Parcel carriers mine returns for more elaborate offerings
FedEx got itself arguably the best possible Christmas present for a parcel operator – a massive handle on product returns. In mid-December the integrator announced the agreement to acquire GENCO, a major specialist in the reverse logistics arena. According to FedEx, its acquisition handles in excess of 600 million returned items a year, serving seven out of the top ten retailers in the US. FedEx did not reveal how much it agreed to pay for GENCO, but analysts’ estimates put the transaction in the neighbourhood of US$2 billion.
The move reflects the growing focus on returns in the rapidly growing B2C e-commerce field.
“Returns is an issue for all our customers,” remarks Brian Bourke, vice president of marketing at SEKO Logistics. “They need good service, all the way from customer service at pick-up to replacement and putting products back on the shelf.”
Tim Sailor, principal of Navigo Consulting Group, describes B2C e-commerce as the new great battlefield for the large parcel carriers. “At some point everybody was chasing over-the-counter, non-discounted business. UPS bought Mail Boxes etc., FedEx bought Kinko’s. The next battle is over the e-commerce customer,” he says.
Returns are a rising concern and play a big part in the communication between retailers and their logistics providers, points out Ryan Persad, director of Purolator Logistics. “Ten years ago returns was not part of the conversation. Then most companies were not salvaging and reselling product,” he says.
Customer retention hinges on a positive experience with returning items, he continues, citing research which shows that 85 percent of consumers would not buy again from a vendor whose returns process is not satisfactory and 89 percent would not order from merchants who charge them for returning goods.
“You cannot do a distance sale if you do not offer a reasonable return service, and ‘reasonable’ translates as free for the consumer’,” agrees Horst Manner-Romberg, head of German mail and parcel logistics consulting firm M-R-U.
Inevitably the surge of on-line orders in the run-up to Christmas generates the most pronounced spike in returns. According to UPS, there is even a ‘National Returns Day’ (January 3), which was supposed to produce a return volume of about 520,000 parcels this year. On December 26 the integrator signalled that it was expecting to handle altogether 4 million return shipments in the Christmas holiday season.
More and more on-line shoppers send merchandise back. A UPS-sponsored study titled ‘pulse of the on-line shopper’ shows that in 2014 62 percent of surveyed consumers returned an item that they had purchased on-line, up from 51 percent two years earlier.
“Returns used to be less than 10 percent of sales, now they are about 17 percent,” says Persad.
Some estimates put return rates as high as 25 percent. Manner-Romberg cautions that there is considerable variation between different segments. While shoes and garments typically show high return numbers, other sectors like cell phones or consumer electronics have low return rates, he notes.
In any case, return logistics have become part of the logistics contract for e-tailers’ business. “Returns have to be part of an overall inventory picture,” says Sailor. “Returns are not going to be the driver in the contract, but they certainly can be a differentiator.”
The most critical element is to make the return process easy for the consumer, lest the e-tailer loses him for good. On the outbound side, operators offer a variety of delivery options. This cannot be duplicated for the reverse flows, although there is the possibility of a driver picking up a return item when delivering a new one, Manner-Romberg points out. Usually consumers drop off their returns at depots or postal outlets, he adds. Operators like UPS have an advantage with their footprint of retail stores and drop boxes.
The channels for outbound flows often do not work in the opposite direction. “A lot of customers think you can use the outbound platform, but not really,” says Persad.
In some cases geography is a major determinant. One of Purolator’s customers is an Ontario-based maker of golf equipment. About 80 percent of its golf clubs are sold in BC and Alberta, so it makes no sense to funnel returns back to Ontario, Persad points out.
Given e-tailers’ strong emphasis on keeping costs low in the returns process, most of this traffic moves in consolidations. The second essential requirement is visibility. “Building solutions that have an IT component for visibility is key,” remarks Persad, adding that Purolator usually sets up solutions that give clients visibility across the country. This is partly to optimise the flows of returns to their respective destinations, partly to allow the e-tailer to credit the consumer earlier, he notes.
Cost considerations may suggest basic return models, but the different nature of the goods involved dictates different requirements for return flows. In some cases goods are not supposed to be fed back into the selling cycle. “If you bring back a $2 or $5 item, you will probably dispose it, but not a $1,000 bag,” remarks Jeff Cullen, CEO of forwarder Rodair International.
“With electronics you may have a $700 order. You do not want that floating through your supply chain. Also, you want to credit the customer faster,” observes Sailor.
The predominant factor in determining the best return solution is the average order value of a commodity, according to Sailor. “If you have a higher order value, you want more of an end-to-end solution. And you want to make it easy for the customer to return the item,” he says.
Returning electronics often involves inspecting faulty products and running basic diagnostics before sending them back. “We try to take the inspection further up the supply chain,” remarks Persad.
Clothing like golf shirts also needs work – at least a check for physical damage, followed by steaming the item, folding and packing it. A service deal with footwear distributor Josef Seibel calls for Purolator to pick up returns from various Costco outlets, move them to logistics facilities located in Dorval and Richmond, BC, check for defects and give each shoe a quick clean and wipe before packing the pair for re-sale.
“In clothes the fulfillment rate is higher than with spare parts,” remarks Manner-Romberg. Overall returns are moving increasingly to individual solutions for on-line retailers, he adds.
In the main the rapid growth in on-line shopping has played out in domestic markets, but international purchases over the web are on the rise. This will force logistics providers to up their game in parcel return flows.
“International returns are difficult. Most companies do not have great international return solutions,” comments Sailor.
“If you have returns from Canada to the US, we have to consolidate them and take them through customs,” notes Persad. To avoid this, US retailers have begun to establish return distribution centres in Canada, he observes.
One example is rechargeable batteries. In the past Purolator would move these into Canada from the US and funnel back returns across the border. Today they are flown in from China, and Purolator puts on labels that include return addresses – in BC for consumers in the province and Alberta, while returns from Ontario flow to a facility in Toronto.
To create a return solution to an offshore facility logistics providers need scalability, Persad points out. “You need to have multiple return locations. Having only one is going to drive the cost up,” he says.
Increasingly clients look for alternatives to returning rejected merchandise back to their shelves, which calls for more sophisticated logistics solutions. Instead of going back, products may end up being re-sold to other parts of the world
This is where the acquisition of GENCO promises rich pickings for FedEx. The former runs a proprietary ‘Marketplace’, which acts as a wholesaler of retail returns and surplus inventories. It sells returned and surplus goods to discount retailers, who buy liquidated products in bulk for resale. A chunk of this goes to markets like China or India, which can feed into FedEx’s traffic to these markets.
The evolution of returns services has opened lucrative doors for logistics providers, comments Manner-Romberg. Rather than having to offer returns services at or below cost to win the outbound traffic of a retailer, they have been able to broaden their offerings and tap into additional revenues, he says.
“Usually parcel companies get a good price for returns, albeit not as high as for outgoing traffic, as they usually move slower, but many parcel firms have turned this into a fulfillment service. It is an additional revenue source for them,” he comments.
Are there limits how far return logistics services can go? Persad draws the line at services that require certification from government authorities like Health Canada. “That is risky to take on. Most logistics companies stay away from it,” he says. “The customer sends out a technician or inspector who can take care of this, but we will do all the solutions.”
Ian Putzger is an award-winning journalist with more than 20 years experience covering transportation and logistics issues. He is a former writer and editor with the Hong Kong-based Asian Sources Media Group, and Airtrade, a British magazine covering the global air cargo industry.