposing restocking fees, according to Baird.
What is different now is purely a numbers game. Costly consumer buying behaviors can be tolerated or accommodated when e-commerce sales are 3% of a store’s total volume. But it simply cannot be absorbed when it’s 30% of sales.
“I think as consumers get pinched by inflation, the tendency to look at returns as an easy way to get cash rises, so that puts an additional pressure on the behavior,” Baird observed.
Sometimes retailers will be aggressive about managing return costs. Other times they will be taking a competitive stance on the policy to try to drive competitive differentiation.
Baird sees implementing restocking fees as a pendulum that will continue to swing back and forth over time. It is more like finding the right balance of discouraging the behavior in the first place, without alienating your best customers.
Competition Part of Equation
In isolation, a restocking fee is viable for a retailer. However, it is less viable in a competitive marketplace, countered Shen.
“We should expect retailers to experiment with stocking fees across a number of price points to determine if it can be viable versus competitive policies that do not offer restocking fees. We would expect retailers that deliver great service in the form of quick shipping, quality customer service, and ease of returns would be the first to experiment with restocking fees,” he said.
Alternatively, retailers may choose to include this in their retail price calculations rather than charging a restocking fee that is apparent to the consumer. This will be enabled by data based on historical return rates, shipping costs, and the ability to resell or liquidate the products returned.