Online shopping, be it groceries, household items, gadgets or clothes, has made life easier for most Indians. But often, products need to be returned because they don’t match our standards, fit us or they could be expired. While this is an extra chore of the buyer, product returns are also a headache for businesses. As the e-commerce industry in India grows, so has the rate of reverse logistics.
Reverse logistics is when customers return products to the seller and opt for a refund or exchange of a particular product. The report ‘India Reverse Logistics Market Report 2022-2027’ states that India’s reverse logistics market is growing at a CAGR of 6.15% and is expected to reach $ 39.81 billion by 2027.
Changing consumer behaviour and the way Indians shop online have prompted every e-commerce brand to have a return policy and process in place to ensure customer satisfaction. While reverse logistics is expensive and adds to the cost of an e-commerce business, it has become a booming industry in itself. However, it remains a challenge for the e-commerce industry as lower volume for transportation, the need for separate warehousing and general transportation costs make reverse logistics more expensive.
What Does The Process Look Like?
Just as a product travels from a factory to a warehouse to a pick-up hub and then to your doorstep, the process of reverse logistics is similar but goes backwards.
Even a decade ago, consumers in India mostly bought products from physical stores. Returns used to be infrequent and only if the product had a defect, was expired and had size issues in the case of clothing. Today, the reasons for returning have changed. Consumers return products for a variety of reasons, including dissatisfaction with a product, dents, packing issues, or just changing their minds.
Mehul Kapadia, chief revenue officer at logistics solution provider Locus, told The Core, “Amazon introduced the service of returning a product for free. If you don’t want the product, without looking at or opening the package, you have the choice to return it. The idea was to lure in more consumers with a free return policy. From there to now where we have reached, in 2022 about $ 816 billion worth of returns happened in the US.”
Getting a sold product back to the warehouse also involves a quality check, refurbishment and return to the shelves for reselling. In the case of a damaged product, it is usually scrapped.
Waking Up To Needs Of Reverse Logistics
With the increasing need, companies are now strategising to come up with seamless operations for returning products. There has been a shift towards having a separate warehouse to store products that have been returned.
Varun Gada, director of LP Logiscience, a logistics and supply chain solutions provider, said “Larger companies are getting a separate warehouse or separate facility that deals only with returns because the process for such returns is to go through a quality check whether they can be put back on the shelf, whether there has been some contamination, or a specific part of the product needs to be replaced. Several tasks must be completed in a particular warehouse. As a result, reverse logistics is handled in a different facility.”
The volume of returns for a particular brand or business is also key in reverse logistics. Sometimes trucks set aside for reverse logistics stay empty or have a minimal load. This is not an India-specific problem. In 2020, nearly 20% of the road freight in Europe faced inefficiencies due to empty-miles, covering a distance without any freight. This inefficiency has an impact on the transportation costs and the overall logistics ecosystem.
Pawan Kumar, co-founder and CEO, ShipEase, that specialises in reverse logistics, told The Core, “To manage a route for forward and also a reverse logistics is a critical task. You need to assign a person for pickup, and design a specialised route for pickups, these things are challenging. Such things are managed well in metro cities but in the tier 2 or Tier 3 cities especially just to get one reverse pickup the cost is extremely high.”
Returned Products Cost Companies
Many e-commerce companies have a no-return policy or intentionally complicate the return process because of the high costs of reverse logistics. Larger brands, engaged in bulk manufacturing and that higher sales volumes, frequently opt to refund customers instead of retrieving damaged products, as it proves to be a more cost-effective approach.
The additional procedure of inspection, quality check, sorting and packaging of the returned product is also an expenditure for the business.
Sunny Choudhary, co-founder of Khubsoorat Eva, a Jaipur-based apparel business, said, “On average if 1000+ orders are delivered in a month, about 100 would come back for an exchange/replacement and these also include products that are not delivered. All the return to origin (RTO) and returned products go through a quality check, and if required washed, ironed and added back to our inventory. We have specially hired two men for this job and about 20- 25% of our profit margins are invested into reverse logistics.”
After a returned product is quality-checked, the product has to be put on the inventory. This involves refurbishing, repackaging, and relabeling, which adds to costs.
