Try-Before-You-Buy Trend is Causing ‘Returns Tsunami’

A growing online shopping trend may be a great perk for consumers, but it could take a significant toll on unprepared retailers.

I’m talking about try-before-you-buy (TBYB), a new shopping trend that enables customers to order multiple items before deciding what they want to keep. There's no up-front cost; shoppers simply pay for items they keep after a certain number of days — usually 30 days. They return unwanted items and are never charged. It means that customers can order and try items as they would in-store, but crucially, they don't have to wait for returns to be processed to receive reimbursement.

TBYB options are increasing, thanks to online businesses including Amazon.com's new Prime Wardrobe, Trunk Club, Stitch Fix, Warby Parker, and ASOS. We decided to look a little closer into this trend, researching the opinions of 200 retailers and 4,000 consumers, and found some unsettling insights.

While 25 percent of retailers globally will adopt online TBYB services by 2019, a majority of companies are unprepared for a surge of returns that could quadruple return costs for retailers in the United States, according to our new report.

We found that the trend is threatening to overwhelm retailers — many of which are already reaching crisis point — with a huge surge of intentional returns that may undermine their profits.

The Appeal of TBYB

There's no doubt that try-before-you-buy is an attractive offer for consumers, and retailers may covet the incremental sales and goodwill that it generates, but the costs of handling returns must be considered.

Total merchandise returns already account for more than $351 billion in lost sales for U.S. retailers, according to Appriss Retail. However, this figure could skyrocket due to the complexities of TBYB returns.

For example, more than 40 percent of retailers have already seen increased "intentional returns" in the past year (i.e., customers ordering multiple items because returns are free or cheap).

Looking ahead, shoppers offered TBYB would purchase on average five extra items each month, yet 87 percent would return up to seven purchases. Meanwhile, 85 percent of these consumers expect free returns.

It’s no surprise then, due to these circumstances, that almost half of of retailers (44 percent) agreed their margins are being strongly impacted by handling and packaging returns. Furthermore, 70 percent said they're worried they will be squeezed further as TBYB intensifies.

TBYB: Good News for Retail or a Future Fault Line?

Try-before-you-buy can be a positive trend, as it removes another barrier to purchase, potentially leading to uplifts in sales for retailers. Consumers will buy more, but retailers must be aware that their return rates will increase significantly, alongside their costs. For example, when you consider handling, transport, admin and possible repacking, the costs of returning an item into your supply chain could be double that of delivering it.

All things considered, does the equation work in most retailers favor? Probably not without an investment in technology. However, despite the concerns of retailers, the vast majority aren't making any moves to pre-emptively tackle the problem. Right now, almost two-thirds of U.S. retailers are not deploying technology solutions to process returns. This is despite the complexity of managing them — the average returned purchase passes through seven people before it’s listed for resale.

This could spell disaster for business owners that don’t have the right framework and solutions in place to manage returns. Consumers sending back many more items a month may prompt  an unmanageable tsunami of returns for some merchants.

As an increasing number of retailers are pushed to adopt TBYB services — or simply more flexible returns policies — by the competitive marketplace, the logistical and financial implications of such consumer benefits could lead to significant problems, especially for smaller merchants which may be most affected.

Our research showed that small and midsized businesses are expected to be hit hardest by shrinking margins, and 70 percent of companies surveyed in this category expressed concern about the impact of try-before-you-buy on their profits.

However, I remain optimistic that try-before-you-buy is a great opportunity for retailers. However, to capitalize on the trend without cannibalizing margins, businesses must have the right systems in place to optimize the returns process and ensure end-to-end visibility over factors such as available cash flow and inventory in the system, both of which could cause major pain points.

Furthermore, the fact that two-thirds of retailers still process returns "by hand" shows that with the right preparation, and by exploiting relevant technology, forward-thinking merchants should be able to turn the returns tsunami into a tide of fresh profits.

The full “Try Before You Buy: A Returns Tsunami for Retail” report is available for download on Brightpearl’s website here.

Derek O’Carroll is CEO of Brightpearl, a cloud-based ERP that works with retailers and wholesalers to implement back-office automation.