Suzy Davidkhanian (00:05):

Hi everyone. Today is Wednesday, April 22nd, and it's also Earth Day. Welcome to EMARKETER's weekly retail show, Reimagining Retail. This is the show where we talk about how retail collides with every part of our lives. I'm your host, Suzy Davidkhanian, and on today's episode, we're breaking down returns because beyond the cost of retailers, there's a growing awareness of the environmental impact, from extra shipping to packaging waste. Joining me today, our podcast regular senior analyst, Blake Droesch, who's with me in our new studio. Hey, Blake.

Blake Droesch (00:38):

Hey, Suzy. It's good to be back.

Suzy Davidkhanian (00:39):

Thanks for joining us and principal analyst, Sky Canaves, joining us from Texas. Hey, Sky.

Sky Canaves (00:44):

Hi, Suzy. Hi, Blake.

Suzy Davidkhanian (00:45):

Guys, I'm so excited. Returns have quietly become one of the biggest side effects of e-commerce growth. In fact, according to our forecast, we're on track for online returns to approach half of all retail returns by the end of the decade, even though e-commerce sales will only account for about 20% of sales, but it's hard to wave a magic wand to make them go away. Returns are the cost of doing business. If the process is too hard, you risk losing the customer. If it's too easy, it eats into your margin and encourages behavior you don't really want to see. So retailers are stuck trying to find the balance between growth, customer expectations, and profitability. So today that's what we're going to get into with a few of our favorite segments. What's driving returns and what levers do retailers actually have to help mitigate the cost? But before we get into the conversation, I want to ask you guys a very quick question. Sky, what was the last thing you bought and returned and how did you do that?

Sky Canaves (01:39):

Okay. So I will not be able to give you a quick answer because I consolidate my returns. I hold onto them until I have a bunch of things to return at once, so I have a little pile. And I'm taking most of them to UPS and one of them or two items are going to a store because it was the free option as opposed to having to pay for the shipping. And I can mix it or combine it in the same trip.

Suzy Davidkhanian (02:05):

Makes it easier for you. Probably better for the retailer too. Blake, what about you? What's the last thing you returned?

Blake Droesch (02:10):

I actually couldn't tell you the last thing I returned. I probably returned maybe one thing a year. And the last thing that I returned was probably a piece of clothing that didn't fit. That's typically the only time that I'll return an item. But yeah, I think I might be an outlier.

Suzy Davidkhanian (02:30):

Was it an item that you bought for yourself that didn't fit or it was a gift?

Blake Droesch (02:35):

No, it's an item that I bought for myself.

Suzy Davidkhanian (02:37):

Oh, interesting.

Blake Droesch (02:38):

When I do, I mean, I don't return things for other people. If I give them a gift and it doesn't fit, it's on them.

Suzy Davidkhanian (02:44):

You got it. I meant that if you got a gift, Blake.

Blake Droesch (02:46):

Oh, if I got a gift.

Suzy Davidkhanian (02:47):

Come on.

Blake Droesch (02:49):

No, because it's awkward to ask for the receipt.

Suzy Davidkhanian (02:52):

Oh, everybody should know to give a gift receipt with a gift. For me, I also try not to return a lot of things because it's so expensive for the retailer and having worked in retail, somehow I'm acutely aware of all of the costs associated to return. However, there are every once in a blue moon things I return when I buy on Amazon because... And they're always home things because I didn't quite figure out if it was going to fit or not. The last thing was this tray organizer for my kitchen. However, I processed the return, but it was very complicated, so then I didn't actually return it. And if anybody needs a kitchen cabinet tray thing that's too big for a New York apartment, let me know because it is sitting in my living room because it was too hard to return. Okay, let's dive into the actual segments.

(03:35):

Returns are something that every retailer has to deal with, but just like we're talking about now, it's how you handle them that can make or break the business. So let's put you guys each in the hot seat. I'm going to start with you, Blake. You're the CEO of a national omnichannel retailer. Amazon counts because they have Whole Foods and Kohl's. Returns are eating into your margins, but customers expect them to be free and easy. You can change one thing overnight. Wave that magic wand and tell us what you would do.

