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The Economics of Free Returns: The Winners and the Losers

I’m a self-confessed “non-shopper.” I do admit though that online shopping may have changed that a bit for me, and the real game changer—free returns. Imagine browsing online, never having to leave the comforts of home, and really just wait for the goods to arrive, try them on (or not!), then return for free if and when those don’t work out.

Returns…there’s a fancy name for that, and it’s called “Reverse Logistics,”, and there seems to be a whole industry built around it. And with increased competition in online shopping and the declining popularity of actual stores, it has become a booming industry.

I have been wondering, though, and mostly from a sustainability standpoint, what happens to the merchandise that we return and what the true costs are of such decisions? So before we dive into that, let’s track where the stuff we return end up going. Fair warning, it is not a straightforward process.

Some companies reallocate returned items to fill demand in specific geographic areas. For example during the pandemic, American Eagle sent returned leggings to Vietnam to fulfill an increased demand in the region. Other items are sold in secondary markets like eBay, ThredUp, who have the capacity to resell the items usually online, and some are sent to third party liquidators like 888Lots, who in turn sell them to resellers. When they end up with these liquidators, we at least try to keep these items off our landfills. But that’s not usually the case. For some items that get returned, the cost of these items are sometimes higher to reshelf, restock or liquidate so much so that the retailers end up telling the customer to keep them or toss them out. These will end up most likely in our landfills. For instance, mattress companies usually offer a 100 day trial period for mattresses some like Nectar offer 365 day guarantees.

What happens to those mattresses that get returned? They end up in recycling facilities, but many of them end up in landfills.

Workers endeavor to recycle mattresses, a noble job indeed.

It’s no surprise that the cost to sellers are enormous when you consider that around 10 percent of merchandise are returned. Taking into account the product’s cost as well as inventory costs and even shipping, and we are talking about billions of dollars. Despite all these though, retailers are reluctant to discourage customers from returning stuff because it discourages them to purchase these items in the first place. And for some consumers, the absence of free returns can be a dealbreaker so much so that some retailers like Target even make it easy for customers to return items by offering up a drive-up window.

The cost to the environment on the other hand is quite difficult to track especially if we try to consider attaching dollar values to these. The incentives for retailers to throw away these returned items are higher because it is much cheaper for them to just dispose of these than finding ways to recycle them. But the costs to the environment is much, much worse. Carbon emissions caused by shipping these returned goods amount to 4,500 tons of per year. When a returned items go to a landfill, they are tightly packed under a heavy layer of dirt, rubber and clay. As they decompose, methane gas rises and goes into our atmosphere, pollute our drinking water, etc. When we factor in the snowball effect of all these, they translate to increased costs related to health, ecosystems and even to the economy as a whole.

So how do we reconcile these seemingly irreconcilable objectives? I think it makes for a complete change in mindset. Clarifying return policies and reducing return windows encourages customers to really think through their purchases before checking out. Another way is to discourage return labels. By adding an extra step, consumers may find it more of a hassle to return items. Encouraging and incentivizing exchanges instead of refunds may give customers some pause before the purchasing different sizes of the same thing. Consider donating first instead of discarding. Reselling Used Items within a company’s own brand at a significant discount allows customers who cannot afford it at regular prices to purchase them. All of these suggestion are part of what could be a profitable and socially responsible “Green Shopping Initiative.”

This underscores an important aspect of Economics—incentives. If we use incentives to promote the underlying goal of sustainability, i.e rewarding green shopping practices more, maybe we could all end up winning after all.

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