This story is part of Glossy and Modern Retail’s series breaking down the big conversations and innovations at NRF 2024: Retail’s Big Show. Click here for more stories in this series.
Brands and retailers have struggled to mitigate retail’s growing returns rate since the pandemic, but thanks to a new report from the National Retail Federation, it appears that new retail strategies are beginning to work.
Consumer returns within the retail industry hit an all-time high in 2022: $816 billion worth of merchandise, or approximately 16.5% of all purchased goods were returned to retailers, according to the National Retail Federation and Appriss Retail annual report.
It’s a figure that stayed relatively flat from 2021 when 16.6% of all goods were returned, worth about $761 billion. These rates are concerning for brands and retailers, especially when compared to previous years. In 2020, consumers returned around $428 billion worth of merchandise, equal to 10.6% of retail sales. And in 2019, that number was $309 billion, or 8.1% of sales, down from 10% in 2018 and 11% in 2017.
Returns cost brands and retailers billions each year in processing costs, shipping fees, unsellable merchandise and fraud. Mitigating returns has become a top priority for retailers since the pandemic, when remote culture bolstered online sales. At the same time, consumers leaned deeper into shopping habits like “bracketing,” or ordering several sizes to try on at home and ship back, and “wardrobing,” which is using and returning merchandise.
Luckily, after two years of an elevated returns rate, the rate of returns dropped for 2023 to 14.5% of all retail sales, worth about $743 billion, as announced by the NRF and Appriss Retail in late December.
According to Steve Rop, COO at GoTRG, a reverse logistics company, it happened thanks to a few strategic shifts across retail. GoTRG oversees the full returns lifecycle of merchandise for retailers including Walmart, Target and Amazon.
“[The rate of returns could be dropping because] retailers put in place better fraud detection to prevent fraudulent returns, stiffened the returns policy so they’re charging people to ship back a return and [implemented] policies that [imposed fees],” Rop told Glossy.
Of course, macroeconomics could have also played a role. “Consumers thought a recession was coming, [so perhaps they] wanted to hold on to their money and were smarter in how they shopped [in 2023],” Rop said.
Rop believes the rate of returns is just part of the issue. “If you think about overstock inventory, which we estimate to be [worth an additional] $300 billion to $400 billion [per year], it’s over a trillion-dollar market [of unsellable and returned goods],” he told Glossy.
On Monday, Rop appeared on the ”Rethinking Returns” panel at NRF’s Retail’s Big Show, a summit in New York City that brought together more than 35,000 retail executives, leaders and professionals.
Patrick Murphy, senior director of returns CX and analysis at Walmart, also sat on the panel. He shared that, for Walmart’s strategy, the team has implemented easier returns to help get merchandise back faster and in better condition, while also providing a service that improves customer loyalty. Currently, Walmart offers 365-day returns with free shipping.
“The innovation is taking what we’re doing from a forward-filling standpoint and introducing it into returns to meet the customer where they’re at,” said Walmart’s Murphy. In the past year, Walmart rolled out curbside returns, doorstep returns for loyalty members and even in-home return collection for those signed up for InHome. The program, launched by Walmart in 2019, allows customers to have their items delivered all the way to their fridge or counter. “If you’re an InHome member and have a meeting upstairs on Zoom, you can just leave that item right on your counter and we’ll pick it up [to return it for you],” he said.
“There are a number of challenges, but the key is to get it back fast and reuse it as fast as possible [by getting it] back into inventory,” said Tony Sciarrotta, executive director and publisher of Reverse Logistics Association, a global trade association for the returns and reverse industry that was purchased by NRF in the third quarter of last year.
Imposing fees is another successful strategy for retailers, GoTRG’s Rop said. “[A return should] be convenient, safe, fast and potentially friendly, but does it have to be free? No, it doesn’t,” he said.
But imposing fees of any kind to valued shoppers is risky for brand loyalty, so many retailers are segmenting their shoppers. Determining and tracking “trusted buyers” — the ones that make minimal returns, ship items back quickly in the expected condition and shop when making a return in-store — is becoming table stakes for both returns processing companies and retailers.
Rewarding trusted buyers includes issuing immediate exchanges and refunds when requesting a return, allowing them to keep unwanted items under a certain price point — where shipping it back for free would mitigate profits for the retailer — and offering free shipping on all orders. Customers who abuse returns policies or impact a retailer’s profits due to undesirable return habits receive the opposite treatment: Refunds are held until merchandise is validated, fees are imposed and keeping unwanted items is not offered, Rop told Glossy.
In 2023, return fraud contributed $101 billion in overall losses for retailers, according to the NRF. The group estimates that, for every $100 in returned merchandise, $13.70 will be lost by retailers to fraud, including the return of shoplifted, stolen or used merchandise.
During the panel, Murphy explained how Walmart compiles data to better understand its returns and quickly process them. It factors in where the purchase was made and where the return was requested, plus any call center logs or information about the item’s condition. It also gathers the current value of the item, which determines if it should be resold in-store, liquidated through a third party, destroyed or another option.
“It’s a lot of data,” he said. “Once we have a 360-degree view of the return, it will enable us root causing and driving it down on the front end, allow us to better understand the customer experience during the return itself, allow us to figure out our most profitable way to reverse-supply-chain it on the backend, and allow us to make any policy changes,” he said.
Currently, artificial intelligence is used to help shoppers locate the right item through size and shade matching. Eventually, AI will own returns processing, but Rop told Glossy we’re five or more years from meaningful impact without a human team playing administrators.
GoTRG recently implemented OpenAI’s Chat GBT Enterprise for this. “For the past 12-18 months, we have been using a form of AI and machine learning to take data and do predictive analysis of [how a] product comes in, [what its] condition is at this value and in this category, and what the correct disposition strategy is,” Rop told Glossy. “We might spend a couple hundred thousand on a license for enterprise [AI technology], but we are still going to have four or five people trying to figure it out [for years to come]. … So, while [this technology] is rolling out and in a hot phase, it’s not making everything perfectly optimized or reducing labor yet.”
Eventually, AI will allow for better back-end return processing across the industry to reduce costs while mitigating returns. This icludes redirecting returns to the right final destination, even before they’ve been dropped off, all based on data. “Returns get moved an average of three or four times the number on the forward side; and if you’re going to touch it more, it costs more money,” said RLA’s Sciarrotta. “That’s an AI approach that’s coming.”
