Consumers are increasingly treating online purchases as risk-free discoveries for size and style as opposed to end-of-shopping journeys. This practice is reinforcing the rapid growth in return volumes, unlocking a large market opportunity. Investors and start-ups, determined to make the return process more efficient and scalable, are entering the market to provide this much-needed service. However, the heavy carbon footprint and waste driven by online returns have a devastating impact on the planet. Yet, technological innovation in returns management can mitigate returns’ environmental impact without eroding retailers’ bottom lines.
Returns are becoming completely ingrained in how consumers like to shop. In the US alone, the total value of returns in 2022 is estimated at $816 billion. To put this in perspective, the value of US goods returned in 2022 would rank as the world’s 19th largest economy, just ahead of Argentina. In turn, over 20% of online sales end up being returned compared to just 9% of brick-and-mortar sales. This phenomenon is even more pronounced for apparel and electronics, where e-commerce return rates jump to over 40%. This consumer practice resulted in $212 billion of merchandise purchased online returned in the US in 2022 –accounting for approximately a quarter of total returns. Moreover, with global e-commerce expected to grow at 10% year-on-year over the next 4 years, online returns are not likely to decline significantly.
Retailers have realized that a satisfactory return process is essential to sustain customer loyalty and increase customer lifetime value. A McKinsey survey found that 62% of shoppers would not buy from a retailer that doesn’t offer free returns and 84% would not buy again if they’ve had a poor return experience. In response, businesses are investing in reverse logistics and return user experience. Although some retailers like H&M and Zara have started charging return fees to compensate for shipping and operations costs, most retailers aren’t following suit. Rather, they see free returns as a must-have for their clients. Nevertheless, activists and environmentally conscious consumers are pointing out that embracing returns might be a step backward in the fight against climate change.
There are two obvious ways in which growing return volumes negatively impact the environment. First, through the C02 emissions generated through the physical logistics of handling the return (e.g., all the unnecessary shipping back and forth). Second, substantial waste is produced from the additional packaging and discarded products. Many retailers end up throwing away over 25% of their returns to avoid the complex reverse logistics and costs associated with the return process (i.e., inspection, reparation, repackaging, shipping, etc). This behaviour is especially common in the fashion industry, where any return delay can result in significant price reductions on resold goods. Collectively, this results in more than $6 billion of goods ending up in landfills worldwide a year.
In turn, bracketing is becoming a well-rooted shopping habit. Bracketing refers to the practice of purchasing multiple variations of a product with the intention of returning the ones that happen to be too small, too blue, or just don’t fit the trend. A Salescycle report estimates that around 30% of consumers deliberately over-purchase with the intention of subsequently returning unwanted items. This customer behaviour generates a trail of C02 emissions and waste. Moreover, bracketing erodes retailers’ profits and causes inconveniences which can result in a retailer permanently losing customers. There are two main viewpoints on how we should position ourselves in the face of this new consumer behaviour.
Advocates of buy-and-try practices rely on circular economy approaches to legitimize returns. If companies manage to make the return process fully sustainable, they argue, embracing returns is the best alternative for the environment in the long run. By closing the production, consumption and recycling loop, returns will help us transition from a linear to a circular economy. As a result, embracing online returns will eventually reduce waste and pollution in several ways:
Advocates claim that all the above, coupled with advancements in green mobility and drop-off locations, will allow shoppers to use their bedrooms as fitting rooms without destroying the planet. Therefore, companies should ask themselves how they should manage returns more sustainably while ensuring it doesn’t destroy their profit margins.
Conversely, others claim that the idea of a fully waste and carbon-neutral return process is dubious. In other words, buying 5 products and returning 4 will always be more polluting than buying 1 and keeping it. This is because there will always be negative externalities resulting from returns; whether in the form of C02 emissions, overproduction, or packaging waste. Additionally, the more seamless the return process is, the easier will be for consumers to embrace buy-and-try practices, incentivizing even more unnecessary purchases and corresponding C02 emissions and waste. In response, they argue, regulators and retailers should step in to reverse this consumer behaviour. Initiatives in line with this thinking are removing free shipping on returns, using analytics to sanction misuse, and communicating with consumers to influence behaviour.
