Returns management: challenges and opportunities for mid-sized E-Commerce companies

When it comes to e-commerce, most people immediately think of a few large platforms like Amazon, eBay, or Zalando. However, many other medium-sized companies have successfully established themselves in the market. These include webshops for special target groups or product segments or the successful cross-over from traditional retail to omnichannel businesses. Alternatives to the dominant market leaders are becoming increasingly popular. However, if a provider has made the successful leap into the online segment, returns management can be a significant roadblock on the way to success. This blog reviews five obstacles that make returns management a challenge for medium-sized e-tailers, and we explain how you can overcome them.

After a long consolidating phase, the e-commerce landscape is currently growing again. The study “The Marketplace World 2020” lists more than 170 different marketplaces in the DACH region. In addition to marketplaces, there are also numerous specialized online stores. Younger generations of buyers, in particular, have new demands and expectations regarding brands and suppliers. They prefer brands that authentically and comprehensibly represent a deeper meaning and purpose. And they also demand ethical behavior from (r)e-tailers, according to a study by Accenture. According to the analysts, the attitude of this buyer generation has a massive impact on consumer behavior, as they use their influence and purchasing power to enforce their values. With the goal of more sustainable commerce, “re-commerce” (the resale of returned or used items that have been checked and evaluated) has also found its way into online retail.

In the context of sustainability, the way many retailers deal with returns (some of which are even destroyed) has also come under massive criticism from consumers, associations, and politics. A so-called “duty of care for dealers” is expected to be anchored more firmly in law – e.g., as part of the German Recycling Management Act (Kreislaufwirtschaftsgesetz – KrWG). This includes a ban on removing (returned) electrical and electronic equipment from the market if it could still be used after repair or reconditioning. Retailers will then be asked to keep records of all returned items and their whereabouts in the future. They could be legally prosecuted if they violate the relevant guidelines. But how should medium-sized companies, in particular, implement this? Many providers lack the resources to map all processes internally and ensure the required transparency. Let’s take a look at some key returns management roadblocks.

• Missing priority

The e-Commerce market is constantly evolving. There are almost always business-critical, urgent tasks for business leaders to keep the day-to-day business going. Due to the lockdowns, the increased demand has made many medium-sized companies reach their capacity limits. How effectively or profitably consumer returns are handled is therefore never a top priority.

• No clear responsibility

While large companies usually have a “reverse logistics manager,” medium-sized providers often do not have a dedicated person responsible for the processes related to returns management. Accordingly, these processes are often not integrated into the overarching business strategy. This applies to investments in new systems, strategic partnerships, portfolio expansions, or other business decisions. For example, if the product range is expanded, it is rarely considered how this will affect returns management.

• Complex processes

Ensuring that customers can conveniently return products comes with many requirements. However, this is just the starting point for returns management. After a returned item has been accepted, the next step is the so-called “grading” – the testing, evaluating, and processing of returned products. This is a labor-intensive and time-consuming task. On the one hand, the various categories of returns, from “as good as new” to “severely damaged,” must be considered. On the other hand, products such as coffee machines, smoothie mixers, furniture, or sports equipment require completely different processing than products with personal user information, such as laptops and televisions. The more diverse the product portfolio, the more test procedures and specialists are required. Errors in the evaluation and processing can lead to an immediate loss of profit.

The grading should include a functional test and description, the cleaning of the returned products, the creation of detailed photos, and the secure removal of personal data. The next step is the selling-off part. Necessary steps include determining which of the various sales channels –such as marketplaces, auction platforms, or a dedicated website or website section for returned or used products – are suitable for selling the products. Then the products have to be listed with all necessary information on the channel(s) of choice. These steps also require data insights and human resources and involve costs.

• Lack of resources

Often medium-sized companies do not have the resources and technical facilities to handle the returns management processes entirely internally. Specific software solutions can help with the processing, but implementing such a solution might not be profitable for every vendor and use case. Many retailers are so overwhelmed with the issue of returns and the limited capacities of their warehouses that they decide to liquidate the goods through bulk buyers. However, this is the least profitable and least sustainable way of selling returns. Depending on the product group, not even 10 percent of the actual value of the goods can be realized this way, and some returns are even destroyed.

• Underestimated impact on the balance-sheet

The costs for returns in online trade amount to hundreds of millions euros every year in Germany alone. Especially in the case of medium-sized providers, high losses from returns can significantly impact the balance sheet. However, due to the lack of prioritization, dedicated responsibility, and strategic integration, many companies lack fundamental transparency about all costs associated with the return processes. Additional factors can lead to even more profit losses and lost business potential – e.g., if the returns are not re-sold on time or the decisions about the distribution channel and pricing are not made wisely.

A more efficient and sustainable returns management offers many starting points for reducing costs and increasing profits. More sustainable handling of returns and their return into the consumption cycle also offers new positioning angles, options to differentiate from the competition, and the potential of winning new customer groups. Companies should carefully check whether they can and want to implement all the necessary return management processes internally or whether they prefer outsourcing some or all processes to a specialized partner. This way, they can focus on their core business.

For many decision-makers, one of the main concerns about outsourcing their returns management is the fear of losing control of their products. Therefore, it is essential to check whether a potential partner can offer full transparency about the status and whereabouts of each product in the reverse supply chain. Collaborating with a specialist can provide many benefits if this transparency can be guaranteed.

Our new whitepaper, “Returns management: Hidden costs and wasted potential,” gives a detailed overview of (hidden) costs in the various returns management processes and shows where profit potential is hidden. A checklist helps classify the areas that can be covered internally and the processes that could be optimized with external help from a partner.

The German language whitepaper is now available for download – an English version will follow soon.