An increase in returns is forcing many fashion businesses to factor the extra costs into their financial forecasts.
Type ‘returns’ into Google and your web browser will be inundated with page after page telling you how easy it
is to return your items, with free postage and packaging advertised by many retailers keen to cash in on the lucrative online market.
However, the reality for retailers is that the world of returns is anything but easy, costing businesses time and most importantly denting that all-important bottom line.
The cost of returns is much higher than many consumers realise. Along with freight charges, handling costs and credit card fees, returned garments can be damaged, and often go out of season and then need to be sold at a discount.
“For retailers who reported great Christmas [gross] sales, the January returns result in fiscal adjustments and affect the end result [in net sales],” explains Heikki Haldre, founder and chief executive of virtual wardrobe software firm Fits.me. He also says it doesn’t matter what the retailers sell, but what the customers eventually keep.
“As returns are so costly, reducing returns by 1% increases net profits by almost 1% for an average retailer,” says Haldre. “The refunded purchases are not good for the bottom line, [and] more importantly, high return rates display low customer satisfaction and reflect poorly on the brand.”
Due to the financial sting of returns, multichannel businesses have had to factor them into their financial forecasting.
Luke Conod, managing director of young fashion indie Fit in Hereford, says his team has a budget for refunds of 6% of each year’s turnover. “The staff work hard at turning every refund request into a product exchange,” he explains.
The same is true of larger businesses.
Shop Direct Group, parent company of etailers including Very.co.uk and Littlewoods, also factors returns into its financial forecast.
Finance and product director Mark McMenemy says: “We plan for returns on a bottom-up basis by product category.
This is then figured into all of our plans and forecasts, which also takes into account the cost of running our returns operation and stocking sufficient product to manage the process effectively.”
However, Andrew Davidson, who heads up the CFO (Chief Financial Officers) advisory team at consultancy Kurt Salmon, says many retailers are “flying blind” as it is difficult to truly understand the cash flows, costs and profitability.
He adds: “The issue of post-Christmas returns is a good example. While accounting provisions for returns will have been made based on past experience, can the refunds be matched with the initial purchase channel?
Are the true costs driven in store and across the supply chain known and understood? Is the variance in return rates known by channel and factored into financial plans?”
Davidson suggests that businesses need to re-evaluate the role of the finance team, which he advises should move away from its traditional focus of simply being responsible for reporting the numbers and towards working alongside the wider team, providing constant insight and analysis.
As shoppers become more accustomed to buying online the rate of returns has risen, with many consumers opting to buy multiple sizes and styles and then send back the ones they don’t want.
According to etail trade body IMRG, the average rate of returns for online orders was 12.5% in March 2011, whereas by the end of 2012 this had almost doubled to 22%. However, in the fashion sector returns have always been slightly higher than the retail average.
Two years ago, returns for the mid-range fashion market were about 25%, but that figure has now risen to 30%.
The womenswear market also sees a greater number of returns at 42%, compared with the 13% of goods returned in the menswear sector.
Catherine Woolfe, marketing director at courier Collect+, says: “There has been a steady increase in the number of returns in recent years, mirroring the growth in online shopping and consumer demand for convenient services.”
Customers are growing increasingly comfortable with the idea of returning clothes and Woolfe says that last Christmas the first return Collect+ received was its earliest on record - it was made at 7.38am on December 25. Collect+ allows shoppers to return items by post or by taking them to one of the 5,000-plus shops it is partnered with.
In order to keep the number of purchases sent back as low as possible, many multichannel businesses are now avidly looking for ways to reduce returns.
McMenemy says: “It goes without saying that presenting products in as close to a real life manner as possible is key to increasing sales and, in turn, reducing returns.”
He adds that with premium products it can be difficult to convey the true quality, and so in those instances the business invests more heavily in telling the story of the product through descriptions of the fabric and fit, by sharing customer reviews and via demonstration videos.
McMenemy adds: “Towards the end of the last year, we also worked with [virtual fitting room service] Metail to trial a virtual fitting room across a small number of lines on Very, which succeeded in substantially reducing returns rates. We are now in the early stages of rolling out virtual fitting rooms across all of our retail sites and across a broader range of products.”
Another similar product is Virtusize, an application that helps shoppers to see how clothes will fit and what size to choose when they shop online. The application is available on 20 ecommerce sites across Europe including Swedish etailer Nelly.com and young fashion brand WeSC.
The technology illustrates fit and size by allowing the consumer to visually compare the garment they are looking to buy with one they already own.
“More than half of all returns are due to size and fit and Virtusize is able to reduce at least 50% of these,” says Peder Stubert, co-founder and head of growth at Virtusize.
“In addition, Virtusize also increases conversion and sales and improves the customer experience.”
Ian Sutherland, finance director at accessories etailer Stylistpick, says product presentation is integral to helping reduce returns and therefore its website features 360-degree images as well as styling tips.
In January, StylistPick launched Stylistpick Live, which enables customers to upload images of themselves wearing products from the website, which are then featured on an image gallery on the home page. Sutherland says this new initiative will help reduce returns as it allows shoppers to see products on ‘real’ people.
Haldre says the technology reduces returns by about 30% as it lets customers try clothes on virtually, enabling them to see how tight or loose a garment will be on them.
“Customers don’t want to buy a ‘right to return’ - they want to buy clothes that fit,” says Haldre. “Reducing return rates does not simply improve profits - it increases the customer’s happiness. Providing the customers with the goods they need is simply a good customer service.”
The new technologies coming to the fore are starting to bring back what was lost when retailers turned from bricks and mortar to online, and are helping to add a personal feel to the ecommerce experience.
Effectively managing and reducing returns will allow consumers to shop more confidently at their favourite retailers, and ultimately they will come back time and time again.