$114 billion – that’s the amount in returns retailers can expect to see after the holidays. 

Business’ profits always take a hit from returns – this isn’t new. But those returns are estimated to be $14 billion higher than last year. 

This is thanks to a combination of unique conditions elevating costs: Consumers fearfully overbuying. Supply chain disruptions stalling deliveries. Minimal workers handling the onslaught. 

Now those circumstances are creating a new challenge in one key industry: the reverse supply chain. 

As shoppers continue to return unwanted holiday gifts, it will become apparent how much the record number of post-holiday returns are affecting retailers’ profits.

What is the Reverse Supply Chain?

We know the supply chain process – goods moving from businesses to consumers.

The reverse supply chain is, well, the reverse.

It’s returning the ugly sweater your grandma bought you from Kohl’s for a refund. 

Used products travel from consumers and are reprocessed to recover any leftover market value or dispose of them.

Returns not only affect losses if a business cannot re-shelve the item, but distribution, storage and labor costs also eat away at profits.

How Business Bottom Lines Are Suffering

According to data from Optoro, two out of three shoppers will likely return at least one gift during the holiday season.

And this year returns will cost retailers more than ever to process – $33 of the price of a $50 item.

More items returned means retailers must weigh options on how to recover costs. But the current market is costing them more than ever.

Online Orders on the Rise

According to Invesp, 2021 online returns were 3 times higher than those at brick-and-mortar stores.

Online sales rose 13% to more than $222 billion during November and December alone, the National Retail Federation (NRF) estimated. 

While the holiday shopping season typically starts mid-November, some retailers began sales as early as September. This only aided in the influx of orders and resulted in ramping up consumer concern over product availability. 

But with a rise in sales comes a rise in returns. And around $67 billion of those online sales will become returns.

Shoppers Excessive Behavior

Prompted by fear, many consumers began shopping earlier and buying more for the holidays. 

This could be the reason e-commerce shopping saw 2 billion ‘out of stock’ messages online in October alone, up 172% from pre-pandemic January 2020.

A survey by McKinsey found that 45% of Americans started holiday shopping in early October, well before traditional season-time sales begin. Not only that, at least 1 in 5 shoppers ordered or purchased more gifts than necessary for fear of delays or cancellations.

Shoppers that bought 10 of one item will be returning 9 post-holidays. These returns from overbuying will contribute to the flood of holiday returns surging the reverse supply chain. 

And with delays in shipping from supply chain issues, this surge will push back the time it takes to process returns and place items back on already barren shelves.

Spike in Inventories

As lead times extended further and further this year, retailers began ordering in earnest and earlier than normal.  

Big name brands all reported a rise in inventories around Q3 more than the previous year:

  • Target – 17.7%
  • Walmart – 11.5%
  • Home Depot – 27.4%

Aimed to guarantee product availability to their customers, this plan to overstock could have huge ramifications for retailers if it backfires.  

Delays in the supply chain, like cargo ships stuck in main ports waiting to dock, have left many items stranded and unable to reach retailers.

Once the bottlenecks lessen, products will arrive too late for holiday sales. 

Retailers will be left with few options: mark down items to sell for minimal profit or pack away merchandise for next year. 

Discounted items, while making some form of profit, still lose retailers money. 

Holding items until next season means spending money upfront to store them. However, the current demand for warehouse space is leaving companies scrambling to find storage.

Growing Demand for Storage Space

Fulfilling the spike in e-commerce activity was already raising the demand for more warehouse space. 

Industrial real estate demand expects to see a 61% surge in Columbus, Ohio, a market where nearly half of the U.S. population is within a one-day drive. This is well over the 13.7% the previous year.

Now, retailers are looking for temporary storage for the holiday surge to hold inventory. But the marketing is showing a huge disconnect between the supply of available spaces and ever-growing demand. 

Vacancy rates are at a 40-year low when retailers are in desperate need. And due to higher transportation costs, prices are up. 

Industrial property leases spiked 25% on average when compared to five-year lease contracts. 

Businesses desperate for space will be shelling out more money for a few months of use versus what they would on a yearly lease.

Lengthy Return Process

The return process (reverse logistics) is much messier than the alternative (forward logistics).

Instead of one shipping label used to get orders from the business to the consumer, returns take multiple trips through shipments and locations. They must be:

  • Received
  • Inspected 
  • Sorted

All of these steps take extra time, labor, and possibly trips to other 3PLs to complete before the item gets back to the company.

And now, with the influx of a record breaking amount of returns combined with an all time labor shortage, the reverse supply chain process will take much longer.  

Delays in returns processing also means a stall in refunds for consumers. The standard 3 to 5 business days for funds to process could extend to several weeks, causing further frustrations.

Adding together all of these costs is a key reason retailers are looking for less expensive solutions.

How are Retailers Coping?

As mentioned, returns eat away at retailer’s profits. 

The cost alone removes much of the value of getting the item back, especially with cheaper items. Products must go through several channels on their journey through the reverse logistics process, and even then they may not be able to be resold.

To bypass the trouble and price of returns with the current logistics issues, some major retail brands are taking temporary yet extreme solutions.

No-Return Refunds

Powerhouse companies Amazon, Walmart, and Target are giving customers no-return refunds. A more expensive option, customers simply:

  1. Keep or donate the unwanted items 
  2. Receive returned funds

So why is this an emerging trend?

To help offset the rising shipping and warehousing rates, larger name brands find it makes more sense for customers to keep items after issuing refunds than losing more money through the process of shipping items back. 

Especially for low-dollar items, the cost of reverse shipping far exceeds the value of the merchandise.

Longer Return Policies

Top retailers like Best Buy and Macy’s are extending return windows well past pre-pandemic standards. Where items purchased in November and December had to be returned by mid-January, gifts bought as early as October are now being included.

Omnichannel options like BORIS (Buy online return in store) can help alleviate some of the strains on shipping, reducing the management an item receives through the mail and warehouse. 

Items returned directly to physical stores give more visibility to current inventory, which is a top concern for both retailers and consumers.

Conclusion

As the holidays come to an end, it will be a waiting game to see how deep into 2022 the rush of returns will go.

But this might not be a one time situation.

All of the above solutions are merely temporary fixes. But in the long run, the reverse supply chain will need an improved system to manage these problems.

The lost profits felt from this year alone could force companies to take a deeper look at reverse logistics to better prepare for future shipping holidays.