Episode 2: Retail’s returns challenge: How to balance customer demands and overheads

In recent years, consumers have tended to prioritise speed when it comes to delivery. However, as cost of living concerns rise, value is fast becoming a greater factor in consumers' decisions. How should retailers respond?

Amie Larter spoke to Sophia Pope, the sales and customer success leader for Shipstation to find out. 

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Transcript

Intro:

Coming up on this episode of Retail Untangled.

Sophia:

Over a quarter of retail businesses in our latest research actually plan to increase the cost of delivery. Where people go in store and then they will also check online to see if they can get  cheaper deals. Is it easy? Can you pivot? 

Amie:

Welcome to Retail Untangled. I’m Amie Larter and this is the podcast dedicated to business hacks and retail insights you won't find anywhere else. They are stories from the coalface, real time innovations and solutions and each episode we’ll untangle a wide spread retail problem. 

I posed the following to this episode’s guest Sophia Pope, the sales and customer success leader for ShipStation. Sophia, over the last few years, speed has become the most important factor in delivery. However, as cost of living worries rise, value is coming to the forefront, how should retailers respond? 

Sophia:

Consumers are expecting more than ever, free delivery, free returns. So, this puts a lot of pressure on retailers. Whilst retailers really do recognize that that is important, with the ever increasing operation costs for businesses, is a real challenge. And I think, in fact, over a quarter of retail businesses in our latest research actually plan to increase the cost of delivery for their customers in 2023, and only 18 plan no increases. So there is a bit of a misalignment there. And what that's really pushing out into the market is this increase in hybrid shopping. So whereby you would have your online shoppers, they would normally stay online.

But actually what we're finding is that they will go online, have a little look at a deal, but actually go in store as well to check what that looks like and that deal. So we're finding this whole loyal to the brand but not loyal to the retailer, which is really interesting. And it goes the opposite way where people go in store but then they will also check online to see if they can get a cheaper deal. So retailers really have to think about that. And another aspect of that is the experience that they receive both online and in store, because being a lot more hybrid, the expectations are that the experience is seamless wherever they are.

Amie:

Cost is really the factor for both parties, I suppose. It seems like there's two options for retailers and I'm hoping maybe you'll come up with the third. But retailers can either absorb the cost or pass it on. How are retailers grappling with this and what are some of the options you're seeing?

Sophia:

I think retail has been grappling with this for quite a long time. Regardless of the climate, it is difficult. It's a very difficult conundrum for people. Shipping and delivery costs are one of the most expensive costs and it's very difficult to get your head around that, even more so in this climate. So the expectation for free delivery and free returns is huge at the moment, and what we see from our research globally is a huge misalignment again, from the responses from the customers and then the retailers around who should actually foot the bill for this. So what I actually see successful retailers doing this, they can implement a couple of strategies.

One is a multi-carrier strategy. We try and say to retailers, the best way to get on top of these costs is to diversify your carriers. So you are able to then really mitigate the shipping costs. You can compare the rates, retailers can then choose the lowest rates and then they can pass it onto the customer knowing that they're getting the best rate. Or just even knowing that precise cost, you can then absorb that into your product cost, you're not guessing. So that is the strongest strategy that we usually recommend. Another one is automating fulfilment. So this really helps reducing any kind of operating overheads and creating the necessary efficiencies, which then again cost savings, can pass onto the consumers.

Amie

Before this session, I was having a read through your e-commerce industry benchmark report, which I will actually put in the show notes for this session. And this reveals that the returns rate for online purchases can often be as high as 30% compared to less than 10% in store. This is another, clearly, high cost to retailers. How can they reduce returns?

Sophia:

Returns is a hot topic at the moment. Retailers really can look at doing a few things to try and reduce returns. So one, ensuring listings are detailed as possible on their website and really promoting customer reviews. So especially when women buy, maybe, apparel, I don't know if you felt it, but I definitely have. We've all got different body shapes so when you go in to buy something it can be really difficult. And so seeing other people buying items and like, “oh, she has a similar body shape to me, it'll fit roughly like that”. That really helps retailers reduce those returns. So trying to get the community involved in that and making sure it's detailed as possible. 

Surcharges. So actually this is another way this is quite interesting that's come out, but there are some big retailers actually leading the way on this and they're introducing surcharges. So Zara, Boohoo, and they're really trying to reduce this bracketing trend where 15% of shoppers actually do this. So bracketing, for people that might not know what that is, is where you go and buy maybe four items knowing that you're going to return the three because you can't make a choice. It's not actually great for the environment, it's a massive trend and so retailers are really trying to reduce that, and so surcharges really puts people off. I think then the last one that I'm seeing in returns is returning in store.

So where retailers are actually forcing people to have to return items in store, introducing that friction so people would do it a lot less. So one point I actually do want to mention, which I think is a really interesting consideration for retailers when it comes to returns, is that the difference in generations. So this is actually coming out in research where the younger generation is actually more accepting of the idea of return charges. So 40% of Gen Z saying that they would consider paying for online returns compared to actually 22% of Boomers. So I think when retailers need to consider that, who's their audience and what strategy would actually work. So I think that's really interesting.

Amie:

Did you unpack the driving factors behind that?

Sophia:

I think with Gen Z behind all of this, a lot with sustainability. We're seeing Gen Z being a lot more conscious of environments, the environmental impact, and so therefore they're more accepting, "Well this is actually harder for carriers and retailers to do so therefore I'll accept that." Whereas I think Boomers have got very used to expectations that, "Oh well it should happen." But there are consequences to everything that happens and I think Gen Zs are just a lot more educated about that and expectations are different.

