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Retailer profit margins pressured by online returns

Full report: The True Cost of Online Retail

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.


[Continued below]

View the full report here

This work forms part of a wider piece of research and is a downloadable in pdf format


How retailers are responding

Successful reverse logistics for returned items introduces a host of additional infrastructure costs too. The merging of physical and digital channels has increased the complexity of supply chains as retailers battle to cater to rising customer expectations and the fragmented nature of store and home delivery networks. The balance between providing convenient returns for online orders with the cost of doing so efficiently becoming a major priority

Retailers can ease the burden by increasing minimum order values or using subscription models to offer free deliveries, while enhancing the lifetime value and loyalty of online customers. But potential returns still leave multichannel retailers the difficult task of handling combined stock pools for online and store channels, which requires a single-inventory view and advanced capabilities to integrate returns back into the supply chain efficiently.

Consequently, many retailers choose to form strategic partnerships with third-party suppliers to handle returns at scale to ease costs through technology and automation – further disrupting the cost dynamics of online retailing. It is often less capital intensive, faster and less risky to develop sophisticated cross-channel logistics by securing strategic partnerships.

However, the speed, cost and convenience of deliveries are all critical components of scaling a successful online business which become vulnerable if third party logistics companies provide a sub-optimal service.

Average return rates online (%)

Average online retail return rates - Retail Economics

Source: Retail Economics and Alvarez & Marsal


Despite the pressure on profit margins that has arisen as a result of increased returns, our research has found that regardless of returns, a large-scale shift to online would be intrinsically damaging to profit margins anyway. To learn more, explore the next article in the series.


Things to do now

Explore the next article in this series here

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Found this short article interesting?

This short insight article forms part of a thought leadership report entitled “The True Cost of Online”. It was produced by Retail Economics in partnership with Alvarez & Marsal and looks at the impact of Covid-19 across Europe and the accelerating shift to the online retail channel.

View Full Report Here

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