The Hidden Labor Cost of Holiday Returns

by | Dec 19, 2018

It is said that the only things certain in life are death and taxes…and maybe post-holiday returns.  Each year, retailers see a spike in returns after the holidays as shoppers bring back all the gifts that did not fit, were the wrong color or were just not wanted – and that spike is growing. The National Retail Federation reported shoppers returned eight percent of holiday purchases in 2015, rising to 13 percent last year.  And because online purchases are returned at a higher rate than in-store purchases, expect this percentage to continue to rise as ecommerce makes up a bigger percentage of retail sales this season.

Returns are expensive for retailers. The returned merchandise impacts supply chain costs and often cannot be resold at full price, if it can be resold at all. Beyond the merchandise, there is the hidden cost of a return: labor.

For most retailers, it takes more labor to accept a return than to make a sale. A quick look at Axsium Group’s database of retail industry labor standards illustrates this point: a typical return transaction takes twice as long as a sale due to added time to understand why the customer is making the return, accept the merchandise, and issue a credit or refund.

We find that best-in-class retailers are more efficient when accepting the return, often processing the transaction as fast as a sale. For retailers that struggle with returns, the transaction can take four times as long as the sale!

The time (and labor cost) of a return is driven by three things.  We can call them the “Three P’s of a Return”: policy, point-of-sale (POS) and process. Your policy dictates which returns you will and won’t accept. Your POS governs the speed at which any necessary information can be collected from the customer, the amount of the refund given, and an update to the store inventory. Your process includes the steps your associates perform to handle the return.  It is dependent on your policy and POS but also affected by softer factors such as desired brand experience, associate training and customer demographic.

There is an old saying that labor is a retailer’s largest controllable expense because the other major store expenditures – real estate and merchandise – are fixed and cannot be managed by the store.  A similar principle applies to returns. Assuming your policy and POS are fixed, the last P – the process – is your largest controllable expense.  And, our data shows that managing that process is the difference between retailers that are best-in-class and those that are not.

Beyond the return transaction, your stores need to do something with the merchandise the customer has brought back to the store.  This is an area that is expensive even for best-in-class retailers.  Again, looking at Axsium’s labor standards database, we can see that it takes as much time to reshelve a product or return it to the warehouse as it does to accept the return.

All of this adds-up! Between the return transaction and handling the product, a typical retailer will spend four times more on labor with a return than the original sale.  Think about that in context of the returns your stores will get in January.  If the NRF data holds, 13 percent of the items bought will be returned, and retailers will spend half as much labor handling the returns as it did to make 100 percent of the original sales.

Of course, the benefits of getting returns right and making them efficient can be big.  Not only will a retailer reduce labor costs, but a smooth return provides a good customer experience.  It gives stores an opportunity to turn the return into an exchange and even upsell the customer.  And, it reduces risk of fraud and improves loss prevention. Plus, it frees up time associates can spend on something more productive, like selling.  For many retailers, handling returns well this holiday season and beyond may be the difference between profit and loss, especially given the growth of ecommerce. How well are your stores going to do?

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