Product Returns: Return on Profit
As I write this we’re in the midst of the holiday peak — four more weeks of industrywide frenetic selling activity. But while the sales peak ends at Christmas for most direct retailers, the inventory returns peak is just starting.
This annual phenomenon invariably creates waves throughout companies. Naturally, it always physically hits warehouse operations and customer service departments the hardest, but end-of-season returns also impact financial results due to their effect on profits. Less concerned with the operational effect of peak returns, merchandisers and inventory planners must consciously account for returns throughout the year. This is especially true for soft goods, which typically have high return rates. A 10 percent to 20 percent return rate is common in menswear and footwear; women’s basic apparel typically features return rates of 20 percent to 30 percent; and returns on women’s fashion apparel can easily top 30 percent.
Why are these percentages significant? Consider that a return rate of 20 percent for a retailer with $50 million of top-line demand means $10 million in returned sales. Then add in the resulting reduction in gross margin dollars plus the cost of processing returns, and it’s clear that returns can strongly impact a company’s bottom line.
Thus it’s incumbent upon merchants and inventory planners to try to reduce returns — or at least plan around them as best they can. There are three main areas to focus on:
1. Understand the causes of returns wherever possible. To reduce returns you must understand the reasons behind them. If you’re not already doing so, put processes in place to record the reason for every return. Doing so will allow you to perform analysis and take corrective action. Invariably you’ll soon find these at the top of your list:
- “Customer changed mind.” There’s really little you can do to address fickleness. It will always be there.
- “Item not as expected.” Something in the product marketing — e.g., visual image or copy — caused the customer to expect something other than what they received. Reduce these types of returns through better communication. Adapt your marketing to match the customer’s perspective.
- “Doesn’t fit.” Customers come in all shapes and sizes, but you can reduce bad-fit returns by making your sizing rigorously consistent across all product lines and communicating your size specifications clearly and often. Over time consumers will come to understand the fit of your products and return rates will lessen.
2. Factor returns into your product assortment planning. While you can’t eliminate returns, you can at least compensate for them. If you’re able to shift your product mix to favor those with lower return rates, you’ll achieve higher net sales. The tables below show how the simple act of increasing demand within a lower return rate category will lower the total company return rate, helping to improve overall sales and profits. In the second example the same level of demand results in $900,000 worth of additional net sales through an overall reduction in returns.
While this is purposely simplified, the concept is true at all business levels: Growing business in lower return rate product categories results in lower overall returns.
Joe is Vice President of Product Solutions at Software Paradigms International (SPI), an award-winning provider of technology solutions, including merchandise planning applications, mobile applications, eCommerce development and hosting and integration services, to retailers for more than 20 years.
Joe is a 34-year veteran of the retail industry with hands-on experience in marketing, merchandising, inventory management and business development at multichannel retail companies including Lands’ End, LifeSketch.com, Nordstrom.com and Duluth Trading Company. At SPI, Joe uses his experience to help customers and prospects understand how to improve sales and profits through applying industry best practices in merchandise planning and inventory management systems and processes.