How to Eliminate Shrink Caused by Returns

Allowing customers to return items for almost any reason is a sound retail business practice, but it comes at a cost. Although it’s good business to offer returns to customers, poorly managed processes lead to a significant loss of revenue, due to shrink around returns. The National Retail Federation stated that $816 billion worth of product was returned in 2022. But returns are controllable, like theft, breakage, and other categories of shrink. Not all returns are shopper driven, in fact, one study claims that 73 percent of returns occur due to a retailer-controllable action.

Current solutions to mitigate shrinkage associated with returns primarily focus on post-purchase measures, such as imposing fees, narrowing the return window, and re-commerce of returned merchandise. However, these measures do not provide long-term solutions. Attempting to reduce the cost of returns after a consumer has decided to return a purchased item proves to be a challenging, expensive, and ultimately ineffective approach.

Returns also have a significant environmental impact. Although there is confusion regarding specific ESG (environmental, social, and corporate governance) best practices, there is no question that returns leave an enormous carbon footprint. Retailers face significant pressure to reduce the 16 million metric tons of carbon dioxide emissions generated annually from transporting returns. Even the most efficient, ESG-focused reverse logistics operation can’t eliminate the billions of pounds of returned goods that end up in landfills.

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Retailers can reduce returns by aiming at preventing returns in the first place. But how can this be achieved?

Many retailers begin by attempting to influence consumer behavior. However, the reality is that retailers, suppliers, and consumers contribute to the rising number of returns, and all three parties must be addressed to reduce unsustainable return rates. For example, suppliers may incorrectly label a product sent to the retailer, leading to a series of events that result in a return. The retailer’s fulfillment center may make a mispick or the customer may not consider the costs associated with a return decision. As all parties share some responsibility for returns, a solution must examine and address the entire ecosystem.

Reducing the impact of returns on retailers’ bottom lines requires a comprehensive and strategic approach that includes identifying the root causes of returns, using advanced analytics tools to analyze data, and implementing proactive measures to mitigate returns—before they occur.

To tackle return reduction, companies must use AI with predictive and prescriptive analytics rather than relying on human intervention or post-facto cost minimization. Employing these capabilities identifies the root causes of returns and immediately recommends measures to prevent them. Where human and reporting capabilities may get this information in 2-4 months, applied AI solutions generate these insights as an item begins to sell, allowing retailers to make corrections within days.

These analytics integrate millions of data points across the enterprise—including product, transactional, and customer feedback—to detect anomalies and diagnose the underlying reasons for returns. Empirical evidence proves that these technologies are the solution for reducing returns and associated costs.

Adopting a preventive approach to returns aligns with sustainability trends driving consumer behavior and boosts positive business outcomes. Such an approach results in lower cost, less waste, and a better retail experience.

Rhyanna Taylor

Rhyanna Taylor is the Chief Product Officer of Newmine, developer of Chief Returns Officer, an Applied AI Returns Reduction SaaS product. Taylor has over 20 years of experience as a retailer and creating business solutions that enhance performance.

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