Returns are a major headache forcustomers, and they drain companies of millions of dollars in unwantedinventory and extra labor.
Returns create billions of pounds of wasteand entire walls of shame in warehouses around the world. But Amazon is trying tochange all of that. Where Amazon absolutely leads is in tryingto be the easiest, the lowest friction return experience for theconsumer and thereby win customer loyalty and increase customer purchases whilethey tackle some of these other big institutional infrastructureproblems around returns.
From robots to in-person returns, theworld's most valuable company is redefining the returns process. And as e-commerce grows, smaller companiesare finding ways to make money off returns. We wanted to findout how does Amazon process returns? And what's the company doing toprotect the environment and its bottom line? Returns are by farthe largest challenge to e-commerce, and I think to commercein general for both retailers and manufacturers.
As more consumer spendingis shifting from in-store to online, it's really just exacerbating thesize of the returns problem that we all have to deal with. Acrossthe entire Amazon marketplace, you know, they now sell over800 million products. So this is a scale that the worldhas never had to deal with before. There's even an annual conference devotedentirely to solving the problem created by returns, namely inefficient reverselogistics is a huge loss for companies,.
In a traditional brickand mortar store we might have average return rates of 8 to 10 %. But in e-commerce, it's totally common to see20 or 30 % of all purchases get returned. Forrester Research estimatesthat e-commerce will see $207 billion worth of returns this year. Amazon is about half of all e-commerce,so slightly more than $100 billion dollars in returns happen inNorth America just with Amazon.
So that's a huge expense. And the returns processmatters to customers. According to data compiled by Invesp,79% of consumers want free return shipping and 67% check the returnspage before making an online purchase. All this has led to the currenttrend of free return shipping, which is now offered by almosthalf of retailers. Where the challenges is, is can you doit in a way where the unit economics don't kill you? The difference with Amazon is theyhave the scale and they've trained their investors to accept that in thebeginning they may do things at a loss.
What that gives them the flexibilityto do then is to invent. They bring a lot of talent to thetable and they figure out how to optimize and create efficiencies that willallow them to have the unit economics work to their favor andultimately get those margins back. The complicated reverse logistics journey startswhen you decide to return an item. Amazon gives you 30 days fromthe day you receive an item to bring it back or put it in the mail. Generally you get 30 days.
And generally they give your moneyback and even include paying for shipping both ways, right? Which has inspired other companiesto have to follow suit. And with every return, Amazonwants to know why. 34 % say the size,fit or color was wrong. 21 % say the item wasdamaged, broken or no longer functional. 14 % say the item wasn't as described, 10% simply didn't like it and 9 % changed their minds. Amazon sees ontheir scoring system that you're a customer that abusesthe return policy.
It is possible that they'll chargeyou a fee for that out-of-reason return, whereas for a good customerthey might continue to offer that return for free. Whether a return isfree also depends on the method you choose for that return. That menu isgoing to vary slightly depending on your geography and the item.
A popular thing that they'll do is youput it back in the box, you seal the box and we'll send someone to yourhouse to pick up the box and they're going to chargeyou for that option. If you live in a place wherethere's literally no other options, they may offer that for free. But in most cases, they're going to say,if you bring it to a UPS store, it's free.
But for certain itemswhere the reverse logistics costs way outweigh the potential value of theitem, if you're not someone that they've identified as a return abuser, theyvery likely are going to tell you to just notworry about the return. The returns process is now so easythat customers have been caught gaming the system. One man reportedly scammedAmazon out of $370,000 by sending back boxes of properly weighted dirtinstead of the returned products. Amazon has also banned customers who appearto be conning the system by making too many returns. In all, return fraud cost to theretail industry $18 billion in 2017.
You have a secret credit score thatsays how profitable and how good a customer you are for that retailer. A particularly egregious and common versionof this is there's a huge spike in TV sales the week before theSuper Bowl, and there's a huge spike in TV returns the weekafter the Super Bowl, right? So increasingly your own behavior canimpact the returns experience that you get. But even those items thatare legitimate returns can create a lot of pressure, specificallyon Amazon workers. For every package you return fromyour doorstep, there's a delivery driver who has to pick it up and getit started on that journey back to the warehouse. It's those boots on theground that cost Amazon the most.
