Too Many Happy Returns for Retail This Year?

Child wear Santa hat crying

E-commerce may not have the power to move mountains, but it does have the strength to shift an annual phenomenon: UPS (NYSE: UPS) says the annual spike in shipping volumes that coincides with Christmas gift returns actually occurred before Christmas this year, rather than waiting till after the new year.

National Returns Day came over two weeks early this year, when an estimated 1.5 million packages were shipped on Dec. 19, six full days before Christmas; only 1.3 million are expected to ship on Jan. 3, the day returns typically surge. The reason for this seismic shift is the returns process has become so cheap and easy that it makes buying a product on a whim a pain-free choice.

Return to sender

Christmas returns started earlier than ever this year, which UPS ascribes to consumers getting a jump on holiday shopping. Consumers ramped up their gift buying well before Black Friday, and were expected to return 1 million packages a day every day in December.

UPS pointed to a number of factors playing a role in this shift, not least of which was people being more self-indulgent and buying themselves presents because retailer promotions were so good this year. But it's also a result of retailers eliminating the pain point of making a return.

UPS' Pulse of the Online Shopper study says 79% of consumers consider whether a retailer has free shipping when making a purchase, because the biggest issue 44% of them encounter when making a return is paying the cost or shipping the item back. It also noted that returns specialist Optoro found 89% of customers would not shop again at a retailer if their returns experience was suboptimal. Since the cost of a return is one of the biggest stumbling block for many, eliminating it makes sense, even if it is expensive.

The high cost of customer satisfaction

There is a consumer shopping boom under way this year. The National Retail Federation estimates retail sales will increase as much as 4.8% this year over 2017, and they were up 5% in November alone. The retail organization estimates consumers will spend over $1,000 this year on holiday decorations, candy, and gifts, both for others and themselves, seemingly in line with what UPS is seeing.

The dark side to all of this is that shipping is not cheap, whether it is the initial purchase of an item or its return. Worse, online shopping returns are a much larger percentage of the total.

Bloomberg has said almost one-third of all online purchases result in an item being returned, compared to just 9% of physical-store sales, while the expense of handling returns can range from 20% to 65% of an e-commerce site's cost of goods sold. (NASDAQ: AMZN) spent $21 billion on shipping costs last year, and it could spend as much as $30 billion this year. Obviously that's not just returns, but it shows that shipping costs are not an inconsiderable sum, and can't be ignored.

Even if Amazon is accounting for almost half of all online sales, it also has over 100 million members paying for shipping ahead of time through Prime membership subscriptions, which helps offset the actual cost. Other retailers do not have similar offsetting plans in place, meaning that although the boost in early shopping can inflate the top line, the abundance of product returns and the costs the retailer has to bear to ease the process for consumers will have a direct impact on their bottom lines.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy .

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