Quality checks are essential. Often products that are returned are not the ones that were delivered. Kumar said, “For example a customer orders a pair of Levis jeans and since the first or second copy is readily available in the market, if a customer is smarter and if a customer wants to play around, they will return the first or second copy and not the original one. To make sure the product is the original one, we do a quality check at the time of the pickup in front of the customer.”
Disposing returned products that are not resold can involve recycling, scrapping, or landfill fees.
H&M began charging consumers to return online items in selected European countries, including the United Kingdom (UK). Zara also charges customers a return fee for products returned via mail in Spain, the UK and India. The charges of return differ in different countries.
“We provide only size exchange and product exchange policy. A customer needs to inform the team if they need an exchange within three days after the delivery. But this service is not free of cost. The consumer has to pay Rs 140 for the reverse logistics service, Rs 70 for pickup and Rs 70 for the next delivery. There are scenarios where not all customers are always willing to pay the price, so we also have to bear the price because customer satisfaction is more important for us and we believe they should get the desired product in the right size,” said Choudhary.
Lost In Transit
Transporting a product back to a warehouse sometimes turns out to be the most expensive part of the process. According to Deloitte, the cost of transportation for collecting a returned product can go up to 60% of the total cost of reverse logistics.
Gada said, “The expense of reverse logistics is usually covered by the manufacturer or owner of the package. However, if there is damage during transporting or packing concerns, either the logistics provider or the warehouse must make up for the loss to the company.”
While signing a deal with the e-commerce company, logistics service providers usually sign a contract of negotiation that includes reverse logistics costs, misplaced or damaged products, and more. It is also important for a logistics company to understand how efficient they are in the operations and the contract negotiations.
“In scenarios like accidents of a vehicle and cargo getting damaged in the course of that accident is covered by the company's insurance policy. But of course, there will be a clause (in the contract) that there will be a minimum deduction of Rs 5,000 from the service provider. That's how the contracts are framed because, for a very small insurance claim, they don't really want to go to the insurance company. For a smaller customer who is doing 10 trips in a month, the clauses won’t be there and they will have to claim insurance,” Gada said.
What Happens To Returned Products?
The first priority for businesses is to return products back to the shelf to sell it again.
“If the product return is related to a customer changing their mind of course, our first motion is to put that product back on the shelf after a quality check process,” said Gada.
Faulty packaging is typically replaced, while damaged products are returned to the manufacturer.
The fast-fashion sector has a high return rate but they’re also easily sold in the second-hand market. “In the case of shoes when they come back spoiled, for example, a white shoe has a brown stain, maybe because someone used it, then in such a case, we try to either wipe it off with a solution and try to make good of that shoe. Again, if that doesn't work out, then that shoe will get scrapped altogether. When it's cracked, it's not just given away to a scrap vendor, it has to be destroyed completely otherwise, the scrap vendors will start selling it and the customer will kind of end up finding them in second-hand shops.”
To avoid this, brands collaborate with third-party logistics (3PL) service providers.
“You need the end user to be safe. So selling the returned products in a second-hand market depends on the scrapping policy and the level of control the 3PL provider has over the process,” Gada said.
For products like makeup, for example, a lipstick, if it only has a scratch on the outside, it is taken apart. The inner portion is then returned to the manufacturing unit for potential reuse in creating a new product. However, if the lipstick has melted or is misshapen, it is scrapped.
Khubsoorat Eva follows the traditional method of accepting the returned products, going through a quality check, washing, ironing and repacking the product to make it available for reselling.
How To Bring Down Costs
The Indian reverse logistics market is only going to get bigger. Kapadia suggests that companies need to begin innovating on how to resell returned products to make up for the cost of reverse logistics.
Understanding the reason for the return of products for a particular business is also important.
Kapadia said, “We first need to understand what is your first attempt delivery rate, are you able to deliver in one go because a lot of times the return could happen because the customer is not available and it is not a consumer-triggered return. Next, understand if the operational chain is the reason for return. In terms of apparels, for example, there's an estimate about 19% of the people who are ordering apparels in multiple sizes with a thought that if one does not fit me, the other one would fit me and I can make an easy and free return. So a lot of cost economics will work on what are the reasons for the returns happening.”