The High Cost of Returns: Should Retailers Rethink Their Policies?

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Wharton’s Thomas S. Robertson discusses his research on how returns are affecting the retail industry.

Shoppers love the kind of liberal return policy that makes it easy for them to buy whatever they want in store or online with the confidence that a retailer will take products back without hassle. But retailers are starting to rethink this strategy as they are confronted with rising financial losses from returned merchandise and the headaches that come with figuring out what to do with all that stuff. A recent study found that roughly 10% of purchases are returned, adding up to billions of dollars a year, with online returns higher than in-store.

Wharton marketing professor Thomas S. Robertson thinks it’s an area that is ripe for research. He explores the topic in a paper titled, “Many Unhappy Returns: The Changing Nature of Retail Product Returns and Future Research Directions,” which he co-authored with Ryan Hamilton and Sandy D. Jap, both from Emory University’s Goizueta Business School. Robertson, a former Wharton dean and current faculty director of the Jay H. Baker Retailing Center, said return policies are critical to building brand reputation and customer loyalty, but they have to be carefully crafted so they don’t become burdensome to the company. It’s a conundrum he described as both an opportunity and a curse. He spoke about it during a recent interview with Knowledge@Wharton. (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: In your paper, you write, “The sheer magnitude of product returns should give anyone interested in retail a pause.” What are some of the emerging trends with product returns that you are seeing in the retail landscape?

Thomas S. Robertson: I think this is an interesting area for retailers. [Returns] tend to be ignored. Over time, retailers just thought they were an irritant and didn’t think strategically about them. But now with returns amounting to at least 10% of total retail sales, I think returns have come into the forefront. There are a number of trends that are underway. The major trend is at the consumer level. Consumers are coming to expect they can return things, and that it will be easy. They’re coming to expect that returns will be free, that when something is delivered to them, there will be a return label or return envelope for sending things back. There is this major upward trend in terms of consumers returning and expecting to return.

For the retailer, this begins to raise some issues. How should you respond, and how much should you respond? What we’re seeing also is a number of intermediaries entering the space. We see companies that will take over the return function for the retailer. We see some department stores, such as Kohl’s, which will do returns for Amazon. Even Nordstrom in New York was experimenting with accepting returns for Macy’s, which is kind of interesting.

New intermediaries coming in, new drop-off points for consumers — these are some of the responses that retailers are making. Potentially the most important is that retailers may be able to develop better analytics so that they have risk scores as to which consumers are likely to return and which consumers are likely to return too frequently. Supposedly, Amazon has canceled accounts for excessive returners, so how much further does this go in terms of denying returns to consumers? For the retailer, it is an opportunity. I think it’s an opportunity, but it’s also a curse.

“There is evidence that handling returns well builds loyalty at the consumer level.”

Knowledge@Wharton: In your paper, you note that 10% of retail sales were returned in 2018. That’s about $369 billion, which is astounding. How is this a developing opportunity and not just a curse?

Robertson: Yes, the curse is easy to understand, isn’t it? The opportunity is that there is evidence that handling returns well builds loyalty at the consumer level. There’s also the idea that if you can get consumers to the store to return, you can sell them additional merchandise. And there’s the point that you may be able to change it from a return to an exchange. Retailers are moving in some of these directions.

The downside is that it’s really costly to handle returns — and it’s not just the shipping. Can you put it back into inventory, or does it have to go to off-price channels? Specialized firms moved into this space that will take returns off the retailer’s hands. You often see that something gets delivered, and it’s not what you expected, and the retailer says, “Oh, just keep it.” In my case, they said, “We’ll give you half off if you keep it.” We said, “No, we don’t want it at all. Come and take it back.” Obviously, they did not want to take it back because they didn’t know what they were going to do with it. This was a piece of furniture. But by the time you take it out of the crate, can you get it back in one piece? So, the return journey is difficult for retailers.

Knowledge@Wharton: How are returns transforming the customer journey?

Robertson: The customer journey is really changing. We’ve had the notion of purchase journey or customer journey with us forever, going back a hundred years, which was attention, interest, desire, action (AIDA). I think anyone who has studied marketing probably came across AIDA. Over the years, it developed into more elaborate models that would vary by product category as to how purchase decisions were made. It might be routinized and be a fairly simple model — maybe buying a new coffee pot or something like that. But I was talking with one of our Baker Retailing Center companies in the stroller business, and I was surprised how complicated that gets. First of all, the purchase journey is very high on information search. These young parents study it a lot. What’s the right kind of stroller to get for my darling baby? Secondly, it’s very often a gift, but the brand is determined by the young parents and not by the grandparents or the aunts and uncles or whoever else might be making the actual purchase.

The purchase journey is changing, but in this new world of returns, we’re finding that the purchase decision that you think is made in-store may actually be made at home. At that point, the consumer studies the merchandise and either keeps it or returns it or exchanges it. Retailers are now recognizing that there’s often this stage — at least 10% of the time — in the purchase journey. In some product categories, it’s more than 10% of the time.

Knowledge@Wharton: You also talk about the “dark side” of returns. What kinds of returns are acceptable, and which ones are not? How do retailers find the line on that?

Robertson: Those are really difficult decisions, and very often it’s left to the sales clerk in the store. So, you get inconsistency in it all, which is a big problem. What’s a dark side — or what’s unacceptable — depends on who you ask.

We did a little study when we were at a conference. We were able to interview our students — undergrads and MBAs combined — and we were able to interview retailers who were at this conference. It’s not a scientific study; it’s really rather impressionistic. But what we found was that the two have different views, particularly in the middle. You can agree that there are some returns that are probably OK, such as it was the wrong size, and there are some returns that are illegal, such as you can buy a sales receipt, and then you go into the store and find that item and try to return it. You never bought it. You never owned it. You paid some amount of money for this fake receipt.

