Fashion retailers are facing a fierce battle to protect margins and corporate profits against the heavy costs of an explosion in returns. The larger retailers are putting in place systems that offer visibility and control over the returns process. But, asks Gareth Thomas, Retail Business Consultant at Zetes, what can SME retailers do to compete?
Returns in the fashion sector are not exactly a new phenomenon. There has always been a small percentage of mail-order items that are discovered to be faulty, damaged in transit or defective and, of course, there are returns of gifts where the giver’s estimate of size or taste has proved over-optimistic. But historically, such returns have amounted to a very small percentage of sales: readily managed, or even ignored.
That is certainly no longer true in an omni-channel e-tailing age. A recent ‘Fashion Returns Review’ by the e-tail trade association IMRG suggested that the long-term average return rate for online fashion goods is 23%. For some lines and brands it can be very much higher – anecdotally, over 50% in some cases and still growing. In a 2014 research note, Gartner stated that for most retailers, returns represent the largest single ‘supplier’ to their business.
With returns now accounting for such a large proportion of goods sold online, and with internet sales still growing rapidly – the IMRG Capgemini e-Retail Sales Index reports online sales rising by 7% in January 2015 compared to the previous year – retailers are facing a tough challenge. How to manage returns in order to minimise costs, improve availability, reduce stock obsolescence and maximise margin?
It is easy to see how this ‘explosion’ in returns has come about. ‘On approval’ is no longer the privilege of the high credit few: it is a right claimed by every shopper with valid plastic. More seriously, in the online world, without a physical changing room, fit and colour become a matter of guesswork. The result is that an online shopper may order three styles, each in three shades and three sizes – nine items of which eight will probably be returned.
A feature of the modern retail environment is that it is not just the initial sale that is multi- or omni-channel, so is the returns flow. Returns may be collected from the customer, posted or couriered back to a DC or a specialised returns reception point, or returned in-store. But that shop may well not be the branch that made the original sale. More likely the sale was on-line and never went near a physical shop. Some lines may only be sold on-line, so the shop may now hold goods that are not in its sales range. Even if they are, that store may have plenty of that line, while another branch is out.
So returned goods may face a variety of fates depending on condition, obviously, but also location and the costs of the processes involved relative to the goods’ residual value. Ideally, returns in pristine condition can be put straight back into stock where they lie, be that DC or shop. More likely, at least some remedial work will be required, especially on packaging and it may need to be moved to an appropriate location.
It may not be possible to recover the goods as full-priced stock. There may be damage that renders the item a ‘second’. The item may be obsolete, no longer carried in the retailer’s range. Or the item may be stained, damaged or defective to an extent that it cannot be resold.
With a quarter or more of ‘sales’ being, in fact, nothing of the kind, it is imperative that the retailer has timely and efficient processes for realising the maximum residual value of returned goods at the least additional cost. Some studies suggest that as few as 48% of returns are subsequently resold at the full original retail price – on average they suffer a 5-10% markdown. But that disguises much more drastic reductions on some lines, and these goods are now bearing their share of the costs incurred in the initial sale plus those incurred in the returns process.
Every item requires an individual decision. Such decisions are complicated because while retailers may have an overall idea of the ‘cost of returns’, they often have little visibility of cost at item level.
The 2013 ‘Retailtopia’ report for BT cautioned that ‘Accountants tend to overvalue returns’ and that aggressive write-downs of at least 25% are appropriate, but clearly this will vary from case to case. Depending on company policies, not least on brand protection, returns may be offered through ‘outlet’ venues, or, suitably stripped of branding and at even greater discount, through market traders or charitable donation. The BT report says that 85% of returns can avoid being sent to landfill.
The returns management process is thus influenced by many factors, from marketing strategy, brand image and customer service to the harder numbers of costs incurred and cash recovered.
Optimising this complex situation requires well thought through policies and procedures and acute decision-making. It also requires IT systems at warehouse, shop and business levels that can identify, track and progress individual returns through the appropriate procedures and, ideally, back into saleable stock, giving visibility of the availability of returns in the overall stock picture. This should help inform decision-making around the alternative recovery routes and supporting financial operations, including, if necessary, customer refunds.
That is a complex set of tasks, but the last thing a mid-sized fashion retailer needs is another set of systems just for reverse logistics – with all the costs, integration issues, and burden on a small IT department. Therefore, the exacting requirements for reverse logistics and returns management need to be built in to retail shop and warehouse solutions from the start.
At one level the solutions should enable the effective management of returns in-store, providing visibility to the business that the return has been made and then managing the move back into stock, probably through the POS system. Or if the return is, directly or through the store, back to the DC, then the system must support the ability to identify the stock and its condition and manage the process for repackaging or other remedial work – ultimately it must manage return to stock in the appropriate location, with minimum re-handling, cost and time. At a holistic level the system should offer the retailer a comprehensive view of stock that supports a Distributed Order Management model wherein items are treated as free available stock to meet online or store requirements.
As an example, at Zetes three of our solutions have a key role to play. Medea is our warehouse execution system optimising processes including returns and providing visibility. Athena operates similarly in the store environment, from order picking and managing click’n’collect to stock enquiries, inter-branch transfers, price markdowns, ticketing and the returns process and supplying visibility at store and company level. Olympus forms a high-level event repository for the comprehensive tracking and tracing of individual items. All can be deeply integrated with established WMS, merchandising, ERP, POS and other core systems.
The best approach is to start by doing a front end evaluation of existing systems and identify the optimum processes for handling returns, be they in store, at the DC, or both – taking into account the need to incorporate or replace legacy systems, including paper-based systems. Then integrate relevant Cloud-based solutions, data-capture technology and the rest, to the key elements of the supply chain – in-store, at back of store, in the DC, in the transport network – to provide the required efficiency and visibility.
Critically, it is important to break down the barriers between the ‘silos’. For example, a DC may be running at an apparently high level of efficiency in meeting store and on-line demands, but that efficiency may be ‘bought’ by giving lower priority to the smaller volumes and more complex processes involved in returns handling, without regard to, or visibility of, the wider impact on the company and its customer base.
Traditionally, retail systems have treated stores as ‘black boxes’ – they know what has been received, what has been sold and what is available in stock and that is about it. But it is vital that management has more granular visibility by being able to identify stock aligned to specific business areas, for instance returned stock but also stock that is already allocated as part of a click’n’collect order and so is not available. Through this we can make visible the impacts on replenishment, availability, the validity of the ecommerce offer and the availability to fulfil from store.
In turn this enables management by location, which is key in reverse. This level of granularity allows more effective store management, a greater visibility of the real stock position, improved accuracy, greater ability to fulfil orders, which in turn, leads to an improved customer offer with reduced stock levels. Or more simply, better margins and bigger profits.
