Some of the biggest business winners of the Covid-19 pandemic were e-commerce retailers. In the US, Census Bureau data shows $571.2bn (£473bn) of goods were sold online in 2019. The next year, that figure hit $815.4bn: a 43% climb. In 2022, annual US e-commerce spending hit the $1tn mark for the very first time.
But the sheer volume of goods sold and shipped from the warehouses e-commerce giants, such as Amazon and H&M, came with a price for retailers. Roughly 17% of online purchases were returned in 2022, according to data from the National Retail Federation, down from 21% the previous year. When retailers rode the pandemic wave of online shopping growth, the volume of goods coming back swelled exponentially.
Their answer? Return fees.
Since the pandemic began, fast fashion retailers have especially taken up the practice. In late September, fashion giant H&M began charging customers £1.99 ($2.40) to return online purchases. The company joins many other fashion brands asking customers to pay up: in May, Zara introduced a return fee of £1.95 for items sent back via mail. Similarly, in the US, clothing retailer American Eagle charges $7 to return purchases; JCPenney, $8; Saks Fifth Avenue, $9.95; and TJ Maxx, $10.99. Even $100bn fast fashion brand SHEIN added return fees (although the Chinese e-commerce giant still offers free returns for first purchases).
Many retailers of expensive or bulkier goods like furniture charged for returns before the pandemic, according to Regina Frei, an associate professor of digital economy at the University of Surrey, UK. Returns fees were not limited to these purchases; about one third of omni-channel retailers charged these fees before 2020, says Heidi Isern, vice president of experience at Narvar, a US-based post-purchase customer software platform.
Yet today, she adds, the practice has gone mainstream: Isern says around 40% of online retailers charge some sort of return fee for shipping an item back to a warehouse, repackaging it or disposing of it. Some retailers charge a fee, regardless of whether it comes back in-store or online, but most are willing to let customers return an item purchased online to a brick-and-mortar location for free.
Return policies vary – some companies are making store returns free, while others are issuing blanket returns policies (Credit: Alamy)
The trend may seem like a way for companies to squeeze consumers as online shopping continues to generate major revenue. Yet retail experts say return fees are a balancing act between retailers’ thirst for profits and the record-returns problem still plaguing the e-commerce industry.
An expensive problem
Many online retailers had years of experience with same-day processing, packaging and delivery by the time Covid-19 hit, when e-commerce sales started going through the roof. But they hadn’t built out a similarly robust process for handling the much more difficult – and expensive – problem of processing returns for such a high volume of sales, known in the ecommerce industry as ‘reverse logistics’.
Fara Alexander, director of brand management at returns-management platform goTRG, provided BBC data that shows 49% of retailers her company surveyed in March 2023 now consider handling returns to be a serious problem, up from a mere 2% last September. These problems aren’t just about a lack of warehouse capacity to re-package mountains of returned goods: “It’s actually costing them money to process these returns,” she says.
A report by Narvar earlier this year, seen by BBC, estimated retailers spend around $33 (£27) per return counting postage, packaging, the depreciation of an item’s value, labour and missed sales windows. The postage alone, says Alexander, might be as much as $7 – or double without a return fee. For companies that resell returned goods, refurbishment also cuts into margins.
The increasing popularity of ‘bracket buying’ (buying multiple sizes with the intention of returning whatever doesn’t fit) and ‘wardrobing’ (buying clothes, wearing them for an event, then returning them for a full discount) also leaves retailers holding the bag. The fashion industry bears the brunt of this, since fit is not an exact science. “You’re not buying a ballpoint pen,” says Toronto-based independent retail expert Bruce Winder, “so you need to try it on, and you need to touch and feel the garment and see if it looks good on you.”
Ultimately, around $212bn in online purchases in the US were returned in 2022. That’s far more than many retailers are able or willing to tolerate. In fact, according to Winder, the e-commerce operations of some retailers are effectively underwritten by their brick-and-mortar sales.
This is the central reason why more and more retailers are introducing these fees, whether they’re charging only for online returns or also include in-store. For many businesses, even though they’re not recouping all their costs by charging customers, they are asking for some money as a matter of solvency.
Playing a long game for profits
Yet although retailers are looking to make up for some of their losses, they’re also playing a longer game to change consumer habits and even grow revenue.
For one, as much as the raw dollars make a difference, if return fees give consumers pause to shop more consciously – say, double-checking their measurements instead of bracket buying – companies can end up reducing their overall return costs going forward with a lower volume of goods coming back to warehouses.
In some cases, the introduction of return fees can also boost profits. For example, says Alexander, some retailers will allow customers to return items for free if they bring them back to a brick-and-mortar location, rather than shipping it through the mail. And that means increased store foot traffic.
“When a customer returns an item in the store,” she explains, “they are 70% more likely to spend not only their full refund, but up to 20% beyond the cost of the item.”
Fast fashion retailers are among the companies introducing return fees (Credit: Alamy)
Return fees may also drive sign-ups for membership programmes that waive these costs. Before joining Narvar, Isern spent four years as an executive at Gap Inc. She says the clothing retailer, alongside American Eagle and Levi’s, offered free returns to members; the same is true now at H&M, despite its new UK return fees policy. These clubs can drive immense revenue: 2020 research from McKinsey and Co showed shoppers enrolled in free loyalty programmes spend 30% more than non-members, and 60% more if they pay for a membership.
A waning age of free returns?
Experts largely believe charging for returns is a good way of curbing the worst excesses of consumer behaviour, while also encouraging purchases. Free returns are still an option at many retailers, and not every company will necessarily implement a return fee policy. But the tide does appear to be turning, they say.
In today’s world of high inflation and post-pandemic mark-ups, these costs might appear to be an easy way to turn off customers. However, with giants like H&M and Zara now charging return fees, experts say many retailers are willing to follow suit – and customers appear to accept them as a reality of modern shopping.
But while more return fees may be popping up, they are likely to look different from retailer to retailer, especially as customer data on shopping habits gets more sophisticated. For instance, Isern says some companies are incentivising customers to consider exchanges rather than simply returns.
Frei says others might include adjusting return policies to the behaviour of specific customers, especially if brick-and-mortar stores can’t serve every customer equally – for instance, shoppers who need extended sizes exclusively offered through e-commerce portals. When Frei was shopping for maternity clothes in the UK, she not only found few options, but even online, couldn’t easily assess their fit. Frei also notes some companies could make exceptions for disabled consumers unable to shop in person, who often return multiple online purchases by necessity
Regardless of how many businesses introduce these fees – and for whatever reasons they do – Frei says the current retail model is unsustainable, both from an operations and environmental standpoint. “We really need to change how retail operates,” she says.