Financial Impact of Returns on Retail Policy

Most of the players in the online as well as offline retail industry have a clearly defined retail policy. It is considered to be an important part of business for most players in the retail industry.

A lot of retailers don’t give much thought while creating this policy and such policies are often created based on what the competition is offering. However, research conducted in this matter in the recent past has shown that the return policies offered by retailers are not inconsequential. Instead, they can have a significant financial impact on the bottom line of the retailers. In fact, some of the impact can even be non-financial in nature.

This article makes an attempt to explain the financial impact of the return policy offered by retailers.

Why Return Policies are Important?

The return policies which are offered by retailers can be quite important in driving their overall sales. This has been the case particularly with online retail. This is because when retailers offer a liberal returns policy, it creates a situation in which the risk is reduced for the end customer. As a result, retailers which offer a more liberal return policy are able to increase their sales as well as their brand loyalty.

Customers tend to make repeat purchases from these stores since they are convinced that even if they end up buying the wrong product, they will be able to return or exchange the same. It is for this reason that retailers have been creating liberal return policies in the past.

Misuse of Return Policies

However, in the past few years, retailers have realized that the return policies do make a huge impact on their profitability. Categories such as online apparel, where the percentage of goods returned is high tend to have a lower profitability as compared to other categories. Retailers have also realized that certain customers have started deliberately misusing the return policies. Some examples of misuse have been mentioned below:

  1. Return Fraud: There are certain customers who order products such as apparel for wearing on special occasions such as weddings. These customers wear these products without removing the label attached to it. Later on, once the product has been worn and the utility has been derived, it is returned to the retailer as unused. There are several Instagram influencers who use this technique as well. Obviously, this is return fraud and retailers need to protect themselves against it.

  2. Excessive Ordering With the Intention to Return: There are many customers who buy products with no intention of keeping them. For example, if a person wants to buy a shirt, it is common for them to order two or three different shirts, try them on, select only one and return the rest. Even though this provides convenience to the customer, the return costs eventually eat up any profit that the retailer may have made on the sale.

Impact on Profitability

There are multiple ways in which returns impact the profitability of the retailer. Some of the important financial impacts have been explained below:

  1. Lost Additional Sales: First and foremost, when an item is sold and then returned, it shows as being out of stock for a certain amount of time. It is possible that during this time frame, a genuine buyer who wanted to purchase the product could not find it because it was already shipped to the customer who was planning to return it.

    The lost additional sales can add up significantly over time and can impact the overall profitability of the firm. This is particularly problematic in case of fast fashion wherein by the time the returns are processed, a significant portion of the season is lost and new stock is introduced into the system. The loss associated with lost sales is the highest in periods such as Christmas which are traditionally associated with higher sales.

  2. Additional Workforce: It is important to note that companies have to deploy additional personnel in order to process returns in their stores. They also have to deploy additional personnel during the reverse logistics process. The deployment of all these additional individuals leads to an increase in the cost in the form of increased overheads.

  3. Cost of Reverse Logistics: Companies also have to bear the costs of repackaging the product, the fuel for transporting the product back and forth again and even marketing the product again to increase its sales. In some cases, when companies are not able to resell the product, they must bear the costs associated with disposing off the product.

Impact on Carbon Footprint

From the above points, it is clear that frequent returns of products have a huge financial impact on retailer. However, it is also important to understand that the costs may not always be purely financial. There are huge environmental costs associated with returns as well.

When retailers process returns, they need to utilize a lot of resources such as fuel and electricity which leave a massive carbon footprint. Also, a lot of these products ultimately end up in landfills which again causes significant environmental damage.

It is important to note that retailers have to ensure that they get their returns policy just right. If the policy is too restrictive, it is likely to cost the business in the form of lost sales. However, if the policy is too liberal, it is likely to cost the business in the various ways mentioned in the article above.

Retailers which are able to discover and implement a balanced returns policy are likely to experience financial gain.

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Finance in Retail