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How Free Returns on Online Purchases are Crippling Retailers

The holidays account for about $69 billion in returned merchandise

Well-intentioned holiday gift-giving means there will be plenty of holiday returns. While shoppers used to head back to the stores to exchange those presents for something they really want, many will be sending their returns back the way they were purchased: through e-commerce channels.

Americans return more than $260 billion in goods each year, according to data provided by Optoro, a logistics company that helps retailers with returns and excess inventory. Nearly a quarter of those returns occur over the holidays, for a total of $69 billion in merchandise. Last year, about 80% of consumers who returned items returned clothing and accessories, according to a recent Optoro survey.

E-commerce has made it easy for consumers to be indecisive without financial consequence — at least for the shopper. For retailers, it is a different story. Free shipping and returns aren’t just about the cost of getting things from one place to another.

“Items need to be removed and inspected, people opening the boxes have to have additional training on quality control,” said Brandon Levey, chief executive of Stitch Labs, an inventory management software company. “If it is too damaged they need to write it off. The delay of getting something back could impact inventory. All these things add to cost.”

Now retailers have to find ways to reel in the price of a perk that customers have come to take for granted.

Rob Taylor, CEO of Convey, a company that is focused on customer deliveries, recommends three key steps to helping retailers successfully complete return transactions while saving some cash. First, make starting a return as easy as possible, which usually means kicking off the process online. Second, help consumers track both the return and the refund. And third, especially for large packages, choose the best carrier for the job, which will keep costs low and limit damages.

“By optimizing the carrier decision, our clients have seen an average 22% cost savings on large item returns,” said Taylor, in an emailed comment to MarketWatch on Tuesday.

IHL Group, a research and advisory firm serving the retail and hospitality industries, tallied $642.6 billion in world-wide returns in research published in 2015. Reasons range from defects or poor quality ($162 million) to wrong sizing ($62.4 billion), buyer’s remorse ($88.7 billion) and return fraud ($28.2 billion).

The mountain of returns, along with out-of-stocks and overstocks plaguing retailers have given rise to what IHL Group calls a “ghost economy.”

Retailers who sell exclusively online such as giant Inc.AMZN, -0.54%    are typically initially focused on acquiring customers, and without feeling pressure to be profitable immediately, have tended to offer pricey perks.

“The fact that they lost money was irrelevant,” said Antony Karabus, the chief executive of HRC Advisory, a retail consultancy. “Traditional retailers felt they had to match that. I don’t think they realized the implications of this free return policy. It was all about the customer rather than how much this was going to cost.”

“Retailers cannot afford it,” said Karabus. “It’s not sustainable.”

One solution is to reconfigure fulfillment centers to better handle returns, which would also come with a price tag. Technology upgrades would also help.

One other option is to change the rules. Many retailers are trying to challenge Amazon on its terms, rather than by making the most of the advantage they have: brick-and-mortar stores, said HRC’s Karabus. In-person customer service is an advantage that can’t be replicated online.

Retailers can change consumer expectations, by setting a deadline for returns, for example,and levying a surcharge for items received after that date.

However, retailers have “got to be very careful with modifying the rules,” said Karabus. Customers are unlikely to quietly accept that once-free services will come at a charge.

It may be better to be more strategic about services going forward.

“Be mindful of additional services you offer to the consumer, particularly when you mix online and offline,” said Stitch Labs’ Levey, who notes that even offering the option to buy online, pick up in-store comes with its own set of inventory issues.

“Over the next few years, there’s going to have to be a rebalancing of consumer expectations and what these companies can provide,” he said.

The SPDR S&P Retail exchange-traded fund XRT, -0.33%  has rallied 7.5% over the past three months, while the S&P 500 index has climbed 5%. SPX, -0.67%

This article originally appeared in MarketWatch on December 21, 2016.