There is perhaps a middle ground – led by technological innovation. Through an embrace of technology, retailers can work to prevent unnecessary returns while sustainably reintroducing into the economy those which are unavoidable; this is a solution that better aligns the fight against climate change with consumer preferences. By reducing these kinds of returns, a large amount of waste and C02 would therefore be avoided –without eroding retailers’ bottom lines.
There are several tech solutions aimed at reducing unnecessary e-commerce returns. Clienteling tools leveraging consumer history, brand-fit comparisons, augmented reality and AI-powered body measuring technology, are exciting developments, to mention a few. Emerging start-ups like Shoefitter, Perfitt, Vyking or Spotsize digitally recommend the best-fitting sizes for users through smartphone 3D scanning technology and big data. However, even if retailers employ all the best practice levers above, some levels of returns are unavoidable. For the latter, innovation and capital directed at alleviating the main pain points in the customer return journey will help reduce the waste and pollution derived from returns.
The level of inefficiency in such a large market can be shocking. Fragmented reverse logistics, lack of data and analytics and limited refund finance alternatives make the return process burdensome both for retailers and consumers. These pains, coupled with the consistent growth in return volumes, are unlocking many business opportunities. This is attracting innovation, capital and high-growth start-ups determined to solve the following issues through technology.
First, reverse logistics remain fragmented and subscale. Handling product returns typically requires receiving, inspecting, repairing, and repackaging processes among others. The operational complexity and lack of visibility involved discourage retailers from investing in in-house reverse supply chain technology. In response, tech-savvy Third Party Logistics (3PLs) offer reverse logistics operations and seamless integration with retailers’ e-commerce platforms, ERPs and CRMs. Some examples of tech-enabled 3PLs and delivery solutions are ShipBob, Happy Returns and Paack –the latter having raised a $225M Series D led by Softbank in January 2022. Geographies with fashion retail expertise have bred scale-ups and start-ups addressing returns (e.g., Cubyn and BigBlue in France, ifLastmile in Spain). These types of business models are expected to continue to require high levels of external financing to scale due to the high Capex required to offer reverse logistics.
Second, lack of data and analytics limits retailers’ ability to understand and address the root causes of returns. A McKinsey survey found that most retailers do not understand the full unit economics of returns. Without this visibility, many retailers mistakenly find it less expensive and logistically easier to dampen returned products instead of reselling them. In turn, many are missing the opportunity to incorporate returns data into the whole product development life cycle. Some of the most popular return management platforms are Parcellab, Loop Returns and Optoro. Emerging start-ups aimed at improving visibility and returns automation are Revers.io, 8Returns and Swap. The software nature of these businesses makes them more capital efficient and therefore scalable.
Third, few financing options allow online merchants to accelerate refunds. A slow refund process severely impacts customer loyalty. A Klarna survey found that e-commerce companies can achieve up to 29% more sales by offering instant refunds to their customers. Although we have seen a wave of buy now, pay later (BNPL) fintech solutions –Klarna and PayPal Pay in 4 among the most popular ones–, these types of business models have not yet expanded to returns. As a result, retailers often end up with over-dimensioned finance teams to manage online repayments. Start-ups such as Returnly, Reveni and Rever offer instant refund fintech solutions for e-commerce usually in exchange for an interest on returned GMV.
Preventing unnecessary returns while sustainably reintroducing those which are legitimate into the economy seems the way to go. This approach achieves necessary climate goals while acknowledging the reality of consumer preferences. The first step in this direction is helping consumers get the product right the first time. This will reduce all the unnecessary waste and pollution associated with shipping, re-packaging waste, and overproduction. The second is implementing return processes and technology to close the production-consumption cycle; allowing retailers to move closer to a truly circular economy without eroding their bottom lines. However, much innovation is still needed to drive this change. We must therefore back entrepreneurs and leaders who are bringing breakthrough technology into these sectors. They are often who have the solutions to the world’s most pressing challenges.