November 2002

Delivering product to consumers is only the penultimate stage of e-fulfilment. Concluding our series on direct deliveries, Marcia MacLeod says returns represent the last stage, and explains why a sound policy for dealing with them can prove a key market differentiator

As the Christmas season reaches a peak of frenetic sales activity, more than a few e-tailers probably wish that Santa and his helpers could come to the rescue. But even the most efficient sleigh-driver won't be around to deal with the aftermath, and what is often the hardest aspect of e-fulfilment to cope with: returns.

The way in which vendors handle returns can determine the success or failure of their entire home shopping operation. Consumers might be stuck with an unwanted gift, clothing that doesn't fit, goods that don't meet anticipated quality standards, or, worse, damaged or faulty product - and they want to return the item quickly, easily and preferably without charge. They also want to receive cheque or card credit by return. Failure to meet this expectation frequently results in lost business, even if the consumer has been a regular and happy customer in the past.

Given the importance of returns, it is amazing how little thought the majority of e-tailers devote to the necessary processes. "Many companies don't think about returns until the last minute," says Manish Joshi, a market manager for DHL. "But those who see returns as a service, rather than a cost, will be the successful companies."

"Returns are very poorly understood and poorly supported," agrees Steve Bolton, chief operating officer of Zendor, the fulfilment company. "If you make it easy for a customer to return goods, that's likely to stimulate business, as the customer feels comfortable in dealing with you. E-tailers need to put an effective returns process in place and send an immediate cheque for the amount paid or an acknowledgement that the credit card has been credited.

"Until a return is credited, it affects the consumer's 'open to buy' ability. Every consumer is credit scored - without their knowledge - and a credit limit is determined. If the customer wants to buy more but a return is not credited, it could stop another sale."

Some vendors deliberately make returns difficult. "A lot of retailers take the attitude that if they make it slightly awkward to return goods, they won't get so many returns." That's the belief of Charles Doyle, joint managing director of delivery company Beck & Call.

Mike Trenough, group commercial director of fulfilment specialist I-Force, agrees. "In my experience, few retailers offer any returns process," he says. "It's not that they want to make it difficult, but it is not always in their interest to make returns easy. Companies that are protective of their brand and focused on customer service will offer more returns options." Perhaps those vendors - the vast majority - which expect consumers to take returns to the post office and buy their own postage don't have too high an opinion of their customers, or themselves.

After consumer-pays postage, the next most popular method of implementing returns is to send a pre-paid label. Allowing goods to be returned in-store, where relevant, should be - but isn't always - automatic; but offering collection usually becomes an option only if the items are more valuable or fragile than the average clothing/CD/book order. DHL is not the only carrier asked to collect mainly items such as laptops, mobile phones, digital cameras or small electrical goods.

The cost of collection makes it too expensive a service for low-margin goods. Every carrier charges at least the same for home collection as for home delivery, and many make an extra charge for "difficult" collections, or even all collections. Others won't collect unless they are delivering to the same address - or simply won't collect at all.

"Catalogue companies won't pay for home collection," points out Jane Hart, marketing assistant at Amtrak. "Our Startrack service allows retailers or consumers to book a collection for any day in the future, but we impose a surcharge on home collections. Our Returns Express project is aimed at computer and mobile phone companies that need to retrieve a damaged or faulty item: we deliver the replacement when we collect the faulty goods. A wine company also uses the service, with our driver delivering the wine and collecting a cheque at the same time."

Business Express, which names parent Littlewoods as its main customer, offers a 48-hour collection service. "Most of our returns are for Littlewoods, although around 12 to 15 per cent are for non-agent operators," explains managing director Mick Janicki. "But returns are difficult: often the consumer has thrown away the packaging, which is essential in the case of many items such as electrical goods; they're waiting for a replacement, which could mean two trips to the same address; or they're not at home when we arrive.

"Many vendors now won't accept returns that are not in the original packaging. If the consumer has packed it in something else, the item might be okay on collection, but by the time it goes through the warehouse, the packaging is destroyed and the item is damaged. We've just done a trial in the North West that involves sending out the proper packaging before the goods are collected."

Unique service

Beck & Call provides a unique service in which carriers deliver to its depot, and then it completes last-mile delivery to west and south-west London consumers, and it can implement the same process in reverse: the retailer calls Beck & Call, which contacts the customer and arranges collection within a time window between 7am and 11pm, seven days a week. Goods are then picked up by carrier from its depot. Such service doesn't come cheap, though.

Unattended delivery specialists also offer returns options, with the consumer bringing the item to a Collectpoint, for example, or a ByBox locker bank. Collectpoint uses Business Post to collect a number of returns, all dropped at one Collectpoint, for delivery back to the retailer; chief executive Jim Doyle admits there are few B2C returns as yet, however. "Returns aren't currently high on our list of priorities - but we have registered ReturnPoint as a domain name," he says.

