Frenzied Shopping Season, Record Hangover

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by: Wolf Richter

And what happens to the returned goods?

It was, by all accounts, an exciting shopping season, particularly for e-commerce. I figured that out very quickly when things we'd ordered in early December took days longer than normal to arrive. The tracking info showed various issues, including packages getting hung up for days in some warehouse, apparently waiting for the next available spot on a truck.

So here's the frenzied party.

Now we got the first set of numbers. MasterCard SpendingPulse reported that holiday shopping - not including automotive - from November 1 through December 24 across all payment types, including cash and check, rose 4.9% from the same period a year ago, the largest year-over-year increase since 2011. Folks spent over $800 billion this shopping season - the most ever.

Online sales soared a breathtaking 18.1% year over year, "boosted by a late season rally," the report said. It ate the lion's share of the increase.

"Overall, this year was a big win for retail," the report said, which based the results on data from the MasterCard payment network and survey-based estimates for other payment types. A special credit went to those retailers "who tried new strategies to engage holiday shoppers."

But now comes the record hangover.

Consumers will return about $90 billion in goods purchased during this holiday season, according to estimates by Optoro, which specializes in the business of return shipments. For the entire year, about $380 billion of goods will be returned.

Of the returns following the holiday shopping party, 40% will happen during return mayhem from December 26 through December 31, and 51% will happen in January, according to Optoro.

Some more return nuggets:

  • FedEx's head of marketing, Raj Subramaniam, told investors last week that about 15% of the goods bought online will be returned, with the return rate for apparel being about 30%.
  • The National Retail Federation estimates that 15-30% of goods bought online will be returned.
  • UPS said that in the first full week of January 2017, 5.8 million packages were returned to retailers. The first full week in January 2018 will likely beat that number.

"Being able to return is now a competitive tool," Bruce Cohen, head of strategy and private equity for retail and consumer products at consulting firm Kurt Salmon, told CNBC. "If it's a pain for customers to return items, they will go elsewhere."

For online shoppers, there are drop-off points scattered around, or they can ship it back using the preprinted return label that came in the box, with the retailer usually offering to pick up the shipping costs. Brick-and-mortar shoppers get to cool their heels in line at the returns counter.

And what happens to the returned goods?

  • Only about half of returned goods are put back on the shelves, according to Optoro, cited by CNBC.
  • About a quarter of returned goods are sent back to the manufacturer, with the retailer thus sloughing off the problem.
  • Other returns are sold, often for pennies on the dollar, to secondary retailers, discounters, and liquidators.
  • And about 5 billion pounds of returned goods get trashed because it's too expensive for retailers to assess their condition and repackage them, or because they're damaged.

These returns - and generous return policies that engender them - are very costly for retailers and consistently rank among their top concerns. Many online vendors offer free shipping for returns, which adds to the costs.

But customers take for granted that they can return those boots and clothes they bought and that don't fit, or where the color looks different in reality than in the shop or on screen, or when the spouse has a hissy fit. Or they find out that the alarm clock they bought has over a dozen buttons and endless complexities and problems that they don't have the patience and time to debug - it's just an alarm clock, for crying out loud - and they send the damn thing back. Then there's the abuse, the party dresses and the like, that get returned the day after the party, stains and all.

People just take returns for granted. It's part of the service in the US retail environment. That is nothing new. Brick-and-mortar retailers have struggled with this for decades. But online sales exacerbate the problem.

Retailers "simply accept it as a price of doing business," Jonathan Byrnes, a senior lecturer at MIT's Center for Transportation & Logistics, told CBNC.

Most retailers report earnings based on quarters that are shifted by a month from calendar quarters. So their holiday sales quarter might go through the end of January. This makes sure that the nasty hangover from the holiday sales party is also included. Otherwise, the next quarter, which is already tough, would be a total fiasco.

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