You’re buying a dress or jeans online – why not buy two or three (or more) to make sure you get the right size and return the ones that don’t fit.
This is one of many reasons that shoppers return goods to retailers. Other reasons include damaged or defective products, description mismatches, or a dislike for the product.
The generous returns policies are often a key influence in whether a shopper picks one online retailer over another.
But it’s not all rosy. First off, returning online purchases to warehouses (known as ‘reverse logistics’) is environmentally costly. Not only do the clothes have to be brought to your house in a van, but they must then also be returned to the distribution centre—effectively doubling the road miles. Many retailers also find it more economical to simply discard the returned clothes.
Secondly, returned goods are expensive for businesses. Online sales in the US for 2022 were c. $1.3 trillion. Further, returned goods are estimated to be $213 billion, or 17% of total. CBRE estimates that it costs $33 per $50 of purchases for a retailer to process a return.
In other words, for a pure online retailer, returns absorb upwards of 10% of revenues – a significant chunk of profits.
The Future of Online Retailing
It is interesting to note that there is one major retailer that never jumped on the bandwagon – Primark, owned by Associated British Foods (ABF), a stock that we cover.
Primark never offered online shopping of any kind, arguing that it couldn’t make sense of the economics. It chose to bide its time and think through its options.
First came the re-development of the Primark website, so that shoppers could see specific stock levels. Second came the introduction of a click-and-collect offering.
The roll-out is happening slowly, with limited commitment until management is certain the idea makes economic sense.
The fruits of this effort can be seen in a comparison with competitors. Boohoo and Asos, both leading online retailers, have seen their share prices fall 70-90% over five years, while ABF is down 17%. Not a great investment outcome – but ABF has, undoubtedly, avoided much of the value destruction seen in other parts of the industry.
This analysis of online retailers, returns, and Primark is part of our ‘Did You Know’ series. Each essay is a short discussion of a topic that we hope is interesting and educational for our readers, while also deepening our own understanding of the stocks and funds we cover.
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