The rapid growth of ecommerce is changing business in many ways. This fact comes as little surprise to anyone in the reverse logistics industry. In a few short years, returns have gone from something to be minimized at all cost to an essential element of the customer experience. In five short years, the value of ecommerce items returned has gone from $58 billion in 2012 to an estimated $113 billion in 2017. And as more retail shifts from physical to online platforms, the growth of returns will outpace the overall growth in retail due to the higher return rate for online purchases.

So, what does this mean for two segments that play essential roles in transporting and processing these returns: retailers and package delivery providers? That is one of the central questions in a recently released white paper from the U.S. Postal Service Office of Inspector General titled Riding the Returns Wave: Reverse Logistics and the U.S. Postal Service. While returns affect many players throughout the reverse supply chain, like 3PLs, refurbishers, and secondary market sellers, retailers and package delivery companies are highly intertwined and reliant upon one another. For instance, retailers rely on accurate package tracking and reliable delivery service to stage assets and quickly disposition returns to recoup the highest value. Meanwhile, delivery companies benefit from the added revenue generated by generous retailer return policies. This paper examines emerging trends in reverse logistics that are affecting both essential segments, with a particular focus on the role the U.S. Postal Service plays in the reverse logistics industry and how improving its current returns services or offering new ones could better serve American businesses and consumers.

Returns continue to be a growing challenge for retailers. With the dual issues of high ecommerce return rates and free returns becoming the industry standard, returns are making up a greater proportion of retailers’ costs. Additionally, returns are causing a sustainability issue with about 5 billion pounds ending up in landfills every year. However, this building pressure throughout the reverse supply chain is creating opportunities for innovation. Improved software is enabling retailers with an existing physical footprint to allow customers to return online purchases in store. The expansion of automated parcel lockers is providing customers with more access. With VC money pouring into supply chain start-ups focused on managing returns, the future looks bright, but there remains no clear-cut, industry-wide solution to the returns challenge yet.

On the other side of the coin, rising returns volumes have been a boon for package delivery companies such as UPS, FedEx, and the Postal Service, with total revenue reaching over $700 million in 2015. While package delivery companies might be riding high on returns now, not every solution explored by retailers means that more returns will be shipped. Omnichannel returns strategies are seeing more returns being taken directly to stores rather than being shipped, and some customers, such as Millennials, actually prefer returning products to physical stores. But the number of retail stores in the U.S. continues to decrease, resulting in more of the population living farther from them. Additionally, technologies like True Fit that use artificial intelligence and augmented reality to allow customers to virtually try on items before purchasing might reduce returns due to bracketing, the process where customers buy multiple sizes and colors of the same item to try them on at home. However, some customers have grown accustomed to trying items on in the comfort of their own homes and many retailers continue to promote this practice.

The Postal Service is a major player in this market, handling at least 148 million return packages in 2016. This includes packages carried through the entire postal network, as well as those where USPS only handles the first mile of the return before passing the packages on to other reverse logistics providers. However, its growth in the returns market has not kept pace with growth in the outbound package market. The report explores a few reasons why that might be the case.

Selecting the proper carrier for return packages is often a matter of determining what level of service best fits the needs of a particular retailer. Our research revealed that the Postal Service has several unique advantages for returns that its competitors do not: letter carriers that go to nearly every address in America six days per week; a retail network of more than 30,000 post offices; 146,000 collection boxes for customer drop-offs; and dedicated law enforcement that provides additional security for returned items. Additionally, a survey of business customers reveals that the Postal Service is perceived to have the lowest price for returns. By focusing on improving its current services like home pick-up and package scanning, the Postal Service can better meet the needs of online retailers. Also, the competencies developed through returns of online retail goods can also be applied to other types of growing submarkets that rely on returns, such as medical test kits, food deliveries, recalls, repairs, and end-of-life electronics recycling or disposal.

Based on our interviews with reverse logistics experts, there are a number of ways that package delivery companies, particularly the Postal Service, can better meet the needs of retailers going forward. If allowed by the postal regulator, one such way would be to start or expand the acceptance of unboxed returns. By accepting a return unboxed, delivery companies can act as the first stage of product assessment, collecting basic information about the item’s condition, such as whether the package has been opened or whether an electronic device can be turned on or not. Such information can allow for better routing of the returned item to its proper destination, making reverse supply chains more efficient. Additionally, by accepting unboxed returns either at postal facilities or through home pick-up, delivery companies can consolidate these items into bulk shipments at less expensive rates. This white paper highlights five existing and four new opportunities for the Postal Service created by the rise in returns, some of which might involve partnerships with other entities in the reverse logistics supply chain.

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Delivery providers, old and new, are putting significant effort into serving the returns market now that it is increasing in complexity and potential. The Postal Service, an early pioneer in consumer returns, must continue to adapt if it wants to grow in this area. It has the potential to solve a critical problem for online retailers and better serve the growing number of Americans engaged in ecommerce. The full report is available for free on the USPS OIG website (www.uspsoig.gov) and through the Reverse Logistics Association’s member portal. The Risk Analysis Research Center (RARC) conducts in-depth research and analysis on postal issues to identify opportunities for revenue growth and increased operational efficiencies. OIG white papers explore strategic ideas for ways to enhance the viability and efficiency of the Postal Service.

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Ian Stanford
Ian Stanford, Public Policy Analyst, USPS Office of Inspector General