Properly Managing Returns is Imperative as Impact Nears the Trillion-Dollar Mark

Having weathered National Returns Week earlier in the year – when consumers returned tens of millions of products from the 2024 holiday season – has many retailers and brands revisiting their return strategies and policies. According to the National Retail Federation (NRF), returns in 2024 reached a whopping $890B, or 17 percent of total retail sales. This represents a 15 percent increase over 2023. Holiday returns were up even more – surpassing the 2023 holiday season by more than 20 percent. So, the message is clear. Now is the time to take control of this costly challenge. While return policies are easy to change, it’s time to shift the focus to strategic and sustainable, long-term solutions. In other words, merchants must move beyond their traditional reactive approach that delivers short-term solutions for managing returns. Effective returns management must address all post-purchase activities, including people, processes and investments.

Knowing that the returns experience is paramount to successful, long-term digital commerce, many sellers will be revamping their approach to returns in 2025. The same is true for 3PL (third-party logistics) companies, as many are expanding their core services to include 3PRL (third-party reverse logistics). This is particularly important when it comes to operational efficiency.

Regardless if outbound supply chains are internal or leverage 3PLs/4PLs, the outward flow of goods has been optimized over the years. Newer inbound return processes, which are often rooted in ad hoc processes, present new challenges and introduce greater complexities compared to outbound shipments.

Complexity of Return Shipments

Returned goods require more handling in the form of inspection, sorting, repackaging, and re-tagging before items can be returned to stock. This additional handling requires a combination of human intervention and specialized equipment and systems. This added workload puts extra stress on all resources, particularly labor. Storage of returned goods also creates new challenges for overcrowded warehouses and can create inefficiencies in inventory handling. And this process represents the tip of the returns iceberg, as it only applies to items once they are received in a warehouse. Obviously, quickly putting items returned in pristine condition back on the e-shelf, where they can be resold at full price, is the best possible outcome. This is particularly important as “bracket purchases” have become commonplace and trend windows continue to shrink – driven largely by the growth of fast fashion.

Maximizing Value Recovery and Sustainability

In the not-too-distant past, many retailers and brands would send items that could not be resold at full-price – or close to it – to landfills. This was a quick solution that mitigated handling costs while providing the requisite brand protection. While this approach quickly addressed some return-related challenges, it was certainly not sustainable.

Pressure to operate more sustainably, both environmentally and economically, continued to mount. This included pressure from the retailer’s customer base and direct pressure from formal sustainability and/or ESG initiatives. Other direct pressure surfaced in the form of legislation, such as California’s Responsible Textile Recovery Act of 2024, which is an extended producer responsibility (EPR) program for apparel and textile articles. This act, which was amended in November 2024, emphasizes repair and reuse, and minimizes the generation of hazardous waste, greenhouse gases, environmental impacts, and public health impacts. It is reasonable to expect influences from consumers, boards, and some governments to continue driving towards more sustainable solutions.

Beyond Direct Costs

Direct costs, or hard costs (e.g., shipping, handling, restocking fees) can be easily quantified. The less tangible costs, or soft costs, are much more difficult to measure. However, certain key metrics can be used in decision support systems, such as CLV (customer lifetime value), which can be connected to customer loyalty. This is where we find the returns dichotomy in which a retailer’s highest returners are often its best customers. This excludes serial returners – those customers that have returned more orders than they have kept.

This dichotomy is why, in my opinion, simply charging for returns is not a long-term strategy, it is merely a policy tactic. While our research shows consumers are becoming more accepting of return and/or restocking fees, our research also indicates that as much as 50 percent of consumers will not shop with a merchant that charges for returns. Furthermore, if charging for returns was actually an effective strategy for reducing returns, we would expect to see return rates declining. Early on, Amazon molded consumer expectations for many things, including returns expectations and those expectations still remain. Plus, the tactic to increase CLV is convenience, which now rivals price when it comes to deciding where shoppers will spend their digital dollars.

Action Items for Online Merchants

There are three critical action items that will help merchants increase CLV.

