Every year, the sales peak ends at Christmas for most direct retailers. That means that the inventory returns peak is just starting.
While returns are inevitable, they often affect warehouse operations and customer service departments the hardest. However, these end-of-season returns also affect financial results because of their toll on profits. Merchandisers and inventory planners must account for returns throughout the year.
Soft goods (apparel) tend to have high return rates. Menswear and footwear averages a 10% to 20% return rate. A 20% to 30% return rate is typical for women’s basic apparel. Returns on women’s fashion apparel can go above 30%.
So why do these percentages matter? Think of it this way. A return rate of 20% for a retailer with $10 million in apparel sales means $2 million in returned sales. Include the resulting reduction in gross margin dollars plus the cost of processing returns: free return shipping costs, demand on your call center, funding a returns department, managing what becomes distressed inventory and it’s obvious that returns can deeply impact a company’s bottom line.
Therefore, it’s necessary for merchants and inventory planners to attempt to reduce returns or plan accordingly. There are three main areas of focus:
- Understand the causes of returns wherever possible. In any area of business, to correct a problem you must first understand the reasons behind them. The same is true when trying to reduce returns. Put processes in place to record the reason for every return. This will allow you to take corrective action going forward. These reasons should be at the top of your list:
- Customer changed mind: There is little you can do to address this.
- Item not as expected: This usually means the product’s marketing made the customer expect they were getting something other than what they received. These returns can be reduced via communication via the product description and product video. Try to modify your marketing to align with customer expectations. WorkingPerson.com strives to market each item to match what a customer receives.
- Doesn’t fit: We all know people vary in shapes and sizes, but you can reduce bad-fit returns by making your sizing consistent across product lines and voicing your size specifications clearly and often. Customers will, over time, understand the fit of your products; return rates will drop. Be sure to use vendor size charts and encourage feedback on fit through your product reviews.
- Factor returns into your product assortment planning. Obviously, you can’t eliminate returns (please don’t do that). What you can do is offset them. To achieve higher sales, alter your product mix to favor those with lower return rates.
- Consider returns in your inventory planning to optimize fulfillment and cash flow. Profits and sales are reduced when inventory is returned; especially if you offer a 100% satisfaction guarantee. Management and timing can also affect profits and sales in relation to inventory turnover. In order to optimize inventory and profits, an inventory planner must consider the following practices:
- Plan for both “total” and “re sellable” returns by product. It’s possible that some of your returns can’t be resold. Personalized goods have a reusable rate around 0 percent while 95 percent of leather belts may be re sellable.
- Include timing of returns in your weekly inventory preparation. You should plan for the weekly demand curve (expectations of customer orders per 1,000 units) and the return curve (timed at about two to four weeks following order shipment). These two curves help inventory planners make informed buying decisions.
- Profile your products and adjust your target inventory levels by product to account for the timing differences of demand and return curves.
Customer returns are inescapable in retail. However, if a retail business can understand the underlying reasons for the returns and can better manage them, returns can be leveraged and profits can be preserved.