As more of Amazon's overall volume getsshifted from UPS and the U.S. Post Office to Amazon's own deliverynetwork, they're also able to handle a lot more of the returnsthemselves and the logistics of picking something up at someone's house andtaking it back to the fulfillment center are actually harder and moreexpensive than the logistics of delivering something to the home. Amazon has one big way to relievethe pressure on its drivers and its bottom line: use youfor the delivery. In July, Amazon expanded its partnership withKohl's to allow items to be returned without a box at anyof Kohl's 1,100 stores for free. If they have to go to 100hundred consumers' houses and collect one box for a return, that's much moreexpensive than having those hundred consumers all go to one Kohl's. Kohl's needs traffic. Retailtraffic is down.
You've got to find a wayto get people in the stores. They're now getting the Amazon customerinto their store who then has money in their pocket after a return. It's a great opportunity. So far, Kohl's saysresults are promising. The net impact of the traffic andsales we're getting and then considering the support that we're leveraging. So in terms of the support insideof our stores, reverse logistics, all of that is expected to be apositive EBIT contribution for 2019.
So we're early days, but we're highly encouragedand we do see this as a profitable venture for the company. If the cost of me handling the return,which by the way they're going to help pay for, is lower than gettinganother pair of shoes sold to the person walking in, then it'sultimately a net gain. In the world of Amazon partnerships, thisKohl's deal is almost unique in how favorable it is for both parties. According to data compiled by Invesp, 62% of customers are more likely to shop online if they canreturn an item in store.
With Amazon, you can also return items inperson without a box to one of 2,800 Amazon Hub locker locations, which canoften be found at Whole Foods or college campuses. Depending on your location, you can alsoreturn items in person at UPS stores and a growing number ofAmazon Books and Amazon 4-star stores, although this does sometimescost a fee. Other retailers are trying to catchup with Amazon's in-store return options. Walmart has actually created aseparate return line so that you don't have to wait in line behindother people trying to get Walmart service. Target has set up dedicated e-commercespace in the front of the store. at Nordstrom's Local stores inNew York and L.A.
you can now return items purchasedonline from other retailers like Macy's and Kohl's. And FedEx announced this monththat consumers can now drop off their online returns at thousands ofWalgreens stores and print their return labels in store too. UPS also unveiled a similarpartnership this month, allowing pre-labeled returns at 1,100 Michaelsstores in the U.S. Amazon and everybody else is constantlytrying to enhance that user experience and figure out howdo you best do that? But you still havethe reverse shipping. You have to pay forthat shipping to go back. You have to dealwith the item itself. How do you file it away? How do you deal with it?This creates another big challenge.
The reality is it often ends up ina place of limbo, a place that some retailers call the wall of shame. Sometimes we've seen it as high as like,you know, 50, 60 ,000 square feet of just all items that are justall returns, all mistakes, all the stuff in there. And we're talkingabout thousands of items.
We sometimes talk about millions ofdollars in inventory that is just sitting there and it's just costing them toomuch to try to fix that issue that they just push it aside. That's what happens. It's at thewall of shame where L.A.-based startup inVia says its 400robots deployed in U.S. warehouses are makinga big difference. The robots can be programmed to processreturns in a way that's custom to the needs of a company. Customers wouldapproach us and say, what can you do to just fix my wall of shame? That's what we want the most. So with our robots, as the items comeback we're actually able to go in and file them away so we're takingaway that pain point of moving the items back.
InVia is now programmingits robots with separate software entirely devoted to returns. For example, after Christmas, there mightbe a lot of Christmas returns, which nobody's probably going toorder til next year. And we'll go file itaway pretty far away. These robots are meant to offercompetitors an alternative to Amazon's Kiva robots, which were used by storeslike Walgreens, Staples and The Gap before Amazon bought Kiva in 2012.
A major difference: inVia's robots can handlesmall totes up to 40 pounds, often carrying one individual item,while Amazon's robots move entire 1000-pound shelves all at once. InVia says this more finite control helpscut down on one big reason for returns: the warehouse worker accidentallyboxing the wrong item. We only present theperson with one item. If you look at the Kiva case, you havea big rack with a bunch of items. There's a guided pointer that points youbut you can still make a mistake. You know, you're trying tomove these things in seconds.
So with our robots, we onlypresent them with one choice. So there's a very, very lowprobability that they'll make a mistake. Amazon says its Kiva robots are notused in areas that handle returns. InVia wouldn't disclose if it's beenapproached by Amazon about acquiring its robotic return software but did confirmit's been in talks with a lot of Amazon's competitors. So far inVia's robots arebeing used in Rakuten's U.S.
warehouses and smaller companies likediscount e-commerce retailer Hollar. Once returned items are sorted by human orrobot, it can still be a major problem to find the best use or them. This can lead to a huge surplusof inventory, wasted fuel emissions and unnecessary packaging to handle it. In a nutshell, returns arehard on the planet. As much as five billion pounds of wastegets thrown away as a result of these returns that can't be resold.
