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How Amazon Returns Work

Returns are a major headache for customers, and they drain companies of

millions of dollars in unwanted inventory and extra labor.

Returns create billions of pounds of waste and entire walls of shame in

warehouses around the world.

But Amazon is trying to change all of that.

Where Amazon absolutely leads is in trying to be the easiest, the lowest

friction return experience for the consumer and thereby win customer

loyalty and increase customer purchases while they tackle some of these

other big institutional infrastructure problems around returns.

From robots to in-person returns, the world's most valuable company is

redefining the returns process.

And as e-commerce grows, smaller companies are finding ways to make money

off returns. We wanted to find out how does Amazon process returns?

And what's the company doing to protect the environment and its bottom

line? Returns are by far the largest challenge to

e-commerce, and I think to commerce in general for both retailers and

manufacturers. As more consumer spending is shifting from in-store to

online, it's really just exacerbating the size of the returns problem that

we all have to deal with. Across the entire Amazon marketplace, you know,

they now sell over 800 million products.

So this is a scale that the world has never had to deal with before.

There's even an annual conference devoted entirely to solving the problem

created by returns, namely inefficient reverse logistics is a huge loss

for companies,. In a traditional brick and mortar store we might have

average return rates of 8 to 10 %.

But in e-commerce, it's totally common to see 20 or 30 % of all purchases

get returned. Forrester Research estimates that e-commerce will see $207

billion worth of returns this year.

Amazon is about half of all e-commerce, so slightly more than $100 billion

dollars in returns happen in North America just with Amazon.

So that's a huge expense.

And the returns process matters to customers.

According to data compiled by Invesp, 79% of consumers want free return

shipping and 67% check the returns page before making an online purchase.

All this has led to the current trend of free return shipping, which is

now offered by almost half of retailers.

Where the challenges is, is can you do it in a way where the unit

economics don't kill you?

The difference with Amazon is they have the scale and they've trained

their investors to accept that in the beginning they may do things at a

loss. What that gives them the flexibility to do then is to invent.

They bring a lot of talent to the table and they figure out how to

optimize and create efficiencies that will allow them to have the unit

economics work to their favor and ultimately get those margins back.

The complicated reverse logistics journey starts when you decide to return

an item. Amazon gives you 30 days from the day you receive an item to

bring it back or put it in the mail.

Generally you get 30 days.

And generally they give your money back and even include paying for

shipping both ways, right?

Which has inspired other companies to have to follow suit.

And with every return, Amazon wants to know why.

34 % say the size, fit or color was wrong.

21 % say the item was damaged, broken or no longer functional.

14 % say the item wasn't as described, 10 % simply didn't like it and 9 %

changed their minds. Amazon sees on their scoring system that you're a

customer that abuses the return policy.

It is possible that they'll charge you a fee for that out-of-reason

return, whereas for a good customer they might continue to offer that

return for free. Whether a return is free also depends on the method you

choose for that return. That menu is going to vary slightly depending on

your geography and the item.

A popular thing that they'll do is you put it back in the box, you seal

the box and we'll send someone to your house to pick up the box and

they're going to charge you for that option.

If you live in a place where there's literally no other options, they may

offer that for free.

But in most cases, they're going to say, if you bring it to a UPS store,

it's free. But for certain items where the reverse logistics costs way

outweigh the potential value of the item, if you're not someone that

they've identified as a return abuser, they very likely are going to tell

you to just not worry about the return.

The returns process is now so easy that customers have been caught gaming

the system. One man reportedly scammed Amazon out of $370,000 by sending

back boxes of properly weighted dirt instead of the returned products.

Amazon has also banned customers who appear to be conning the system by

making too many returns.

In all, return fraud cost to the retail industry $18 billion in 2017.

You have a secret credit score that says how profitable and how good a

customer you are for that retailer.

A particularly egregious and common version of this is there's a huge

spike in TV sales the week before the Super Bowl, and there's a huge spike

in TV returns the week after the Super Bowl, right?

So increasingly your own behavior can impact the returns experience that

you get. But even those items that are legitimate returns can create a lot

of pressure, specifically on Amazon workers.

For every package you return from your doorstep, there's a delivery driver

who has to pick it up and get it started on that journey back to the

warehouse. It's those boots on the ground that cost Amazon the most.

As more of Amazon's overall volume gets shifted from UPS and the U.S.

Post Office to Amazon's own delivery network, they're also able to handle

a lot more of the returns themselves and the logistics of picking

something up at someone's house and taking it back to the fulfillment

center are actually harder and more expensive than the logistics of

delivering something to the home.

