What’s the Deal With Reverse Logistics Anyway?
People are thrice as likely to return online-bought items than store-bought items. And the numbers are exploding.
A hearty welcome to the tenth edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
For a lot of us, e-commerce has increasingly become a lifeline—especially since the pandemic. With a large portion of physical retail shut during the months leading to summer last year, Americans shifted their shopping online. After an expected crash in consumer spending in March ‘20, the market saw a V-shaped recovery, with durable and non-durable goods witnessing historically high demand.
E-commerce was an obvious winner, with Americans spending $861 billion last year online with US merchants—a 44% increase from 2019. While annual e-commerce growth rates over the last decade have been impressive in itself, last year’s increase eclipses them by a factor of three.
While there’s much to cheer for e-commerce retailers right now, there’s the glossed-over part of e-commerce that is causing them niggling discomfort. Reverse logistics, the reverse supply chain that caters to product returns, is an unfortunate byproduct of retail. Although it has always existed in some shape or form, e-commerce has exacerbated the size of the returns market.
From the standpoint of e-commerce retailers, promising flexible returns options is critical to retaining their customers. A recent consumer survey found the ease of returns to impact 73% of the respondents’ decision to continue shopping on the said platform. Ironically enough, the unhappy consequence of simplifying the returns process is the increasing rate of returns. In 2020, US consumers returned merchandise worth $428 billion to retailers—more than doubling in value from 2019. A catch-22 situation indeed.
In 2020, US consumers returned merchandise worth $428 billion to retailers—more than doubling in value from 2019.
Though reverse logistics sounds like regular logistics in reverse, the former is a lot more tricky. For one, reverse logistics is an irregular system that is riddled with inefficiencies. Returns operations often need logistics stakeholders to expend more energy and resources than with their regular e-commerce shipment. Take the last-mile segment, for instance. In an average locality on any given day, e-commerce deliveries would always be more in number than the number of packages awaiting returns.
This goes to say that the density of returns in a given area is lesser than the density of deliveries in the same place. As a corollary, the distance a last-mile van needs to travel to fill its capacity with returns is far greater than the distance a similar fully-loaded van would have to travel to deliver packages. There’s huge inefficiency packed into this operation.
Next, there is the subjective element of receiving and processing a returned product. In a typical delivery logistics setup, products move in bulk through warehouses. Workers are instructed to only move the packages around, rather than checking individual products as part of quality control. However, with reverse logistics, it’s pretty important that returned products get checked individually—for obvious reasons.
And this ‘checking’ is largely subjective. Let’s say a blue polka-dotted shirt gets returned. The reason for return—too large. The warehouse worker takes a cursory glance at the shirt, and finding it in excellent condition, repacks and puts its back in the inventory for it to be shipped to a new customer. Now the shirt gets sold off immediately, only to be held up by a dismayed customer that notices sweat stains on the collar. Long story short, the product gets returned and the seller earns a prompt negative review on the e-commerce platform.
Needless to say, this is a significant risk. With returns sorting being a highly manual process, it is incredibly hard to set standards on products that could oscillate from tennis balls to dining tables. Different workers have different definitions of what can be considered ‘okay’ to be returned to the inventory for a second chance at getting delivered.
With returns sorting being a highly manual process, it is incredibly hard to set standards on products that could oscillate from tennis balls to dining tables.
For retailers looking to improve their resilience to returns volumes, it would make sense to look at the data. Analyzing returns data and understanding why a product is returned could help getting to the root of the problem. Maybe the product does not live up to its promise; perhaps the shirt is one size bigger than advertised. Either way, data will help dig up the anomalies.
That apart, creating a returns profile on every consumer is essential since it can help highlight buyers who hit the return button one-too-many. Frivolous buyers can be blocked or warned of unprofessional behavior. Leveraging data can enable retailers to tighten their returns processes, ensuring returns they receive are largely genuine.
Meanwhile, brick-and-mortar retailers are scenting a business model that could earn them serious money. The explosive growth of reverse logistics has strained the limited physical retail facilities that e-commerce platforms maintain to receive returns. This has put big-box retail majors in the limelight, who are pretty eager to act as temporary storage centers for returns. For instance, Kohl’s accepts Amazon returns in select stores, and Nordstrom is working on a similar agreement with Macy’s. While being competitors in the market, companies seem to not shy away from taking up channels that can potentially be perennial revenue channels.
Intermediary physical retail space gains more relevance during the holiday shopping season. While this season is characterized by record volumes shipped, it is closely followed by a barrage of returns volumes that overwhelm the warehousing system. Big-box retailers can act as proverbial check dams to a returns volume deluge.
All this being said, e-commerce platforms are steadily creating an environment where consumers are unconsciously trained to make returns a part of their regular online shopping experience. Returns can be the way e-commerce retail works to replicate the missing ‘physical’ element of retail. For example, encouraging customers to order five sunglasses and asking them to keep the one they like and return the rest. While an elaborate exercise, this could be a smart way to circumvent the absence of ‘choice’ of physical products to choose from when shopping online.
E-commerce platforms are steadily creating an environment where consumers are unconsciously trained to make returns a part of their regular online shopping experience.
This inevitably hits the profit margins of e-commerce retailers, as they cannot expect to pass returns costs to the consumers. Considering the industry at large, the environmental cost to reverse logistics is massive. However, for retailers, the customer service brownie points they gain via such a service would trump the resulting overhead costs. And in the world of cut-throat competition and predatory practices, customer loyalty means everything.
The Weekly Roundup
🏬 In what could only be termed inevitable, Google is finally entering the physical retail space with its first Google store in New York—close to an Apple store. To date, Google’s physical presence has been by teaming up with big-box retailers like Walmart and Best Buy for people to get an actual feel of their products. While this setup would likely continue, Google could be taking a leaf out of Apple’s notebook and give its physical retail approach more definition.
🚢 Spot ocean container rates have recorded historical highs this year, making many believe this to be the ceiling. However, container rates could still have some steam left in them, possibly to a point where shippers have all their profits yanked out. The retail inventory-to-sales ratio is also seeing multiple-year lows, making it that much harder for freight rates to come down in the near future.
💰 JD Logistics, the delivery arm of Chinese e-commerce major JD.com, is now priming up for its Hong Kong IPO of $3.4 billion. JD Logistics has a sprawling network of last-mile and long-distance hauling operations, alongside over 900 warehouses it operates across China. The company has been at the forefront of technology, automating warehouses and using drones for last-mile delivery.
📦 US imports from Asia in April ‘21 were 29.3% higher year-on-year, with volumes totaling 1.55 million TEU. While this steep rise is expected considering the trade environment back in April last year, import volumes this April are still 25.7% higher than volumes in April ‘19—meaning the impact of COVID-19 does not tangibly skew results. Retailers and freight forwarders believe this might be the ‘new normal’ that supply chains should be getting used to henceforth.
🚚 By pushing for special-purpose acquisition company (SPAC) mergers, autonomous driving companies are charting a new course in self-driving technology’s rise to mainstream relevance. Autonomous trucking companies like PlusAI and TuSimple have recently announced IPOs and raised several billion in the process, taking a significant step to have more cash infusion into perfecting this rather expensive technology.
...said who?
“We don’t know how to do it yet, but it’s not impossible. If you can make one ship net zero you can make all of them, provided the economics make sense.”
- Lars Robert Pedersen, deputy secretary-general of trade body Bimco, commenting on how ships need to become carbon-neutral for countries to keep up with climate goals.
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