How generous return policies can end up costing customers
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Richard Rowley asks:
What do retail stores do with damaged merchandise that is returned to the store by customers? Like a toaster that doesn’t work or a dress shirt with a tear in the fabric.
Returns are not only costly for companies – they’re also costly for consumers in the long run.
Customers returned an estimated $890 billion worth of goods in 2024, which amounted to 17% of all merchandise, according to a report from the National Retail Federation and Happy Returns, a logistics division within the United Parcel Service.
That’s almost triple the $309 billion worth of goods customers returned in 2019. “Returns are a very costly problem for retailers,” said Kirthi Kalyanam, executive director of the Retail Management Institute at the Santa Clara Leavey School of Business.
Returns increased over the pandemic as online retailers offered generous, free return and shipping policies to consumers in an effort to compete with one another, said Lauren Beitelspacher, a marketing professor at Babson College.
If a customer returns a product that was already damaged, some retailers will send it back to the manufacturer, and then ask the manufacturer to refund them for selling a defunct product, Beitelspacher said.
If the customer is responsible for any damage, like a crack on the item or a hole in the garment, retailers who do accept the return will likely just end up throwing it away, Beitelspacher said. Most resellers don’t have the capacity to fix an item and then resell it, with the exception of some stores that sell outdoor products, she added.
Many online stores will also tell customers to keep their item because of the hassle of handling returned items. Generous return policies have become an increasingly bigger headache for retailers, especially online stores who lose out on the sale and have to pay for the cost of shipping, retail experts told Marketplace.
They also lead to higher consumer prices, since retailers want to compensate for reduced profit margins.
“You’re damned if you do and you’re damned if you don’t. If you don’t have a good returns policy, people are going to go shop elsewhere, because returns help people feel comfortable making purchases.” Beitelspacher said. ”But if you do have a good returns policy, people will take advantage. So what you see a lot now is a lot of retailers just saying, ‘Just keep it.’”
During the pandemic, e-commerce business rose exponentially, and retailers tried to lure customers to shop online through their return policies, Beitelspacher said. But some customers who ordered clothing purchased multiple items if they didn’t know their size, and then returned the ones that didn’t fit, Beitelspacher explained.
“If something wasn’t damaged before, and you would return it to a store, they could just hang it back up and put it back out on the floor. But now that we have more e-commerce, it’s been out of the inventory for weeks at that point,” Beitelspacher said.
Retailers struggle with handling returned merchandise even if it’s in pristine condition, especially seasonal clothing items. If you returned a sweater in January, retailers will struggle to sell it at the original price now that the weather is becoming warmer, Kalyanam said.
Return rates tend to be high in the apparel and fashion industry, reaching 20% to 30%, he said.
The problem is worse for e-commerce sites because they have to pay for shipping and return shipping, Kalyanam added. “It really, really hurts their financials,” he said.
The cost of consumer goods across the board have been rising since the pandemic, including apparel (although price increases are far less than other items, like food).
“Part of the reason that costs are going up for consumers is because of a huge increase in returns coming out of the pandemic,” Beitelspacher said.
To reduce returns, Amazon uses a concept inspired by the andon cord method, which empowers assembly line workers to stop production if they find certain parts are repeatedly faulty, Kalyanam said. If Amazon discovers that customers are excessively returning an item, the retail giant might decide to stop selling it, he explained.
Amazon will also tell customers if an item has frequently been returned, Kalyanam added.
Some retailers are also offering less generous return policies, lowering the period from 60 days to 30 days and providing store credit instead of a full refund, Beitelspacher said.
“It is better, when we can, to go to the store and touch the product, try it on, get some information from a sales associate if it’s a high-involvement purchase, and just really pause and think to ourselves, ‘Is this what I really want?’” Beitelspacher said.
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