Amazon has one big way to relieve the pressure on its drivers and its

bottom line: use you for the delivery.

In July, Amazon expanded its partnership with Kohl's to allow items to be

returned without a box at any of Kohl's 1,100 stores for free.

If they have to go to 100 hundred consumers' houses and collect one box

for a return, that's much more expensive than having those hundred

consumers all go to one Kohl's.

Kohl's needs traffic. Retail traffic is down.

You've got to find a way to get people in the stores.

They're now getting the Amazon customer into their store who then has

money in their pocket after a return.

It's a great opportunity.

So far, Kohl's says results are promising.

The net impact of the traffic and sales we're getting and then considering

the support that we're leveraging.

So in terms of the support inside of our stores, reverse logistics, all of

that is expected to be a positive EBIT contribution for 2019.

So we're early days, but we're highly encouraged and we do see this as a

profitable venture for the company.

If the cost of me handling the return, which by the way they're going to

help pay for, is lower than getting another pair of shoes sold to the

person walking in, then it's ultimately a net gain.

In the world of Amazon partnerships, this Kohl's deal is almost unique in

how favorable it is for both parties.

According to data compiled by Invesp, 62 % of customers are more likely to

shop online if they can return an item in store.

With Amazon, you can also return items in person without a box to one of

2,800 Amazon Hub locker locations, which can often be found at Whole Foods

or college campuses.

Depending on your location, you can also return items in person at UPS

stores and a growing number of Amazon Books and Amazon 4-star stores,

although this does sometimes cost a fee.

Other retailers are trying to catch up with Amazon's in-store return

options. Walmart has actually created a separate return line so that you

don't have to wait in line behind other people trying to get Walmart

service. Target has set up dedicated e-commerce space in the front of the

store.

at Nordstrom's Local stores in New York and L.A.

you can now return items purchased online from other retailers like Macy's

and Kohl's. And FedEx announced this month that consumers can now drop off

their online returns at thousands of Walgreens stores and print their

return labels in store too.

UPS also unveiled a similar partnership this month, allowing pre-labeled

returns at 1,100 Michaels stores in the U.S.

Amazon and everybody else is constantly trying to enhance that user

experience and figure out how do you best do that?

But you still have the reverse shipping.

You have to pay for that shipping to go back.

You have to deal with the item itself.

How do you file it away?

How do you deal with it? This creates another big challenge.

The reality is it often ends up in a place of limbo, a place that some

retailers call the wall of shame.

Sometimes we've seen it as high as like, you know, 50, 60 ,000 square feet

of just all items that are just all returns, all mistakes, all the stuff

in there. And we're talking about thousands of items.

We sometimes talk about millions of dollars in inventory that is just

sitting there and it's just costing them too much to try to fix that issue

that they just push it aside.

That's what happens. It's at the wall of shame where L.A.-based

startup inVia says its 400 robots deployed in U.S.

warehouses are making a big difference.

The robots can be programmed to process returns in a way that's custom to

the needs of a company. Customers would approach us and say, what can you

do to just fix my wall of shame?

That's what we want the most.

So with our robots, as the items come back we're actually able to go in

and file them away so we're taking away that pain point of moving the

items back. InVia is now programming its robots with separate software

entirely devoted to returns.

For example, after Christmas, there might be a lot of Christmas returns,

which nobody's probably going to order til next year.

And we'll go file it away pretty far away.

These robots are meant to offer competitors an alternative to Amazon's

Kiva robots, which were used by stores like Walgreens, Staples and The Gap

before Amazon bought Kiva in 2012.

A major difference: inVia's robots can handle small totes up to 40 pounds,

often carrying one individual item, while Amazon's robots move entire

1000-pound shelves all at once.

InVia says this more finite control helps cut down on one big reason for

returns: the warehouse worker accidentally boxing the wrong item.

We only present the person with one item.

If you look at the Kiva case, you have a big rack with a bunch of items.

There's a guided pointer that points you but you can still make a mistake.

You know, you're trying to move these things in seconds.

So with our robots, we only present them with one choice.

So there's a very, very low probability that they'll make a mistake.

Amazon says its Kiva robots are not used in areas that handle returns.

InVia wouldn't disclose if it's been approached by Amazon about acquiring

its robotic return software but did confirm it's been in talks with a lot

of Amazon's competitors.

So far inVia's robots are being used in Rakuten's U.S.

warehouses and smaller companies like discount e-commerce retailer Hollar.

Once returned items are sorted by human or robot, it can still be a major

problem to find the best use or them.