Blake Droesch (04:04):

I would create a system where you basically have two options. You can return it to get your money back, but you've got to pay for either the shipping or some sort of green fee and you can market it that way in order to make a full refund and get your money back and it won't cost me as the retailer anything. Or I would offer a free exchange policy that would be positioned to be more appealing to the consumer. So the exchange policy would ship immediately, so you wouldn't have to wait for the return to be processed in order to pick the replacement item that you want. You could ship it immediately and then the shopper would get the money back for the original item as long as they returned it within 30 days. And that would be free, but you would also be guaranteeing that you would still, as the retailer, collect the money for a sale.

Suzy Davidkhanian (04:56):

So if the retailer charges shipping, do I pay a second time when you're sending me the new item?

Blake Droesch (05:03):

That's a good question. I would offer a free shipping option because I think most retailers ... And it depends, but I think a lot of retailers have offer free shipping over a certain threshold anyways. So I would keep it the original shipping options for a regular purchase.

Suzy Davidkhanian (05:22):

And what if I bought a dress and then I wanted to return it and buy shoes instead? Would that qualify or it has to be a different dress?

Blake Droesch (05:28):

I would say anything of equal value.

Suzy Davidkhanian (05:32):

Got it.

Blake Droesch (05:32):

Yeah.

Suzy Davidkhanian (05:33):

Oh, that's interesting. There was a time I worked for a retailer where there were certain very low cost products that if you threw into your basket, you would get free shipping and they realized that it was meant to be convenient, but it also cost a lot of money and so they had to change things around. Sky, what about you? What would you waive?

Sky Canaves (05:50):

If I'm a CEO of a retailer facing returns challenges and I'm looking for... Well, maybe there's not a magic wand, but I'm going to look for a tech solution that's going to help me understand the reasons for returns on more individualized customer level basis so that I can find ways to tailor their return policy or offer or incentives to keep an item or exchange it to individual customers. One trend I've seen, for example, recently, and that happened with one of the items that I'm going to return it anyways because I really don't want it, but when I made the return online or put in for the return, Amazon offered me a portion of the price to keep if I kept the product. So it's essentially a partial refund if you keep it. I think as a retailer, I would want to look at how much does the return actually cost me?

(06:43):

One of the often cited figures I see is like 25% of the product cost will be eaten up by the return. So what could I offer the customer and how would that vary by customer? Because one customer might need $20 to keep an item, another one might be willing to keep it for just $10. But not just with partial refunds. I would look to other strategies that can resonate with consumers on a more personalized level to get them to try to keep products or exchange them. But either way, save the sale using technology.

Suzy Davidkhanian (07:13):

I mean, it's interesting because there's a lot of research that says if you start making the policies a little bit harder or charging fees, one and two will walk and go somewhere else. And so it becomes this weird competitive challenge against each of the retailers with one another, and it's not everything rises or doesn't rise. But it also, it's like returns has become more than just the cost of doing business from an operations perspective if you don't... It's like a P&L plus a customer experience and it somehow equates to brand trust. And so I really do like this idea of a tech enabled... I would've thrown in if I had been the CEO and got to answer this question, doing some sort of loyalty rewards program that includes the shipping and should you have tiers because there's also research that shows the more you buy from a retailer, this is probably where you sit, Sky.

(08:03):

The more you're buying from a retailer, the more you're also returning, which makes sense. The more things you're buying, the chances of having something that didn't quite meet your need is higher. So I think it's an interesting... There's a lot to consider, I would say, what are you optimizing for? Is it for profitability long-term or conversion today? And it sounds like for both of you, it was a mix.

Blake Droesch (08:24):

Yeah. I think it's about understanding what consumers, what your shoppers believe to be a reasonable policy and sort of towing that line, because you don't want to add friction or lose the perceived value of your return policy, but at the same time, like we've seen that it can't be a free for all.

Sky Canaves (08:48):

Yeah. You don't want to give away too much. And that's where more personalized technology can help to understand which consumer sits where, and you don't have to give everyone the same things.

