InformationWeek.com

Welcome Guest. | Log In| Register | Membership Benefits

January 8, 2001

Ready For The Returns?

After record-setting online sales, E-retailers brace for the result: unprecedented product returns. So far, so good.

More on e-retailers:

Sidebar: Shippers Find That Reverse Logistics Add Up

TechWeb: Lessons Learned, Sometimes Too Painfully (12/11/00)

TechWeb: Key To E-Survival: The Customer Is King (11/27/00)

TechWeb: E-Santas Toil To Improve Fulfillment (10/23/00)

Send Us Your Feedback

he busiest season for online sales is over. Like other post-holiday revelers, E-retailers now must clean up the mess: receiving, restocking, and reselling thousands of returned items and quickly issuing credits to their customers.

Getting it right is important, since 42% of online shoppers say they would buy more on the Internet if the return process were easier, according to Jupiter Media Metrix. The good news is that although returns will continue into February, early reports indicate that, so far anyway, many online merchants are doing a good job of managing the process.

Nordstrom Inc., for example, has tailored its IT systems to let customers return online purchases at its stores. The Seattle department-store chain says returns have been running smoothly, despite the fact that it expects 30% of its online apparel sales to be returned. Nordstrom has a separate IT system for its Internet and catalog operations, and employees use separate terminals to handle such returns made at stores. The data feeds into the online operation's inventory, order, and financial systems, always remaining separate from store IT systems.

The result: Sales tax isn't automatically calculated into the return, an issue because most online purchases aren't taxed, while in-store registers are programmed to add sales tax when calculating the value of a return. And the store doesn't get hit with the revenue loss. The returned products then are sent to the Cedar Rapids, Iowa, catalog/online fulfillment center or are retained by the store for resale if the inventory is needed. "This is a core part of our way of doing business," says Paul Onnen, chief technology officer at Nordstrom.com. "We've been successful in meeting customer expectations."

Today, about 58% of online retailers let customers return their purchases to brick-and-mortar stores, according to a study completed last week by Accenture, formerly Andersen Consulting. In the process, they've addressed some pressing issues, including sales-tax policies, which part of the business takes the hit for the returns, and where the returns will be resold. But many other E-retailers, including Toys "R" Us and Victoria's Secret, don't have IT systems in place to support in-store returns for goods purchased online. For their customers, the only option is to ship back unwanted items--a process that can be a long, costly, and frustrating experience. A few companies are trying to make it easier with outsourced solutions that track and resell goods.

About 5.6%, or $569 million, of all goods bought online this holiday season are expected to be returned--about twice the volume as last year, according to figures from the Boston Consulting Group and Goldman Sachs. Inbound packages cost two to three times more to handle than outbound ones because employees must inspect the return, repackage it, credit the customer, and put the item back into inventory, says David Schatsky, a Jupiter analyst.

Returns can eat up 30% to 35% of potential profits, says Gartner research director Geri Spieler. "Every time a human reads the information and rekeys it into a system, the cost goes up and so does the opportunity for error," she says. Online sites average six to eight human touchpoints in the returns process. "If you handle reverse logistics poorly, you'll find that the cost of disposing of products is going to quickly outrun any revenue that you'll ever realize," says Alex McNealey, director of operations for BlueLight.com LLC, an online retailer that's partly owned by Kmart Corp.

Still, most online retailers haven't invested enough resources in reverse logistics to make returning merchandise hassle-free, Schatsky says. "Online retailers know how important the returns process is, but they still haven't put all the resources into it that they have in other places," he says. Although 51% of online retailers implemented new fulfillment systems last year, only 29% revamped their return processes and systems, according to Jupiter. Even sites with fully electronic fulfillment processes "revert to the horse and buggy for reverse logistics and do everything manually," Gartner's Spieler says.

That helps explain why consumers will spend 35% more time returning goods bought online vs. from a catalog, according to Accenture. Too few E-retailers provide preprinted return labels or instructions, and they require that returns be pre-approved twice as often as catalog companies.

Like Nordstrom, Borders Group Inc. and Kmart have avoided such problems with flexible return policies that permit online returns at their retail outlets. Borders, in Ann Arbor, Mich., uses software from Brightware Inc. and E.piphany Inc. to track orders regardless of the channel or reason for the return. Because Borders' online unit doesn't operate separately, its stores don't have to worry about returns affecting their bottom line. Each store's point-of-sale system can figure out what the sales tax would have been at the place where the item was purchased, then refund only the appropriate amount.

"Virtually anything in salable condition can be returned at any Borders store," says Mary Jean Raab, a senior VP in charge of channel convergence. Returns stay at the store for resale, and online customers get a store credit; if they return the item to the online site, they can get a refund.

BlueLight.com's customers can take unwanted merchandise back to Kmart's 2,000 stores. BlueLight shares Kmart's reverse-logistics processing network, but the two units keep their data separate. Data on returns is batch-processed once a day and entered into the order-management system. There, sales are matched back to the original order data, and BlueLight issues credits or sends online checks the same day to customers who returned merchandise to the stores. BlueLight doesn't offer cash back to consumers at Kmart's cash registers, but Kmart customers are returning online purchases to the store instead of through the mail by a margin of about three to one.

Still, not all E-retailers are willing or able to handle in-store returns. Toysrus.com formed an alliance with Amazon.com Inc., giving the latter full control of logistics for the toy retailer. "They had some logistics issues to solve, and we were able to solve them," an Amazon spokesman says. Toysrus .com accepts returns only through Amazon's three-step mail-in process. Customers select a reason why they're sending something back, print out a postage-paid and bar-coded return label, and attach it to the package.

If the return is because of the company's error, the retailer will absorb the cost of the return postage; if not, it will deduct the cost from the customer's refund.

Similarly, Buy.com Inc. lets customers fill out a template of information on its site, including how they paid for the item, the order number, the reason for the return, and whether they want an exchange or a credit.

Returns are so complicated that many E-retailers simply outsource the whole business to specialists. This has led to a new breed of Internet sites that focus on taking in returns, paying the consumer and the merchant quickly, and disposing of the goods online through auction or discount Web sites and portals.

Egghead.com Inc. is using an outsourced service from ReturnBuy.com Inc. In the past, Egghead returned much of its computer and electronics merchandise to the original manufacturers. "This year, there's been a trend for the big manufacturers to push product off on us with no return privileges," says senior VP of sales and operation Norm Hullinger, who adds that higher sales will result in more returns this year.

That convinced Egghead to try reverse-logistics outsourcer ReturnBuy .com. "ReturnBuy is helping us by taking the product off of our hands," Hullinger says. "It's actually generating more cents on the dollar for us, because returns are its core competency. We understand returns, but we'd rather focus our resources on selling computers and related equipment."

ReturnBuy accepts the returns, credits the customers, and resells the items, charging Egghead $2 to $20 per item, plus a 10% to 50% commission.

MuseumCompany.com, which sells reproductions from museums, outsourced fulfillment and returns to SubmitOrder.com Inc., using return labels that come with every purchase. Says MuseumCompany VP of operations Ned Crosby, "It's important to make sure the customer is credited promptly, and that the goods get back into inventory and are available for sale again quickly." If not, some online retailers may not be around long enough to get the process right next time.