So to put that in perspective, that's250,000 garbage trucks full of goods that people bought, half of which fromAmazon, and then ultimately had to be thrown away becauseit couldn't be resold. The environmentally unfriendly disposal ofunsold and returned inventory has made big news. Burberry famouslyrevealed last year that it incinerated 28.6 million pounds of unsold and returnedproducts, a practice it's since stopped. Earlier this year it wasreported that a single Amazon facility sent 293,000 products to a garbagedump in just nine months. And after a documentary found Amazondestroyed three million products in France last year, the country vowedto outlaw the destruction of unsold consumer products by 2023. That, of course, isan ecological disaster. What's super interesting, of course,is consumers are increasingly sensitive to that. Even when destroying the product isthe best economic option, retailers are having to pivot away fromthat because consumers don't like doing business with theseecologically unfriendly companies. In response, Amazon launched aprogram called Fulfilled by Amazon Donations. Starting September 1st, donationsbecame the default option for all sellers when they choose how todispose of their unsold or unwanted products stored in Amazonwarehouses in the U.S. and the U.K. And that's entirelya result of customer sentiment pivoting away from Amazon. According to Narvar's 2019 consumer report,52 % of shoppers said they would go in-store to return itemsif it helped reduce the environmental cost of returns.
Amazon also has a program calledAmazon Warehouse, which sells renewed goods at a discounted rate. Another big tool Amazon has to helpcut down on wasted inventory: a massive amount of dataon customer behavior. They can look at information about youand and other folks like you, and they can then have, you know,their technology can make predictions that says, hey, this product, there's gonnabe others that want it. There's demand for it. So if we get itback and we get it back in the region where it was shipped, we actuallythink we're going to be able to ship it to a buyer in that same spot. But then there's all that packagingwaste created by returns, which Amazon is trying to reduce.
Kohl's andthe Amazon pickup locations generally are using poly bags and other kinds ofcontainers when they aggregate all of these returns together todramatically use less packaging. Amazon has also replaced manycardboard boxes with more lightweight plastic mailers, although these mailersaren't recyclable in curbside bins. It claims the plastic mailers havereduced packaging waste by 16 % and eliminated the need for more than305 million shipping boxes in just 2017. And last month, CEO Jeff Bezospledged to make Amazon carbon neutral by 2040. While Amazon works to cut down thewaste and high cost of returns, there's a whole other side to it: agrowing market for companies and individuals that make money off returns. It's sort of a new business thatkind of started from this e-commerce that nobody ever thought of.
One example is acompany called Happy Returns. It has 700 return centers at mallsand inside stores where customers can come return items from about30 popular online stores. Happy Returns gets paid by itsretail partners to aggregate all its returns. Saving money on thatlast-mile delivery person who would otherwise need tomake multiple stops. It claims to save e-commerce retailers 20to 30 % on shipping costs. The store or mall also pays HappyReturns a fee, hoping the concierge service will bring shoppersinto its stores. There's also a market of third-partycompanies that buy returns in bulk, repackage them, sometimes with added accessories,and resell them for a profit. So you can go to someof these third-party companies and and buy things that have been returned, kindof almost like a salvage process. And the really fascinating thing is someof that ends up back on the Amazon marketplace. There's also agrowing number of companies specializing only inreverse logistics. GENCO, for example, was bought andrebranded as FedEx Supply Chain.
It helps liquidate returned inventory bysending it to smaller markets like Brazil. It finds a market orplace for donation for products that won't sell in the U.S. Think: the Super Bowl championst-shirt of the losing team. And of course there arediscount retailers like T.J. Maxx that buy returned and unsold merchandisein bulk and then market it up and sell it to consumers. So we should absolutely be payingattention to the returns market. And there's significant economic opportunitiesfor companies that are able to help retailers with this problem.
Meanwhile, Amazon itself is still workingto make returns more profitable by making the process easier andkeeping its customers coming back. Amazon is definitely not perfect atthis whole returns process and there are places where other retailers mightbe more ecological or do something better. But on the whole, Amazon is drivinga lot of the innovation in the returns market. So more so thanreducing their costs, they're saying let's make it really easy and hassle-free forcustomers to return and that will make customers trust us more and moreconfident that they can buy from us instead of one of our competitors.
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