Return Rates: A Real Headache for Fashion Retailers… and the Environment

Subscribe to our newsletter here.

After 2 years of lockdowns and disruptions, UK fashion retail is beginning to steady. We expect the size of the UK fashion market in 2022 to be just about back to 2019 levels but retailers need to account for a big return rate hit looming on the horizon.

Along with the massive shift to online retailing, average return rates from Aug — Oct 2021 are up +1% on 2019 rates. Together that means that there were 90m more returns in 2021 compared to 2019 and that number is set to reach 121m in 2022. The costs of processing these returns alone will cost the industry £1bn (up by ~£420m since 2019). This inefficiency will negatively impact EBIT margins by 1%.

An additional 121m returned items isn’t just going to hit margins, there is a substantial environmental impact too. According to Optoro these additional returns will be responsible for an additional 400k metric tons of CO2 (equivalent to 4,574 double-decker buses of waste and 1.6m hours worth of flight emissions!) as well as some additional waste in landfill for those products that cannot be sold on.

Fashion Retail Over the Last 12 Months

Last year (due to store closures) we saw a big overall increase in online shopping (50%) but the mix of products shifted to reflect a more casual wardrobe. This change in product mix meant that most retailers had a real cash bonus as return rates dropped by 21% (8%pts) across the board. You can read more about this in our blog last year here.

Now that the industry is steadying (with stores mostly open), the picture is different.

Expected Size of Fashion Industry 2022 Back to 2019 Levels

The latest quarterly results across the industry show the market size is pretty much back to 2019 levels (with some clear winners and losers). We expect growth in 2022 to be limited due to inflation and further supply chain disruptions.

25–30% Permanent Shift to Online

The pandemic has also accelerated the shift to online. We estimate there has been a permanent shift of 25–30% to ecommerce. Ecommerce now represents 50–60% of revenue for traditional B&M retailers. This is as we predicted back in 2021.

The average growth of the online channel for Bricks and Mortar retailers in the last 6 months vs 2020 is 24.7% (up 95% on 2019). Similarly, average growth rates for the online pure play retailers is 23%.

Product Mix Back Inline With 2019

The other big shift is a return to a more “return rate heavy” product mix. Dresses, Tops and Jeans/Bottoms are typically the 3 largest categories. Pre-pandemic dresses were typically 16% of the product mix, declined to 11% in 2020 but Dresses are now back to above 2019 levels. The chart below shows the changes in product mix and the corresponding return rates for these categories.

This product mix change has increased the return rate by 2.17%.

Casualisation of Fashion

When you dig deeper into each category you can see that there is a move to a more casual wardrobe. The chart below illustrates the changes within Dresses.

This is the same across the board with return rates within categories reducing. Reducing the return rate by 1.27%.

The combination of product mix change and the casualisation of fashion therefore gives an overall increase of 1% in 2019.

Reasons for Returns

Multiple Style Options is the Big Growth Area in Return Reasons

Rather than rely on reason codes (that are less accurate), we use a data-driven methodology to get a sense of the reason for garments being returned. We split the returns into 3 categories:

• When size is the issue (when the same customer buys the same product in more than 1 size over any number of orders within a year)
• When style is the issue (when the same customer buys multiple options of the same category within the same order, having removed multiple size orders)
• When it is a single size and single category product

Typically the % of returns breaks down as follows:

Although those reasons do vary by garment category.

When you look at the return rates within each reason category, we typically see the below:

When return rates for any multiple size purchase are at 85%, it suggests that the size wasn’t the issue but that the product wasn’t right in any case.

And over lockdown we have seen the biggest rise was in customers buying multiple options (19%) but also in customers buying multiple sizes (11%) and a decrease in customers buying single size single product (-10%).

This suggests that customers are uncertain of what works best for them. Given both of the first 2 reasons have higher return rates this uncertainty will also be contributing to higher return rates.

Overall Return Rates

So all of this means that return rates for the period from Aug — Oct 2021 vs the same period in 2019 are up 1%. We predict therefore that the return rates for 2022 will be either inline or approximately 1% higher than 2019.

What This Means For Margins

Obviously, this shift to online retailing and return rates increase plays out very differently depending on whether it is an online pureplay or bricks and mortar retailer.

Let’s assume 2 fictional retailers, both with gross revenues of £500m in 2019. The first is an online pureplay retailer and the other a traditional bricks and mortar retailer. Let’s assume each retailer follows the average movements within their category.

Online pureplay retailers are having an easier time of it, with average growth rates over 20% and reduced return rates in 2020 and 2021, surplus cash has been considerable (and at least a decent buffer against the recent increased supply chain costs). We predict 2022 return rates to be inline with or slightly higher than 2019 and so although the online retailers will have additional growth, we expect their overall EBIT margins to be negatively impacted by about 1% (not including impacts from supply chains).

