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Reverse Logistics Stress in an Era of Free Returns

Returns produce an estimated 5 billion pounds of waste in landfills and 15 million metric tons of CO2 emissions from transportation every year.

Executive Summary

  • Total online holiday sales are forecast at $138.5 billion,
  • up by 13.5% from last year, and approximately $42 billion
  • worth of those purchases are expected to be returned.
  • Holiday sales bring more challenges for retailers as a surge of products are returned and pushed back into the supply chain—a process commonly known as reverse logistics.
  • The key challenges related to reverse logistics include cost control and product depreciation, along with increased shipments and handling that put a lot of pressure on an already stressed supply chain.
  • Types of products being returned drive shippers’ real estate requirements and space criteria. Second-generation space is typically preferred over modern Class A facilities.
  • Growing returns offer opportunities for product re-use through the secondary marketplace, allowing retailers to recapture some product value.

Soaring 2019 Holiday Sales Mean More Returns

E-commerce sales have a much higher return rate than those of brick-and-mortar stores—between 15% and 30%. Digital Commerce 360, the data and analysis provider formerly known as Internet Retailer, forecasts that online sales during November and December will total $138.5 billion, up by 13.5% from last year, and returns will total up to $41.6 billion. UPS estimates that shoppers will return 1.6 million packages per day the week before Christmas, with returns peaking at 1.9 million on January 2, 2020 (up by 26% from last year). This flood of consumer goods back into the supply chain creates distinct reverse logistics challenges.

Figure 1: Projected 2019 U.S. Holiday E-Commerce Sales and Returns

 

Figure 2: Reverse Logistics is Inherently Complicated

Source: "Retail Supply Chain Management" by James B. Ayers.

 

Cost of Returns No. 1 Stressor for Retailers

Retailers increasingly must meet consumer demand for free returns, along with a simple return process, to remain competitive. If the returns are not handled in-store, there are shipping and handling costs that each have a labor cost. Shipped returns also present challenges in processing times, liquidation recovery and manual processes that can result in more than $50 billion in profit loss and more than 10 billion needless shipments and touches.2

Other key challenges to reverse logistics include product value depreciation and time sensitivity. As the overall return rate continues to grow by 10% annually, a higher amount of inventory is subject to depreciation. Reverse logistics software provider Optoro estimates that fashion apparel depreciates by 20% to 50% of its value within eight to 16 weeks, creating urgency to get inventory back into circulation and ready for resale. Depreciation levels vary by product type, with electronics losing between 4% and 8% of their value per month.

New Omnichannel Return Models Emerge

Efficient return strategies are increasingly important for retailers, and new models have been developed. For example, third-party provider Happy Returns provides a service for customers to send back their online returns by dropping them off at a kiosk. Some retailers without physical locations are partnering with brick-and-mortar retailers, allowing customers to return items to a store. Amazon now offers free returns for Prime members in more than 1,150 Kohl’s locations, allowing customers to drop of their unpackaged items at the store while receiving a 25% discount at Kohl’s.

Reverse Logistics & Real Estate

Optoro estimates that retailer supply chains require four to seven times more space allocation during peak buying periods, and that with the influx of customer and store orders, space for forward fulfillment is at a premium. There were 19 U.S. industrial markets with vacancy rates below the national average of 4.4% as of Q3 2019. And more forward orders mean more returns, impacting space demand especially during the holiday season.

A reverse logistics supply chain requires approximately 15% to 20% more space than a traditional outbound supply chain, according to Optoro. Nevertheless, the types of products being returned drive specific real estate requirements and space criteria. Typically, second-generation space is preferred over modern, Class A space. Lower ceiling heights are more appropriate since the activities within the space are high-touch with slower processing, and the odd configuration of pallet loads makes them difficult to safely stack or store in high racks.

Many retailers, particularly those with a thin supply chain network, outsource their returns management to third-party logistics (3PL) providers in order to free up space for forward logistics. This has created a significant amount of opportunity for the 3PL industry, which has grown in terms of square footage by approximately 31% since 2015. Large 3PLs that offer reverse logistics services include XPO Logistics, Ryder and NFI.

Waste Not, Want Not

Reverse logistics is not just a business challenge, but an environmental one as well. Returns produce an estimated 5 billion pounds of waste in landfills and 15 million metric tons of CO2 emissions from transportation every year, according to Optoro. Retailers increasingly must balance consumer demand with sustainability commitments while providing seamless return experiences.

Retailers may motivate customers to reduce returns by employing new technology like augmented reality to provide more accurate product descriptions and by offering package-less return drop-off points. Returns provide opportunities for product re-use through secondary marketplaces, reducing environmental impact and allowing retailers to recapture a portion of a product’s value.

Optoro, a Washington, D.C. based reverse logistics software provider, collaborated with CBRE on this report.

For more information on holiday trends, please refer to the 2019 U.S. Retail Holiday Trends Guide.

1 UPS Forecasts Record-Breaking Holiday Returns Volume, November 2019.
2 Optoro analysis informed by Hoovers, NRF, US Census, and client data.

Posted on Monday, Dec 30, 2019 - 08:10:00 AM EST
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