Returns mean billions in lost revenue for business - how can they be reduced?

Product returns are a bigger cost than most businesses realise. In the US, the National Retail Federation reported that in 2015, total returns represented over $260bn (£201bn) in lost revenue for retailers. They also note that if merchandise returns were a corporation it would rank third on the Fortune 500 list.

Returns are a particularly problematic issue when it comes to selling electrical and electronic equipment (EEE) products. Here in the UK, retailers compete on price and experience, in a market that’s underpinned by fast-moving and innovative technology cycles and, for some products and brands, low profit margins.

New research from WRAP estimates that £1.5bn worth of EEE products are returned to retailers each year in the UK alone, although the figure could be as high as £3bn. These figures are based on data from members of WRAP’s Electrical and Electronic Equipment Sustainability Action Plan (esap) who have identified typical EEE return rates in the range of 5-10%.

Greg Lucas, WRAP’s technical specialist, says it can be hard to establish overall trends on EEE return rates, given the diversity of product categories and that a high proportion of products returned have no technical fault. “Consumer expectations and understanding will differ from product to product,” he says.

According to WRAP’s own consumer research, over half (57%) return a product because they find it to be faulty. But 39% of returns just fail to meet customer expectations – people either encounter problems with set-up, or simply change their mind about the product once purchased. WRAP estimates up to £1bn worth of non-faulty EEE products are returned each year.

“Often products are returned because customers can’t work them,” says Jonathan Gorst, a principal lecturer at Sheffield Business School who chairs the Chartered Institute of Logistics and Transport’s (CILT) reverse logistics forum, a working group on returns management. He says offering better after-sales support is a worthwhile investment for retailers – Currys/PC World’s Knowhow service and Halfords’ sat nav installation service are two examples.

“With EEE products, the margins are so low that when a return comes back it’s a cost to the company instantly,” Gorst points out. “But if you can get the product back in a useable manner with pristine packaging, the costs of dealing with that return are minimal.”

That’s because handling returns consumes retail staff time and logistics capacity. Electrical items such as TVs, even if reported not faulty, may be PAT tested again for safety. A product returned to a local store often has to be shipped back to a main distribution centre before a decision is made about whether it can be resold or not.

Gorst says holding onto a return for too long can devalue it. “Some of the issues that companies are struggling with are that they may have to ship a [returned] product multiple times. Every time you move a product, you run the risk of damaging it and so its value can deteriorate.”

The key, Gorst says, is to get return rates down. “One of the things that we’ve been talking to companies about is how they buy in the first place,” he says, adding that retailers are becoming more savvy in procuring stock and starting to recognise what component parts might break or fail in certain product lines. They then buy a supply of spare parts from the manufacturer as part of the purchase deal.

WRAP is also helping retailers make better purchasing decisions. It has issued guidance to help companies specify more durable products which are less likely to fail at consumer price points. It’s also working with organisations to drive return rates down through better returns management.

But these measures will only go so far, says Lucas. “One way to increase user satisfaction with their products and reduce return rates down to 1%, which is where we want to be, is through adopting more circular business models.” He says one of the biggest opportunities here is for retailers and brands to help customers buy the right product first time and also develop the relationship beyond purchase into use and reuse. For a monthly fee, the consumer has access to an appliance or gadget that they can exchange or upgrade, allowing retailer takeback and refurbishment for resale into other markets. In theory, such a model could be upscaled to include an entire room such as a kitchen where all appliances and gadgetry are enjoyed by the householder with servicing and maintenance built in.

If such models are to work, they must be of clear benefit to the consumer, provide access to more durable products and be effectively communicated, with fair pricing. WRAP is starting to see evidence of this with some of the pilot work it is doing. But perhaps the biggest challenge will be a marketing one – Lucas says use of language will be critical when it comes to getting consumer buy-in.

“We sit down with stakeholders across society who are talking about leasing and rental, words that can have a negative connotation to a previous era in some consumer’s minds, or consumers with specific affordability needs,” he says. “If we put the same amount of creativity into the communications aspect that we do for new products, you’ll see more of an uptake with these types of business models, which will inherently reduce returns.”

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