For B&M retailers, it is a different story. Although the online channel has doubled since 2019, overall revenues have declined. So, even with the decrease in return rates that gave the online retailers a boost to their contribution margin, it doesn’t make up for the loss in retail sales. As 2022 reverts to 2019 levels but with a higher online percentage and increased return rates, we expect the traditional players to see their EBIT margins negatively impacted by 8% or an additional cost of £15m. Again, this does not include the increased costs of supply chains.

There Are 2 Other Big Shifts That Have Taken Hold Over The Last 2 Years

1) Sustainability

As one of the biggest offenders when it comes to sustainability, fashion has a long way to go to improve its sustainability credentials. Whilst the consumer does yet not always vote with their wallet on this one, sentiments are definitely changing. Most retail bosses understand that even if their consumer is not completely there, most governments are. There is now a necessity to ensure their businesses are more sustainable (2nd biggest opportunity and challenge as stated in the McKinsey’s latest “State of Fashion report 2022”).

But this is not just about better materials, there is so much every fashion retailer can do very quickly TODAY to lessen their impact on the environment.

Returns are just one example. Online returns are typically 3x higher than instore returns. Online returns typically take longer and depending on seasons and styles can be tricky to resell. According to Optara online returns are responsible for 14% more waste. They calculate that every 100m returned items results in approximately 100m lbs of waste in landfill and 300k metrics tons of CO2 emitted.

Returns are a natural cost of doing business online but that minimum natural cost is at least 20% lower than the current 28% return rate.

2) Data Driven Retailing

On the one hand, the rise and rise of Shein proves that the consumer isn’t really there yet from a sustainability point of view but on the flipside, it more than proves the power of data driven retailing.

Now that the majority of most fashion retailers revenue is online, all those retailers have the data they need to implement much better retail practices to ensure that as retailers, the right products in the right quantities and right sizes are produced and that customers are buying the right items in the first place.

Harnessing the power of this data can significantly improve the customer experience, reduce returns to a much lower level and reduce the waste every fashion retailer produces.

What Can Fashion Retail Bosses Do About it

Make someone in the c-suite responsible for returns: Whilst most fashion retailers understand the impact their returns experience can have on customer loyalty and their bottom line, it always amazes us that no one person in the business owns this metric.

Take the time to analyse the data to state the problem (rather than trying to solve a problem you assume exists): Most retailers assume that confusing sizing is the core reason for returns (and, to be honest, so did we when we started!) but a deeper look at the data tells a very different story. We have had much better success reducing returns with our return rate propensity model feeding into the recommendations. Only showing customers items they are likely to keep, it turns out, is a quicker and easier way to reduce them.

As a side note here, it kind of makes sense, 70–80% of any retailer’s revenue comes from their top 20–30% of customers and they typically know their size. Those heavier customers are also responsible for the bulk of the returns so is more likely to be other reasons than size.

AI Artificial intelligence is going to become increasingly important in managing returns: Both in terms of what a customer buys and how the whole logistics process works. There are plenty of companies that are there to help retailers minimise this issue. But, going back to the first point, retailers need to be ready with someone in the c-suite owning the metric, get to grips with technology and be ready to transform their returns processes.

Educate the consumer: Show your consumers that you care. Help them understand things they can do to make a difference: ASOS does a good job.

1) Mid market squeeze: As inflationary pressures set in, luxury is likely to be more resilient whereas consumers who feel the squeeze will trade down to the value retailers

2) Online pureplays to see growth rates reduced to average 13% in 2022: Growth in revenue will offset the margin squeeze that comes from increased return rates but will need to be accounted for.

3) 55–60% of B&M revenue will be from online channel: It will be lower than the 70%+ we saw at periods of 2020 and 2021 but settle around the 55–60% level

4) B&M retailers will see additional pressure on margins: We expect the growth of online to continue to grow (probably by a similar 10–13%). That, with the additional return rates, means a £500m retailer will need to find an additional £15m of cash to pay for the squeeze.

5) Minimal lockdowns: But unsure as to where people spend their discretionary income

6) Return rates will be 1% higher than 2019: Depending on inflation, but even then expect it to be inline with 2019 (Sarah predicts 1% rise, Tash predicts 0% on 2019 and James predicts 0.5%-1% increase in return rates)

7) Category specific Shifts:

• Dresses, Jeans & Sportwear will continue to grow as a % of mix (although smaller increases)
• Big increases in Swimwear (high return rates) and other holiday categories

Originally published at https://dressipi.com on January 10, 2022.