Suzy Davidkhanian (08:59):

Well, that teases up so well into one of my favorite segments, the returns pie. So when you think about returns, what are the biggest culprits? It's like what you were saying. You don't want to give away too much. There is some "bad behavior" potentially that you can try and mitigate or tone down if possible with some of your policies. So I picked five slices, and of course I've added a wild card because everybody always wants to add their own slice, but you don't have to. I might have already picked the best slices out there.

(09:29):

So what I want you to do, and I'm going to start with you, Sky, allocate your percentages of what's driving returns today. The slices are fit and sizing issues, poor product information, intentionally, in my opinion, bad behavior, although maybe we'll discuss this as well. Impulse buying, as in, it was a last minute low intent purchase that you just threw into your cart or delivery and product issues. So that is fit and sizing, poor product information, intentionally bad behavior, impulse buying, and delivery product issues, plus of course, the wildcard. Sky, what are your percentages?

Sky Canaves (10:05):

So for fit and sizing, and here I'm thinking we're talking just about apparel and that market. So I would give this 20%. And the reason is because from our forecast, we see that apparel is about 30% of total online returns. And I would say most of that is due to fit and sizing issues. So I'd give it 20% of that share. And I would say the other 5% is due to fraud, like people wearing things and sending them back. And the rest is when things aren't as expected, you still can't touch and feel the fabric and it might not be what you were looking for. And then the poor product information, I'm going to give that an overall bigger slice because we see in some categories it's really hard to get accurate product information auto parts and that according to the NRF has been like the biggest category where the biggest share of online purchases get returned.

(11:01):

And then there are a lot of things where it's just not as expected because of the product information or the images or something. And there's just no way to really convey the look and feel of a product. I really struggle with buying jeans online because I don't want heavy, stiff, denim fabric. So even if the fit is perfect, if the fabric isn't something thin and drapey that I'm looking for, I'm not going to keep it. A lot of product information is still relatively decent, but it just doesn't meet consumer needs or can't in the current iteration.

Suzy Davidkhanian (11:34):

What percentage would you give that?

Sky Canaves (11:36):

I'm going to say 40%.

Suzy Davidkhanian (11:36):

40%.

Sky Canaves (11:37):

I think the product information and meeting customer expectations with a product, what they see online and what they get is the biggest factor. And then for bad behavior or intentional bad behavior returns fraud, I would give this, I allocated the other 5% from apparel and then I'll say another 10% from other categories. So for a total of 15%, and this is for e-commerce, I think NRF has their returns fraud figure for last year was around 9%, but that's for all of retail. I think there's more fraud that takes place with online retail. And I would not include bracketing in here. I think that's more a sizing issue because I don't think it's intentional bad behavior. I think retailers allow it. People are constantly buying two sizes when they're not sure, three sizes and then they plan to return one.

(12:29):

So that's 15%. And then for impulse buying or lower purchase intent, I'm going to give this 20%. I think maybe I have to because I need a little more pie. And I'm going to add here, you just change your mind. You buy something and by the time it arrives, you realize, I don't really need this. Especially nowadays when people are much more concerned about their spending and they might buy something and then decide, is it worth it? No, maybe not. And then the last 5% I'll leave for the delivery and product issues. I mean, I think overall, sometimes things arrive too late, sometimes they're damaged, but overall my experiences have been that it's pretty consistent and we don't see a lot of delivery failures or damaged products getting to customers.

Suzy Davidkhanian (13:14):

Awesome. Thank you. So it sounds like between size, fit and product information, that's the biggest bulk.

Sky Canaves (13:21):

Yeah.

Suzy Davidkhanian (13:22):

We'll come back to the bracketing if we have time, because I think that's an important distinction. From my perspective, just before you go with your pie, Blake, the bad behavior doesn't necessarily have to be fraudulent behavior. It's just bad behavior when it comes to margin. So the buying multiple sizes of one product is very complicated for a retailer for many, many reasons.

Sky Canaves (13:42):

Because from a consumer perspective, it's almost accepted with-

Suzy Davidkhanian (13:45):

Because the policies are so-

Sky Canaves (13:47):

... online categories like apparel.