This can lead to a huge surplus of inventory, wasted fuel emissions and

unnecessary packaging to handle it.

In a nutshell, returns are hard on the planet.

As much as five billion pounds of waste gets thrown away as a result of

these returns that can't be resold.

So to put that in perspective, that's 250,000 garbage trucks full of goods

that people bought, half of which from Amazon, and then ultimately had to

be thrown away because it couldn't be resold.

The environmentally unfriendly disposal of unsold and returned inventory

has made big news. Burberry famously revealed last year that it

incinerated 28.6

million pounds of unsold and returned products, a practice it's since

stopped. Earlier this year it was reported that a single Amazon facility

sent 293,000 products to a garbage dump in just nine months.

And after a documentary found Amazon destroyed three million products in

France last year, the country vowed to outlaw the destruction of unsold

consumer products by 2023.

That, of course, is an ecological disaster.

What's super interesting, of course, is consumers are increasingly

sensitive to that.

Even when destroying the product is the best economic option, retailers

are having to pivot away from that because consumers don't like doing

business with these ecologically unfriendly companies.

In response, Amazon launched a program called Fulfilled by Amazon

Donations. Starting September 1st, donations became the default option for

all sellers when they choose how to dispose of their unsold or unwanted

products stored in Amazon warehouses in the U.S.

and the U.K. And that's entirely a result of customer sentiment pivoting

away from Amazon.

According to Narvar's 2019 consumer report, 52 % of shoppers said they

would go in-store to return items if it helped reduce the environmental

cost of returns.

Amazon also has a program called Amazon Warehouse, which sells renewed

goods at a discounted rate.

Another big tool Amazon has to help cut down on wasted inventory: a

massive amount of data on customer behavior.

They can look at information about you and and other folks like you, and

they can then have, you know, their technology can make predictions that

says, hey, this product, there's gonna be others that want it.

There's demand for it. So if we get it back and we get it back in the

region where it was shipped, we actually think we're going to be able to

ship it to a buyer in that same spot.

But then there's all that packaging waste created by returns, which Amazon

is trying to reduce. Kohl's and the Amazon pickup locations generally are

using poly bags and other kinds of containers when they aggregate all of

these returns together to dramatically use less packaging.

Amazon has also replaced many cardboard boxes with more lightweight

plastic mailers, although these mailers aren't recyclable in curbside

bins. It claims the plastic mailers have reduced packaging waste by 16 %

and eliminated the need for more than 305 million shipping boxes in just

2017. And last month, CEO Jeff Bezos pledged to make Amazon carbon neutral

by 2040.

While Amazon works to cut down the waste and high cost of returns, there's

a whole other side to it: a growing market for companies and individuals

that make money off returns.

It's sort of a new business that kind of started from this e-commerce that

nobody ever thought of.

One example is a company called Happy Returns.

It has 700 return centers at malls and inside stores where customers can

come return items from about 30 popular online stores.

Happy Returns gets paid by its retail partners to aggregate all its

returns. Saving money on that last-mile delivery person who would

otherwise need to make multiple stops.

It claims to save e-commerce retailers 20 to 30 % on shipping costs.

The store or mall also pays Happy Returns a fee, hoping the concierge

service will bring shoppers into its stores.

There's also a market of third-party companies that buy returns in bulk,

repackage them, sometimes with added accessories, and resell them for a

profit. So you can go to some of these third-party companies and and buy

things that have been returned, kind of almost like a salvage process.

And the really fascinating thing is some of that ends up back on the

Amazon marketplace. There's also a growing number of companies

specializing only in reverse logistics.

GENCO, for example, was bought and rebranded as FedEx Supply Chain.

It helps liquidate returned inventory by sending it to smaller markets

like Brazil. It finds a market or place for donation for products that

won't sell in the U.S.

Think: the Super Bowl champions t-shirt of the losing team.

And of course there are discount retailers like T.J.

Maxx that buy returned and unsold merchandise in bulk and then market it

up and sell it to consumers.

So we should absolutely be paying attention to the returns market.

And there's significant economic opportunities for companies that are able

to help retailers with this problem.

Meanwhile, Amazon itself is still working to make returns more profitable

by making the process easier and keeping its customers coming back.

Amazon is definitely not perfect at this whole returns process and there

are places where other retailers might be more ecological or do something

better. But on the whole, Amazon is driving a lot of the innovation in the

returns market. So more so than reducing their costs, they're saying let's

make it really easy and hassle-free for customers to return and that will

make customers trust us more and more confident that they can buy from us

instead of one of our competitors.