The first is eliminating returns caused by the merchant. Up to 60 percent of returns can be traced back to one of the following reasons:

• Product image or description did not match the actual product
• Incorrect size
• Product arrived damaged

Adding 360^o views of the product or using augmented/virtual reality applications can easily address the disconnects between the digitally-represented product and the physical item.

Ensuring products arrive undamaged can be improved through a focused quality control program.

Data mining return reasons provide further direction as to what actions are required to address the root cause of the return. A SKU with a disproportionate number of returns may indicate disconnects in the description or a potential manufacturing flaw. Repeated delivery of damaged goods may identify a need to improve packaging or to ship goods using a different carrier.

The second action item is “leaning into returns.” This means leveraging returns as a competitive advantage. Complicated or restrictive return policies can harm a brand’s reputation, reduce customer trust and discourage repeat purchases. Furthermore, these negative experiences are easily shared via onsite reviews and through social media platforms. Complex or restrictive returns often negate a merchant’s potential for cross-selling and up-selling. In addition to damaging the brand’s persona, it dilutes customer acquisition initiatives and ultimately translates into lost sales.

Leaning into returns also means optimizing the returns experience by offering frictionless returns. This will likely include free in-store returns for omnichannel retailers and package-free returns at third-party locations, e.g., FedEx Office, Kohl’s, and Whole Foods Markets by pure-play online merchants.

Leaning into returns also means leveraging customer feedback, which comes at no cost to the retailer. This can include feedback in terms of fit, product design, packaging, delivery, the returns experience, and more. Feedback is a gift — one that when properly mined — can serve as the foundation for continuous improvement initiatives.

The third action item is sustainability, which goes hand-in-hand with optimizing value recovery. Many items that cannot be returned to stock can be sold in the burgeoning resale market, which is expected to reach $30B by the end of 2026.

Several apparel and footwear companies have already jumped on the resale bandwagon. Carhartt, provider of durable workwear, outdoor apparel and gear, recently introduced Carhartt Reworked. Timberland footwear also introduced Timberloop, a circular design platform that considers product design, manufacturing, extending their products’ lifecycles and recycling. But the growth in resale isn’t limited to wearables. There’s a “resale market” for almost everything.

Other returns, overstocks and seasonal inventories are often sold to liquidators that sell into secondary markets such as bodegas, flea markets and out-of-market geographies. Liquidation is another viable method for keeping large quantities of goods in commerce, but liquidation buyers must be vetted and monitored to ensure they’re not competing with a brand’s primary sales channels. America’s largest liquidator, InmarLiquidates, sells only in bulk, making it a highly sustainable option for managing returned goods while increasing value recovery.

Merchandise that is not sold through liquidation can be donated to select charities. This extends the product’s lifecycle and avoids landfills while serving worthy causes.

Items that can’t be sold, recycled, or donated can be sent to a “waste-to-energy facility,” where the items are combusted in a closed-loop process that generates electricity for local utilities and commercial properties.

Extracting Greater Value from End-to-End Returns Management

In simplest terms, End-to-End Returns Management begins with returns initiation and ends with the return’s final disposition. This comprehensive approach builds loyalty, reduces hard and soft costs, and makes returns more sustainable.

Using an end-to-end returns management company also enables data collection at every touchpoint across the returns journey. Combining AI with each client’s protocols will ensure value recovery is maximized while limiting environmental impacts. Also, working with a returns management firm that provides a national network of return processing facilities will further reduce costs and improve sustainability. By reducing transportation requirements, retailers can increase cycle times, benefit from zone-skipping, reduce the consumption of fossil fuels and lessen greenhouse gas emissions.

The first step toward optimizing returns is understanding how to use returns as a competitive advantage and creating a strategy to capture that advantage. This often requires a paradigm shift — one in which policy and tactics transform returns from a “necessary evil” to a true strategic planning tool for the further development of capabilities. But retailers and brands must remember the importance of trust. Offering and executing a streamlined returns channel is among the best ways to earn consumer trust – and trust creates loyalty, which over time, increases customer lifetime value.