Suzy Davidkhanian (13:48):

And the policies are so lax and we haven't had a lot of good tools to help me understand, do I need the small or the medium or the extra small? So I hear you. Definitely not meant to be fraud all of the behaviors in that pie, but some of them end up being... Blake, what's in your pie?

Blake Droesch (14:02):

Yeah, mine was pretty similar. I had product information at 40% of it, and that depends as well, largely on the perceived quality that you believe you're getting. I think a lot of people will order something and believe it to be of certain quality. And then when they, like Sky said, when they receive it and they can really just feel it. And it doesn't just have to be with apparel, even though it's probably largely the most prominent use case. I think even things like furniture or household appliances.

Suzy Davidkhanian (14:38):

Kitchen shelves.

Blake Droesch (14:39):

Kitchen shelves or kitchen organizers could also contribute to this as well. So I think that's a big chunk of it. And then the other one, the other I give... So that's 40%.

Suzy Davidkhanian (14:48):

40.

Blake Droesch (14:49):

I'm giving another 40% to size and fit. I think that really just the inability to fully grasp the dimensions and quality of the things that you're buying online really account for 80% of the return. And there might be some fluidity between those two segments, but I do feel pretty strongly that it's the overwhelming majority of driving returns more broadly.

Sky Canaves (15:14):

So would you put the Suzy's organizer into the-

Blake Droesch (15:20):

Oh, organizer.

Sky Canaves (15:21):

Is that a fit and sizing issue or is that a product information issue? Because I would fit in sizing just to be the apparel side of you're putting something on and so I limited it to that category. But yeah, I agree. There's a whole world of fit and sizing that I put into the product.

Blake Droesch (15:38):

Well, I think that's a really good point, Sky, because it depends on-

Suzy Davidkhanian (15:41):

I mean, it's a user issue. Yeah.

Blake Droesch (15:42):

... was it a user error? So was it an inaccurate description of the dimensions of the product, or did Suzy not accurately measure her drawer?

Suzy Davidkhanian (15:53):

Which we all know I'm meticulous. So I'm blaming the PDP page, though I am not... I did not go back to check. And the truth is, I was thinking about this on my walk to the office. Even if they had this AR/VR technology where I could have taken my phone to the cabinet to see if it fit, I didn't buy it.

Blake Droesch (16:08):

It's not precise.

Suzy Davidkhanian (16:09):

Well, not only that, but it's too much work for me because one of the wildcard slices I have fits into this. So I'm going to let Blake finish his thing, but it is an interesting, is it a user thing? Do we have enough tools to help people, but then will they use, even for size and fit for apparel? We have tools, but people don't use them sometimes. We get lazy.

Blake Droesch (16:31):

Yeah. And I think oftentimes the tools aren't great, particularly in apparel. But okay, my other-

Suzy Davidkhanian (16:36):

So you're at 80.

Blake Droesch (16:37):

My other 20%, I'm going 10% for bracketing, excluding other bad behavior because I think Sky really got to the same point that I was going to make before me that I don't think bracketing is necessarily bad behavior, but-

Sky Canaves (16:53):

I put it more as a fit and sizing issue because you don't know the fit and sizing-

Blake Droesch (16:56):

Exactly.

Sky Canaves (16:57):

... you buy two sizes.

Blake Droesch (16:59):

Exactly.

Suzy Davidkhanian (16:59):

Sometimes you buy two colors, same size. That's also bracketing.

Blake Droesch (17:02):

But also the same thing, it's really hard to tell, particularly when I'm trying to buy suits, it's very difficult to see what a dark navy suit is going to look like in person versus online. The picture could be very deceiving. So I think the same could go for colors.

Suzy Davidkhanian (17:20):

I also think you should go to Bloomingdale's to buy that.

Blake Droesch (17:21):

And then lastly, I would say just the other 10% is that impulse, I don't need it anymore. I think that is another thing where online shopping can be very impulsive. You could purchase something scrolling on your phone late at night and then wake up the next morning and regret it. And also, as Sky pointed out, I think by the time sometimes things arrive, you just don't need it anymore. I mean, maybe it's something that was pressing, so you ordered it, but then you had to go out to the store the next day and you saw a product there. And there are all different types of ways that people don't need products based on the fact that we live in a world where we expect things so immediately. So our decisions around what we need and when we need it, I think is constantly changing and that impacts online shopping.