“In this new world of returns, we’re finding that the purchase decision that you think is made in-store may actually be made at home.”

Those are the two extremes. What gets interesting is in the middle, and wardrobing is a really good example. This is the idea that a man would buy a suit, a woman would buy a dress, and you tuck the labels in as you go to a fancy event. Then you return it and say you never wore it. In the study, students were likely to think that this was OK, but certainly not the retailers. Students were likely to think that buying a textbook, copying the little bit out of it that you needed and then returning it was OK — but certainly not the textbook publishers. There’s really a continuum of the dark side, going from what’s probably absolutely OK to what’s absolutely illegal. All kinds of interesting questions are in the middle as to what you do about it.

In the wardrobing example, are you going to give your sales clerk the ability to check for any potential wearing of the item, deodorant marks or smelling of cologne or whatever? Retailers are struggling with that middle ground. We’ll agree on the easy part. We’ll agree on the illegal part. But the middle ground is causing a lot of problems.

Knowledge@Wharton: There are companies that have built returns into their business models, such as Zappos. You can order three or four different sizes of shoes, and they expect you to return them. How does that kind of model, and also just the general ease of returns, impact supply chains?

Robertson: Again, this is part of the developing consumer behavior. We may be training consumers to return. It’s companies such as Zappos or Stitch Fix or Warby Parker, where the expectation is that you’re going to order and return. Let’s take Warby Parker, in particular. I think they let you order five pairs of frames, and you buy one and return the rest. Stitch Fix has a little bit of a different model, curating for you and sending you things with the expectation that you’ll keep some of them and send most of the rest of it back.

In a sense, this is part of returns, and we’re sort of training consumers that, yes, maybe the decision is made at home and not in the store. As a consumer, if you come to expect this, then retailers have to respond. And more and more, they may have to move in this kind of direction.

Knowledge@Wharton: Does it affect inventory when stores need to have an enormous number of sizes or styles to send out, and then most of that comes back?

Robertson: Supply chains work very well going forward. Of course, that’s not totally true. In the women’s fashion industry, the brands get it wrong about half the time as to what’s going to sell. And part of that is the supply chain is too long. It’s nine months to get things from Asia, so you forecast sales upfront, and by the time that season rolls around and the merchandise arrives, consumer tastes may have changed, colors may have changed, whatever.

But in terms of your question on supply chains, it’s good going forward, and it doesn’t work very well in reverse. Going forward, it’s sort of routinized. We know what we’re doing, and we’ve got all of the intermediaries lined up to do it. But going backwards, as a consumer returns things to the store, it’s idiosyncratic as to what’s being returned. It’s irregular, and irregular processes are expensive. It’s expensive for the store to take things back, again, not just in terms of the freight. Can you put it in the inventory, or do you have to go to off-price retailing or sell it to an intermediary? Forward is great. Backward, we’ve got some work to do figuring that out. And again, there are new companies appearing in this middle ground to handle backward supply chains.

Knowledge@Wharton: In what way are return policies affecting brand reputations?

“Your return policy helps define you as a retailer. If it is fair and equitable and consistent, that may very much be to your benefit.”

Robertson: Your return policy helps define you as a retailer. If it is fair and equitable and consistent, that may very much be to your benefit. If consumers perceive it to be unfair or inconsistent, that may be damaging to your reputation. Another potential damage is in the area of sustainability. Retailers, particularly in the fashion and clothing area, have tended to dump unused merchandise to some extent. Some of it goes to off-price channels and so forth. And some of it gets dumped into landfills. There are statistics around how many tons of clothing wind up in landfills per month, and that is a concern for many of us who are worried about sustainability. It’s also a reputational concern for luxury brands. If they take things back, what do they do with them? They can’t let the merchandise go out and reach broader market segments, because if you’re paying a lot of money for one of these brands, you don’t want to see someone else on the street with it who has been able to buy it off-price someplace else.

For luxury brands, what do you do? For a while, there was burning going on. The idea is that it’s better to burn it than to let someone wear it who’s not in your market segment. But I think there has been such a reaction to that, that I’m not sure what exactly they’re all doing these days.

Knowledge@Wharton: What would you say are the most critical areas for research so that brands can better understand how to set policies and manage returns? What should they be looking at?

Robertson: Yes, this has been a neglected area. As I said, retailers tended to ignore industry trends and just treat returns as an irritant. Finally, they’re starting to pay attention to this. In our interviews with retailers and in thinking about this and studying literature and so forth, we came up with about 25 areas for research in order to make the return process more beneficial to retailers and in the best interests of consumers. There are just a lot of questions. One of your questions was what is the dark side? It varies by demographic segment of the market. What segments think about it in what way?

This has really become an industry issue, and, to some extent, it’s a trade association issue that the National Retail Federation and others should be looking at. It’s ripe for further research. There has been a little bit, but not very much. Understanding what consumers’ views are of returns: Who returns? Who returns a lot? What do they expect in terms of returns? And for the retailer, what are best practices for returns so that you maintain a positive image with consumers and a profitable position for the retail brand? There are a lot of questions when it comes to returns. One of them is also trying to avoid returns in the first place. I think for a lot of retailers, they’ve cut back on personnel in stores, so you get the situation where people buy incorrect sizes and return them. That can be avoided, I think, with the right kind of sales help. Sophisticated sales help in the store can be augmented by technology, especially in terms of issues such as sizing.

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