E-commerce orders could be harder to return this holiday season as retailers try to maintain margins

Direct-to-consumer companies as well as e-commerce platforms Flipkart and Amazon may raise the bar on accepting returns more than in previous holiday seasons to maintain margins by eliminating the costs of reverse logistics, staffing and packaging, said two executives aware of the matter.

In the last three months of the calendar year, when e-commerce companies typically have sales around major holidays like Dussehra and Diwali, product returns go up by as much as 30% compared to days when business is normal, according to Shashwat Swaroop, co-founder of GoKwik’s Return Prime returns and exchange optimization platform.

Common ways to limit returns, executives said, include shortening the return window, charging a return fee to frequent customers, offering store credit only and not allowing payment at the time of delivery. Swaroop added that in some cases, retailers can be lenient with loyal customers while limiting choices for others.

E-commerce companies, especially marketplaces, have been trying to clamp down on returns over the past few years. Last year, Myntra introduced a fee of ₹199 to ₹299 for customers with a high return rate. However, with the increase in the return rate, now more than ever they are scrutinizing consumer behavior.

Amazon, Flipkart and Nykaa did not respond to queries sent by Mint please comment on this matter.

A Growing Problem

Product returns are becoming increasingly burdensome for e-commerce companies. Initially a customer-attracting function, it could cost Indian e-commerce companies $20-30 billion in revenue by 2025, according to Return Prime. E-commerce in India is expected to be worth $188 billion by 2025, according to Brand Equity India Foundation, citing Grant Thornton estimates.

And while e-commerce sales have jumped 38% during the pandemic, the return rate has doubled. According to the founder of an online clothing company, who wished to remain anonymous, there are more returns during the holiday season.

“Attractive offers on online platforms have led to an increase in impulse purchases and, as a result, a greater chance of buying something that you didn’t really like or need. In the case of clothing, it is also possible that customers bought something that they were only going to wear for an event,” the director added.

Reverse logistics costs can be burdensome. From picking up a product, sending it back to the warehouse, performing quality checks and ultimately refunding the money, companies tend to lose margins, according to Satish Meena, an advisor at Datum Intelligence.

“Returns typically account for 10-12% of the total cost of a product, leaving brands with very little profit. In some cases, brands may have to pay out of pocket to facilitate the return,” Meena noted.

According to Datum Intelligence’s 2024 Holiday Sales Report, the biggest online purchases during the holiday season are in the fashion category, followed by food and personal care.

The largest returns are for fashion, which includes accessories, handbags and footwear. Personal care and electronics products can only be returned in exceptional cases of defects or damage during shipping. Nykaa’s fashion business’s net sales value (NSV) accounted for 30% of its gross merchandise value (GMV) in the quarter ended June.

“The higher the number, the better, as it indicates that brands are losing less money on each returned order,” said Meena of Datum Intelligence. Although NSV includes discounts and cancellations, it can be a good metric to assess a company’s ability to turn a profit.

Difficult to implement

It is important to note that consumer goods companies are unlikely to implement aggressive strategies to limit returns, but will instead adopt a more gradual and quiet approach.

“Returns and exchanges are key value drivers for online businesses. Many consumers only shop online if they have the option to return an order,” Meena said, noting that any major policy change could have a direct impact on sales.

Swaroop of Return Prime found that eliminating returns altogether will result in a 50% drop in GMV, and nearly 85% of shoppers remain loyal to companies that offer easy returns.

However, many companies are factoring the cost of returns into their prices. Online retailers including Nykaa and Myntra now charge customers a platform fee to account for possible order returns.