Sky Canaves (18:16):

And also when there are big promotional events like Prime Day or Black Friday, Cyber Monday and you see a great sale and it's like you get the FOMO and buy something and you realize, oh, I just got caught up in the moment.

Blake Droesch (18:28):

Yeah. So that's my 100%.

Suzy Davidkhanian (18:29):

That's your pie.

Blake Droesch (18:30):

I realize I left out some topics-

Suzy Davidkhanian (18:32):

That's okay.

Blake Droesch (18:32):

... but I think that those are probably-

Suzy Davidkhanian (18:34):

You don't have to.

Blake Droesch (18:34):

... statistically less relevant. So I will leave them there.

Suzy Davidkhanian (18:39):

And I'll be sure to tell everybody you don't need every ingredient. You can use whatever portions of the pie slices that you want. From the conversation though, I feel like maybe one of the pie slices should be lax policies. Did retailers have such lax return policies that they have encouraged bad behavior? And in the shopper mindset, this idea of the impulse, like, "Oh, I bought something. Oh, I don't really need it. It's so easy to return it. I'm just going to return it." Or the bracketing or the wardrobing retailers have figured out, especially it happens a lot in dresses, so they have the little tags on the dress. If you take it off, you can't return it. So it's interesting. I think that could be a slice. Another one, which is why I was asking about your returns, Blake, was gifting is a big returns portion and could have its own slice. What are some of the tactics that retailers could put in place so that you give the perfect gift so that it doesn't need to be returned?

Sky Canaves (19:31):

Gift cards.

Suzy Davidkhanian (19:32):

That's true too. Okay. So let's play keep or curb. Retailers are trying a lot of different policies and changes to returns to keep them under control. We just talked about a bunch of ideas. So I'm going to throw out a few of the policies and I want each of you to give me your quick take. Do you keep it? Do you curb it? And how does it actually help reduce bad behavior? Rapid fire, just one point on each thing. If you think the same way, that's okay. Just say, "I agree." and we'll go to the next one. So the first keep or curb is free returns. We know it drives conversion, but does it also encourage over ordering? What do you think?

Sky Canaves (20:11):

Keep them as a perk, though they're for paid memberships, high spending loyalty members, everyone else when it comes to shipping, that can be passed on.

Suzy Davidkhanian (20:21):

Oh, I like that. Like shipping thresholds. Blake.

Blake Droesch (20:23):

Yeah. Curb, it's very costly and most consumers are fine paying a couple of bucks to process a return.

Sky Canaves (20:32):

It just has to be disclosed upfront.

Suzy Davidkhanian (20:35):

Yes.

Sky Canaves (20:35):

No surprises.

Suzy Davidkhanian (20:37):

And that brings us to the other one, which the next one, which is restocking fees, kind of like what you just ended on. What do we think? Keep or curb?

Blake Droesch (20:45):

Curb. I think restocking fee, it sounds like a BS charge just as a consumer. I would rather it be a green fee, a shipping fee, something that doesn't have to do with the fact that the onus is back on the retailer. I think you could just brand it differently, charge the same amount.

Sky Canaves (21:01):

Totally agree. Consumers are getting mad at fees nowadays.

Suzy Davidkhanian (21:05):

And it's true, restocking makes it feel like I'm helping you do your job. I didn't think about it that way. Next one, Sky, shorter return windows. Feels more palpable than a fee. What do you think?

Sky Canaves (21:16):

I would keep them within reason. You don't want to get too short because that can put too much pressure on the consumer and then they might decide to return a product that they would've kept if they had more time to think about it.

Suzy Davidkhanian (21:29):

Blake?

Blake Droesch (21:29):

I would curb it. It doesn't actually cost the retailer anything to have a return window that keeps up with the industry standard and you don't want it to be too short.

Suzy Davidkhanian (21:41):

I think we can talk about this for another hour because it does cost them. If you return something in three months and it's like a bathing suit and now it's winter. But the question is, what is the industry standard?

