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Supply chain - Starting over again

Dealing with a high volume of clothing returns is an expensive business for multichannel retailers.

The average rate of clothing returns runs at between 30% and 40% for most multichannel retailers, which represents a significant amount of working capital. Therefore having robust processes in place to refund payments and reprocess stock back into the supply chain as quickly as possible should be central to any multichannel strategy. However, this is not always the case.

Jon Gibson, head of logistics at supply chain consultancy Crimson & Co, says that whereas pure-play etailers are quite far down the line in regards to returns processes, those from a bricks-and-mortar background are lagging behind. “If you look at the more traditional retailers who are largely store-based they still tend to see it as a problem, and I’m not convinced that a number of them have addressed and thought about how they deal with it efficiently. You have to look at returns as a part of business and they will increase,” he says.

Tony Mannix, managing director of logistics firm Clipper, which counts Asos, John Lewis, Asda and Tesco among its customers, agrees. “Returns tend to be the bit of the omni or multichannel strategy the retailer thinks about last. But actually it’s probably one of the most important things to get right. Online has kicked up a big returns issue, possibly far greater than some of the retailers were expecting. The reason it becomes a big issue for them is as their online business grows the inventory that is then tied up in returns can be of enormous value.

“Now to put that into context, if you look at Asos and you look at the value of its turnover, you are talking hundreds of thousands of returns a week. Now that applies to everyone we deal with, so John Lewis, or George at Asda (for example).”

John Bailey, European vice president at software supplier JDA Software, says: “Retailers are realising this is severely damaging their profit now as the ecommerce business is so much bigger. And retailers say to us the goal is to get that product back on sale at full price.”

James Harper, head of returns at home shopping giant Shop Direct Group, which owns Very, Isme and Littlewoods, says returns vary by product type, with the majority based on fit and choice reasons. Womenswear is typically above 30% and kidswear at only 15%. All of Shop Direct’s returns are reprocessed at its dedicated centre in Oldham, which employs 500 people and where every item is examined, credited and in most cases put back on the [virtual] shelf for resale. “After initial inspection we have a variety of options. These include various steam-cleaning mechanisms, spot cleaning, reboxing or rebagging and minor repairs,” says Harper.

Etailer Isabella Oliver has a returns rate of 33.4% for its womenswear website Baukjen, and 27.5% for its eponymous maternitywear site. Chief executive Geoff van Sonsbeeck says reprocessing returns quickly is essential: “It’s critical to do it as soon as we have it and action either an exchange or refund. The customer experience is paramount.”

He says it aims to get products reprocessed - after steaming and cleaning if needed - rapidly. “Certainly as we get close to the Sale you want to sell out, so we want to get it reprocessed as fast as possible.

If I had unlimited working capital pockets, then it might be less important. But I need to get my working capital back onto the shelf as quickly as I can.”

Mannix says product arriving back will potentially need to be checked, cleaned, repackaged and relabelled, because the customer who then buys it does not want it to arrive looking secondhand: “If a retailer doesn’t have slick ways of reprocessing returned stock, it ends up with cash tied up in inventory that it can’t sell, with potentially a big write-off of inventory that has been damaged or it doesn’t know what to do with. So suddenly the value in all that is enormous.”

In fashion, where product is largely seasonal, failure to reprocess clothing swiftly could result in a lost sale if a retailer keeps few items of a best-selling piece in stock, or if it is out of season.

“It’s crucial to reprocess returns to minimise wastage. We handle more than £500m of stock in returns every year.

That makes returns the largest single supplier to our business,” says Harper.

Clipper, which provides a full range of reprocessing services, is now looking at how it can further extract value from damaged returns. Mannix says that whereas this would previously have been taken by the “jobbing” market - and sold on market stalls often in different countries - that market is now oversaturated with such pieces so can’t take them. Clipper has created an eBay shop called Genesis to help clients such as New Look sell in-season excess stock and end-of-season clearance lines, but Mannix says in the future retailers might need to consider what to do with damaged product.

“Retailers have to ask themselves whether it’s got a fault worth rectifying, or would eBay be a better distribution route for that product, and to market it as a product that has a particular problem. Or is there work we could do where the product justifies it in terms of sticking a button on or proper dry cleaning, because actually it is a very expensive item and the cost of rectifying isn’t that great,” he says.

Counterfeit returns are also a problem. In some instances customers will buy an expensive item, remove the label and attach it to a cheaper garment that they then return. This is a particular issue with higher-priced items, and retailers need to have the correct processes in place to spot them.

“We sell highly desirable brands and products so we’re mindful that a small minority of people will try to exploit our returns policy. We work very closely with our suppliers and our colleagues also have great ongoing training to enhance their knowledge and ability to undertake stringent checks. Having specialists to secondary check such products also helps,” says Harper.

The other major factor adding in complexity is international returns. About 50% of Isabella Oliver’s sales are international, and Van Sonsbeeck says return rates differ greatly across the world: “In the US it isn’t a given, or at least a perceived given, that you can return products, so the rates are very low. Whereas in Germany it is very high.”

He adds: “Typically it is more costly to get the parcel back and it can be more cumbersome to keep the customer experience high during the process of getting it back. I might have less control of how quickly I get it and how fast I can deal with the paperwork and the refund or the exchange, because on occasion I’m dependent on couriers and it could take longer than expected.” Although the answer here could be regional distribution and returns centres.

Clearly returns are an issue that many fashion brands and retailers are still grappling with, but as online sales continue to increase, so will returns.

Li & Fung adapts to the short-order challenge

Hong Kong supplier Li & Fung is adapting its business model as a result of a shift towards short-order buying among its customers.

The global business reported just a 1% increase in pre-tax profits for the first half of this year. It explained that the trend for short order was making its financial performance “increasingly skewed towards the second half of the year”.

“The extent of this skewing effect is even greater this year, with customers requiring shorter lead times and less inventory, and therefore requesting shipments closer to the peak year-end retail season,” Li & Fung’s statement said. “We expect the proportion of sales and earnings recorded in the second half of the year to increase in future.”

President and chief executive Bruce Rockowitz told Drapers on a recent visit to its Hong Kong office that far from being a response to the unpredictable British weather, short order is a global phenomenon, noting that with improved data gathering, retailers are able to make decisions later.

“The decision-making process is being better planned by the retailer, and by waiting until the last minute they know what is and what isn’t selling.”

This means the supply chain is having to change its working practices, all the way down to staffing in factories. “Factories are used to slow periods but there is definitely a change.”

This will all feed into Li & Fung’s next three-year plan, which is being developed now to be unveiled next spring.

Rockowitz would not give away too much detail, but noted that Li & Fung will be looking to cross-sell more between its businesses: “We will be focusing on organic growth rather than acquisitions.”

  • Catherine Neilan

Readers' comments (1)

  • I would agree with all of the points made here. We've seen that retailers often spend too much time focusing on optimizing their front end for sales, when they should also be focused on optimizing for profit.

    It is becoming clear that returns are a key issue for retailers that need to be tackled, and using data-driven techniques that allow them to be proactive rather than reactive and process stock quicker will be a huge benefit.

    Ellie Turner
    Clear Returns

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