From Returns to Riches: How Retailers Transformed the Reverse Supply Chain
The Early Days of Returns
As e-commerce started to boom in the early 2000s, return policies for many brands were heavily reliant on Return to Vendor (RTV) programs. Under these programs, more than 90% of returned products were sent back to the original manufacturers (Brands/OEMs). Retailers preferred this model because it allowed them to avoid the complexities and risks associated with managing returned inventory. The focus was strictly on offering new products, leaving the disposition of returned items to third-party logistics firms, such as GENCO.
These third-party logistics firms were responsible for handling the returned products, evaluating their condition, and finding suitable secondary markets for resale (primarily wholesale & liquidation). This system was convenient for retailers but placed a significant burden on brands, who had to manage the afterlife of their products.
Shifting Towards Enhanced Customer Experience
A significant shift began around the mid-2010s as retailers started to place a stronger emphasis on enhancing the customer experience. Investments were made in offering same-day or next-day shipping, and implementing friction-free return policies to boost customer satisfaction and loyalty. Around this time, retailers also started identifying a major gap in leveraging returns as a monetization opportunity….so they started to invest in their reverse supply chain capabilities, incorporating reverse logistics and recommerce capabilities internally.
The Benefits to the Retailers
This not only improved customer loyalty and engagement, but also created profit opportunities. Retailers started charging brands ‘allowances’—fees ranging from 3% to 15% of the cost of goods sold—to manage their returns. They then fed these returns into their own reverse logistics processes and repurposed those items for resale – effectively turning the reverse logistics process into a profit center.
Retailers gain significant advantages from the reverse supply chain and lenient return policies:
- Enhanced Customer Loyalty: Offering hassle-free returns encourages shoppers to return to stores, fostering long-term customer relationships and repeat business.
- Resale Revenue: Retailers can repurpose returned items for resale, either through their own marketplaces or by collaborating with liquidators and third-party buyers, which boosts their profit margins.
- Quality Standards Control: By maintaining their own standards for evaluating returns, retailers can manage the quality and reputation of brands’ refurbished and resale items. This control allows them to effectively oversee inventory, minimize losses, and maximize profits in secondary markets.
- Profit Optimization: With the autonomy to determine resale strategies and collaborate with liquidators, retailers can optimize the returns on returned merchandise, ensuring efficient inventory management and increased profitability.
The Cost to Brands
All of these benefits to the retailers come at a significant cost to brands:
- Lack of Customer Touch Points and Engagements: Brands lose visibility into the reasons for returns, eliminating their capacity to address customer concerns directly. This lack of feedback hampers their ability to identify and rectify product defects, respond to customer complaints, and detect trends such as wardrobing.
- Sales Cannibalization: While resale revenue benefits retailers, it can have detrimental effects on brands by recirculating their products in the secondary market. This forces brands to compete with their own items, thereby impacting the sell-through rates of primary product listings and price control across marketplaces. Sales cannibalization consistently accounts for an estimated 3-5% of topline revenue for brands involved in ZVR programs and third-party resellers.
- Brand Reputation: When third parties like retailers and associated liquidators handle returns, brands relinquish control over how these items are treated. Brands have no input on how returned items are cleaned, refurbished, packaged, or listed in the secondary market. Despite this, the unpackaged item still carries the brand name, indirectly costing the brands in terms of reputation.
Conclusion
While retailers’ reverse supply chain offerings and zero vendor returns (ZVR) programs can initially appear beneficial for brands, the resulting costs of these conveniences must be critically evaluated. Brands face substantial challenges, including lack of visibility into customer return data, potential cannibalization of primary product sales, and loss of control over their own brand reputation. The ever-increasing fees for return management add to the financial burden, making it imperative for brands to reassess their return policies.
The positive takeaway is that retailers have revolutionized the reverse supply chain, demonstrating that it is indeed possible to manage and repurpose returns efficiently. This transformation has given rise to the concept of recommerce, making it more accessible for brands to reabsorb their returned items. By embracing recommerce, brands can recover costs, enhance customer engagement and loyalty, and maintain control over their brand reputation and equity across the entire product lifecycle.