Sky Canaves (21:54):

I think that shift. So in the holidays, it's a very long window and that's been driven by Amazon and the big retailers who can afford to extend that window from say November 1st until early February even. And then people have to keep up with that. But other times I think retailers have been shortening their return windows over time, but I think you don't want to get too short to a week or two weeks. Maybe 30 days sounds reasonable.

Suzy Davidkhanian (22:21):

But it is interesting to your point, Blake, people don't really need to understand the operational mechanics of making margin and how inventory flows and all the policies that have been out there help support this kind of behavior that feels like we're now taking away something that was so easy before.

Blake Droesch (22:40):

Yeah. And seasonal fashion items, yes, could cost the retailer money by having too long of a return window. But I'm thinking within the context of having a standard 30-day return window across the board for all retailers isn't going to cause one particular retailer to bleed too much. It might weigh on certain fashion retailers who are only selling things in season slightly more, but I think across the board, I wouldn't make it shorter than the industry standard.

Suzy Davidkhanian (23:07):

And even I said bathing suit, so I'm taking ownership of that, but even bathing suits now or a year round. You just need to find the right spot to put it so that people find it. Next one, store credit versus full refund. Blake.

Blake Droesch (23:21):

I would keep, I would think as my original point was, I think that there's a good way of giving consumers options for either or, and that actually gives the retailer some flexibility to improve their margins and return.

Sky Canaves (23:33):

Yeah. You don't want to trap the consumer into having to have store credit if they have an option for a full refund. But I think retailers should think about how they can incentivize the store credit maybe with a bonus of like 10% or, I mean, depending on the customer, it might be a little more or a little less, but creating that incentive structure for shoppers to opt for the credit over the taking the money.

Suzy Davidkhanian (23:57):

As a retention mechanism, I love it. What about buy online return in store, keep or cut?

Sky Canaves (24:03):

Oh, absolutely keep because this brings a customer back into the store and it also can help reduce returns fraud because somebody's not going to bring in a box of bricks or something that's obviously worn. They might be too embarrassed to do that. And it obviously creates the opportunity to then have them buy something else. It improves the chances. I have that return. I mentioned that I'm taking back to the store. I'm hoping I can find something else when I go there.

Blake Droesch (24:32):

Yeah, I would definitely keep it. I think I know it's logistically complicated sometimes for retailers, depending on how they're set up, but from a consumer, nothing is more ridiculous than learning about the silos between how online sales and store sales are processed. So it's really important that retailers work that out.

Suzy Davidkhanian (24:49):

Last one, guys, keep or cut different policies based on the consumer tier.

Blake Droesch (24:56):

I would say keep for, as Sky mentioned, like loyalty program members, but I would shy away from an AI enabled personalization policy because to me that seems like dynamic pricing, which is always a touchy subject. But yeah, I think it's a great perk for loyalty programs to have a better return policy if you're a part of it.

Sky Canaves (25:24):

I would keep both on the loyalty side and on the more dynamic personalized side. One reason is because it is personalized. It's not as public as say dynamic pricing. And I think it's maybe more palatable that your return policy is going to vary depending on your value as a customer versus the pricing based on what you're willing to pay. That said, I think that there are still important guardrails that need to be put in place to avoid actual discrimination.

Suzy Davidkhanian (25:53):

Awesome. This is such an important topic for retailers, not only because of sustainability and because of the customer experience and also the cost-cutting and the margin pressures, but it really does help tie into loyalty and trust. And so we could keep going and going, but unfortunately we're going to have to leave it here today. Maybe we can do another episode, just talk about sustainability and returns. If there's one thing I do think we landed on is that returns may feel like a cost center for retailers, but if you don't have the right levers in place and you don't treat it like an opportunity to court a customer, you might never get them back. Thank you, Blake.

Blake Droesch (26:31):

Always a pleasure.

Suzy Davidkhanian (26:31):

Thank you, Sky.

Sky Canaves (26:33):

Thanks, Suzy.

Suzy Davidkhanian (26:33):

And thanks to our listeners and to our team that edits the podcast, please leave a rating or review and remember to subscribe. I'll see you for more re-imagining retail next Wednesday and on Friday, join Marcus for another episode of Behind the Numbers.