Retailer profit margins pressured by online returns

3 minute read

As the shift to online accelerates, partially driven by Covid-19 impacts, online retail return volumes are rising. This is clearly putting intense pressure on retailer's profit margins at a time when operating costs are already problematic for many retailers.

This is the third of five articles based on a wider piece of research on the true cost of the shift to online by Retail Economics and Alvarez and Marsal.

This research looks into the true cost of online retailing across Europe. It found that young adults are the most prolific online returners of products, causing significant impact to retailer's profit margins.

In countries such as France, Switzerland and the UK, those aged 18-24 years return approximately twice the number of items as their senior counterparts (65+ years). Young adults have grown up experiencing fierce rivalry between retailers and changing consumer rights. They have witnessed the balance of power shift away from retailers towards consumers, to a point where return volumes now pose a 'significant headache' for many retailers; not just from a profit standpoint, but also in returning unwanted products back into the supply line.

Within Apparel for instance, ordering multiple items online (with the intention of returning unwanted items, or ordering multiple sizes to ensure a good fit) has become normalised for younger shoppers. This poses long term risks as such behaviours are likely to be sustained into adulthood as online develops. Beyond returns eroding profitability for retailers, they are also inconvenient for consumers. With the likelihood of fewer store visits in the future, returns could intensify pressure on courier services as goods effectively funnel down fragmented channels.

Rising online sales has also led to operational
challenges across the customer journey –
particularly for fulfilment and after-sales.

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