One of the more unusual users is The Source, which provides an outsourced claims settlement service for insurance companies. The insurance company tells The Source that a laptop, Palm Pilot or whatever has to be collected; The Source arranges home collection - or offers collection from a Collectpoint as an alternative - and then inspects the item, validates the claim, repairs it and returns it or replaces unrepairable items. "Collectpoint only accounts for 5 per cent of our work, but it gives us the ability to deal with claims that might slip through the net - because if it is difficult for a consumer to return something, they might go for a cash settlement instead."

ByBox, too, finds returns "very embryonic", but chief executive Stuart Miller believes its new contract with Hays Logistics (see page 5) will help. "The consumer can scan the label with a barcode scanner to open a locker bank; or the consumer could have a scannable membership card; or a returns label sent out with the parcel has a bar code on it. Lockers can be reserved, if desired. Then Hays, which will be going to the banks all the time, will be able to collect returns and deliver them back to the retailer."

Getting at least this part of the process right can bring benefits, as Business Express's Mick Janicki points out. "The return rate for agent-type catalogue companies is 35 per cent. In fact, returns are the biggest supplier, since most of the goods go back into stock."

Which presents another problem: examining, testing and classifying returns for re-sale. "There needs to be a separate warehouse or part of a warehouse, to match goods to the customer's account," emphasises Zendor's Steve Bolton. "Then warehouse staff must inspect the goods, see if there's anything wrong with them and whether they can be re-sold or need to go back to the manufacturer. Any item of which there is already excess stock will have to be 'jobbed off'.

"Electrical goods, by law, have to be re-tested and can then only be sold as secondhand. Some companies won't accept the return of earrings for pierced ears or of underwear that has been taken out of its packaging. Other decisions have to be made, too. If goods are sold with, say, a 14-day return, but they are sent back on day 16, what do you do? The returnee could be a valued customer, or the goods could have been sent back in plenty of time, but got held up on the way.

"And there is the issue of branded goods. It is impossible to hold all branded packaging, so retailers are getting clever about the types of packaging they choose to try to ensure it is re-useable. Also some companies are limiting the types of folding boards used in garment packaging, to simplify handling returns."

Abuses of the system

E-tailers have to be aware of abuses of the system. Fur coats have been known to come back with confetti in the pockets; shoes and bags are returned the worse for wear; party dresses have been worn. One company now sends party dresses out with large, ugly security tags; the garment is not returnable if the tag has been removed.

Abuse has become so prevalent, says Janicki, that many catalogue companies are now looking at charging for returns. "Returns of worn clothing are common. Now some electrical goods are being sent back long after the guarantee has expired."

It all boils down to having the right controls in place for every stage of the returns process. Any return-to-manufacturer agreement must be flagged so the warehouse knows what can go back, saving the retailer money; any SKUs experiencing excess stock should be flagged so returns go straight to "seconds"; and there must be ways to pick up things like garment shrinkage or mis-sizing, indicated by a high percentage of returns, to prevent these problems in future.

"Returns need to be analysed so the vendor can work to reduce them," says Mike Trenough of iForce. "Is there something wrong with a product? Are too many items being damaged by one carrier? If so, is the packaging adequate? Returns are an expensive and complex problem - but they can be reduced."

However difficult, returns cannot be ignored. "Returns should be an integral part of the final mile delivery," insists Zendor's Steve Bolton. "It will be a differentiator in the future."

But don't despair. You could do worse than one catalogue company in the States that replaced a pair of boots returned after 45 years. They turned it into a PR stunt to back up their claim on quality and service. Wonder how many sales that laced up?

Case study: The Children's Warehouse

The Children's Warehouse sends a pre-paid returns label with all orders as a matter of course - but it also uses Beck & Call in the latter's service area, west and south-west London.

"South-west London accounts for a large part of our business," explains managing director Bernard Bunting. "We supply uniforms for a number of schools in the area. So all orders for the relevant postcodes are separated out for Beck & Call to deliver. And as we're using them for delivery, it makes sense to use them for returns.

"The customer contacts us to return something; if there is a replacement order, we arrange for Beck & Call to deliver the replacement and pick up the return at the same time. If there is just one item being returned, the call centre agent makes a judgement, based on the item's value, the size of order and size of garment being returned, whether to use Beck & Call or ask the customer to use the pre-paid label. We cannot let the customer arrange collection though, as it proves too expensive."

There are, Bunting admits, "a huge number of issues" with returns. Accounting for promotions, so the return credit matches the sale price, can be tricky. Even harder to deal with is postage: if a customer obtains free delivery because of the size of the order, but returning part of the order takes the value below the minimum, The Children's Warehouse needs to recover delivery costs. "There are security issues, too. We need to check for needles or other items inside the clothes before we put them back in stock.

"We aim never to let returns build up; we know we get 8 per cent returns, and build that into our cost structure. Returns are something that catch novice mail order companies out big-time, but we like to think the way we handle them acts as a differentiator."