The Returns Epidemic: How Opportunistic Shopping Behaviors Erode Ecommerce Profitability

Key takeaways for ecommerce brands:

1. Holiday seasons often see a surge in online returns, significantly impacting profit margins. The burden of returns is unevenly distributed, with clothing, footwear, and health/beauty categories suffering the highest return rates.

2. Serial returners, who intentionally over-order and return items, make up only 11% of returners but account for a large portion of total returns, creating substantial financial strain on ecommerce businesses.

3. Return rates serve as a critical metric for online retailers, affecting inventory management and financial health. Not monitoring return rates can lead to operational inefficiencies, increased costs, and financial miscalculations that erode net sales

Many industries see a spike in revenues during the holiday season, but if you're going by absolute numbers, bragging rights belong to ecommerce. In 2023, revealed Salesforce’s shopping index, global online sales amounted to $1.17 trillion between Nov. 1 and Dec. 31. In the US alone, per Adobe Analytics, online holiday spending reached $221.1 billion last year.

For DTC operators, though, the holiday season is not only an opportunity to improve the bottom line – it's also an endless source of stress. From inventory management issues to delivery surcharges and cash flow considerations, ‘tis the season of concern as much as anything else.

In recent years, another stress point has emerged: online returns. An unavoidable aspect of ecommerce, return rates typically increase during the holiday season. In 2022, for example, the average return rate in the US during this period was 17.9%, equating to nearly $171 billion.

A big chunk of these returns are made by serial returners. According to a new report by reverse logistics platform ZigZag and research consultancy Retail Economics, while serial returners only account for 11% of online shoppers that make returns, they are responsible for “a silent crisis” eroding ecommerce profit margins like never before.

The Young and the Slow: Categorizing Online Returners

Drawing on a consumer survey of 2,000 representative UK households, the Annual Returns Benchmark Report 2024 segments returners into four main cohorts based on scale and speed of returns:

• Occasional returners – rarely return items unless they fail to meet expectations.

• Efficient returners – promptly return items, typically only returning a small percentage.

• Serial returners – frequently over-order with the intention of returning many items.

• Slow returners – tend to delay returns, sometimes for weeks.

Serial returners skew younger, with Millennials (38.7%) and Gen Z (34.5%) making up the majority of the cohort. Per the report, they generate 24% of all online non-food returns in the UK, which will add up to £6.6bn in 2024, as total returns across this category are forecast to hit £27.3 billion.

Additional findings include:

• The burden of returns is spread unevenly across categories, with Clothing, Footwear, and Health & Beauty suffering from the highest return rates.

• Together, serial and slow returners account for 22% of all returners but generate almost 50% of returns.

• On an annual basis per person, serial returners are projected to send back £1,400 worth of non-food products in 2024 – more than double the value expected to be returned by efficient returners and occasional returners.

“Serial returners are quietly eroding retail profitability in ways many retailers are only just beginning to understand,” said Richard Lim, CEO of Retail Economics. “The rise of opportunistic shopping behaviors, where many people intentionally buy large quantities of goods with the intention of returning most of them, is placing an unprecedented strain on retailers. This creates significant challenges in inventory management.”

Tracking Return Rates as a Key Financial Metric

The rate of returns is one of the most crucial KPIs in online store inventory management. There are two types of inventory KPIs:

1. Inventory sales KPIs, such as inventory turnover, stock-to-sales ratio, sell-through rate (STR), backorder rate, and days sales in inventory (DSI).

2. Inventory operations KPIs like lead time, carrying costs, dead inventory/spoilage, and return rate.

Defined as the percentage of purchased items that customers send back to the retailer, return rate is calculated by dividing the number of returned products by the total products sold over a specific period:

Rate of returns = [(# of items returned)/(total # of items shipped)] x 100

DTC brands should regularly track this metric to identify increases or potential patterns. A high return rate might indicate that there is a problem with your online store inventory management. Even a minor discrepancy, such as a misrepresented color in a product image or an inaccurate sizing guide, can contribute to a significant jump in the return rate.

But it goes deeper than that. Not tracking your return rate is a common financial blind spot – areas within your financial operations that go unnoticed until they cause significant issues – in the ecommerce space. High return rates can severely impact your bottom line through increased operational costs, turning seemingly successful sales into costly mistakes.

Here's a hypothetical illustration: an online furniture store experienced a surge in sales in Q4 but failed to account for the true cost of returns. With a 20% return rate and free return shipping, they were losing money on one in five sales. The result: what looked like a promising quarter from a gross sales standpoint turned out to be disappointing from a net sales POV.

The rise of online returns, highlighted by the effect of serial returners, underscores just how crucial it is for DTC brands to stay on top of their key financial metrics, particularly when it comes to return rates. This requires, first and foremost, in-depth knowledge of ecommerce accounting – something not many DTC brand founders bring to the table.

Fortunately, there is a solution. By adopting ecommerce accounting software, brand operators can integrate returns seamlessly into the broader financial picture, gain full visibility into their associated costs, and make informed decisions to mitigate the silent crisis eroding ecommerce profit margins.