In retail, your job is to sell products. When you sell products, you generate revenue (and hopefully profit). If you sell more products, you increase revenue. Therefore, the more you sell, the more profitable you are, right?
It may seem counterintuitive, but there are reasons increasing sales can actually lead to a reduction in profitability. Reverse logistics (item returns, specifically) is one of the stickiest parts of your retail business. And, it can cause this profitability paradox.
How returns can reduce profitability.
Most companies invest much less into the returns part of their supply chain, compared to the supplier-to-consumer part. They are quite efficient at purchasing products from suppliers, getting them into stores and warehouses, and into the customers hands. They use strategies like just-in-time inventory to increase throughput.
But, retail is not a one way street. The product entering the customer’s hand is not the end of the customer experience. What happens when a customer returns a product you sold them? It’s likely that you haven’t invested enough in that part of your business.
Returned products turn back into inventory. Depending on how long it has been, since the initial sale, that inventory may even be less valuable as a sale than it once was. If you’re forecasting how much to buy from suppliers and where to put it, and you’re not considering what will be returned, it’s likely that you’ll end up with an excess inventory.
Making better use of returns.
With unmanaged or poorly managed returns process, the more returns you receive, the more it effectively bogs down your system. Eventually, many of those returns will have to be sold at a discount, just to get them out of the system.
In fact, a new Gartner global reasearch study* into the multichannel fulfillment and returns practices of 300 multichannel companies across a wide variety of retail sectors indicated that these “companies only resold at full price 48% of the products that consumers returned.” (You need a Gartner account to see the full report.)
These returns are eating into your profit. A study performed by Aberdeen Group, and cited in a UPS white paper about reverse logistics states that “the average manufacturer will spend 9% to 15% of total revenue on returns.”
It doesn’t have to be that way. That same UPS white paper states that “improving reverse logistics can help a company increase revenue up to 5% of total sales,” by turning returns back into high-value sales.
Retailers can view returns as opportunities to sell products, just like they would the products they buy from suppliers. If you implement efficient ways to re-catalog and restock your returns, you get them on the shelves, in front of a customer, quicker. The more efficiently you can do this, the more likely that you’ll increase that percentage of returns that get sold at full price.
You can go even further, by actively anticipating your returns and factoring that into your purchasing decisions from suppliers. You don’t have to keep bringing in as much inventory, if you’ve forecasted a certain amount to be returned into the store. It’s a delicate balance, and it cannot happen without the right processes and infrastructure in place (hint: we can provide that). But, it can seriously streamline your supply chain.
Do something about it.
The holidays are just around the corner, and you know what that means. Returns like no other time of the year! What can you do to be prepared for that December 26 returns rampage?
Understand the impact returns have on your bottom line. This post talks about it in the abstract. Now go look at the numbers. Seriously…right now.
Invest in people and technology that helps you streamline your return process. You’ll be able to offer your customers better return policies and you’ll be able to squeeze more profit out of what they return.
Incorporate returns into your financial forecasts. If you have a reasonable expectation about how much product will come back into the supply chain, you can make more intelligent decisions about how much product to initially buy (and when to buy it). Your past financial data should have this valuable insight just waiting to be unlocked.
Shameless plug: Looking for a solution to your return woes? We’ve got one.
*Gartner, Returns – The Ticking Time Bomb of Multichannel Retailing, Tom Enright, September 17, 2014.