Amie:

Customers may not be willing to pay for fast delivery right now, so obviously we've gone from that speed and convenience and now we're looking for value. But there are a certain cohort, and this is obviously Gen Z, that are proving to be willing to pay for green delivery options. Is there an opportunity for retailers here and what does that look like?

Sophia:

Sustainability isn't going to go anywhere. So consumers are more than ever conscious about their purchases, what effect this is having on the environment. But people, however, are very attuned to greenwashing. So where retailers really need to be careful is what they're promoting and ensuring that it's not conflicting in their messaging. So that's a note definitely to remember. Our research actually shows that currently in this climate, consumers are actually very sensitive to price and paying full green options, so it might be a deal breaker currently in this climate.

Amie:

How does the value versus the sustainability balance itself out with what you've seen?

Sophia:

The research basically says if you have two retailers that are offering very similar products and one offers a green option, if they have to pay for it, it will be a deal breaker currently. And so then our research really, with that sustainability piece, we see 26% of shoppers are actually planning to buy second hand. So that's a huge thing that's coming up at the moment, is secondhand. One in four shoppers are planning to use resell marketplaces more often in 2023. So there's no stigma these days around thrift shopping, secondhand shopping, that is actually going to be very, very common. I've seen big e-commerce brands, apparel brands, where they put a pre-loved section on their website and then they actually give consumers credits if they return some of their items and have that, and that's been super successful for them.

Amie:

We're seeing it on the pages of Inside Retail as well. And people do attach themselves to brands that are doing the right thing and making our choices more sustainable choices as well, which is fabulous. Customers right now are obviously price conscious. You have to only read the front page of any news outlet to understand why. Do you think setting yourself up now in terms of sustainability, even though it might not be the key differentiator right now, it's about setting ourselves up three months, six months, 12 months down the track when that may very well be the deciding factor?

Sophia:

Do you know what? I think retailers really need to look inward, and sustainability needs to be like partner values and their mission. Because as I said, consumers are very sensitive to this greenwashing. So it's not to be like, oh, I'm going to do it because I might get extra sales. It shouldn't be for that reason. It should honestly be, we want to try and do our bit and retailers should just start small. They should start small, try and make a difference, really look at their messaging. Am I being conflicting? Am I trying to say there's a green option here but then I'm promoting returns?

Returns are the biggest carbon footprint. They go out, they have to come back in. So is that conflicting? When we hear it time and time again, retailers really need to be authentic, they really need to understand where they stand and their vision and their values. And I think that's where it starts. And start small. You don't have to then all of a sudden, three months, I'm going to be the most sustainable company out there and we're going to go completely carbon neutral. It's those little things that I think they need to start embedding and it will pay off dividends.

Amie:

And it's true, you can't change a full strategy in three months, but you can take a baby step and I think baby steps is-you're on the journey- no one expects to get to the destination straight away, but at least you're on the journey and progressing in a way that I really think is an expectation. It's starting to become an expectation. It's what customers want. So it's such an interesting time to see where that's going to go. There's a long chain of events, I'm going to call them events, that happen before the parcel gets to the customer's doorstep. What are some of the quick wins for retailers looking to improve efficiency of these earlier stages of the delivery process?

Sophia:

Look, it's extremely hard for businesses to scale without improving efficiencies. It just does not work. So retailers really need to make their tech stack work for them, they need to look at their tech stack and go, "Can I pivot? Is it nimble? Is it easy?" These are really considerations, especially for new retailers. So really think about that when you're setting up. I was just at a retail facet in Queensland and I was talking to lots of businesses there, and there was a business just setting up and they were telling us what platforms they're thinking about and choosing. And my biggest advice was, is it easy? Can you pivot? Because it sounds like this particular couple were looking at custom this, custom that. And I said, "So if you want to change something six months later, how easy is it going to be?” And they're like, "Oh yeah, I don't know."

So tech stack is super important to retailers. So with that it's automation as well. So if you have automation, it reduces the reliance on any human errors, you'll be able to scale so much quicker. And especially when it comes to delivery. And all the events, as you mentioned, before that it gets really complicated. There's a lot of logic behind it, and we see businesses maybe with 50, 60 casual staff. Now if you have to teach every single person all this logic, it just doesn't make sense. So that's why you need tech stack to be able to put the automation in. You set, you forget, you know that you can get busier and more orders and it doesn't become any more complex. And when you think when you get to a certain size, there's just so many other people in the organisation, the change management in just changing tech stack, it becomes so difficult. It it, it's a nightmare. So get it right at the beginning.

Amie:

And I think this applies to many businesses, not just retailers. If you don't set it up from word go properly, you're going to be revisiting. And when you revisit, it takes time and you are undoing a lot and then rebuilding. And I do think there's a lot to be said for just thinking about it and using that advice from word go, because you will scale in such a different way.

Sophia:

People love the word custom and they're like custom, I'm individual, it's my business, we're going to be special. Just watch out when it comes to custom. I think it can work for some people, but for majority it can get very expensive. You need development teams and those development teams need to stay with you and they could even get bigger, that's a whole cost in itself. So really think about tech stack that is easy, that's out of the box, that you can change, and that has lots of integrations as well because then you can add to those, oh yeah, brilliant. Oh, I have Shopify, then I can connect to ShipStation, I can connect to Klaviyo, I can connect to... The ecosystem is your oyster then. 

So whereas if you are just “I'm custom and I'm separate,” that might work for your business model, I'm not saying that that's for everybody. But I think really think about it and talk to other retailers who have gone through that and have got those learnings, and just go and speak to a lot of people that might be able to just make sure that you don't fall into those pitfalls.

Amie:

Let's look down the track five years time from now. And we've moved from speed focus to now price focus being quite a significant differentiator for customers when it comes to online delivery. What should retailers be really considering now for when it comes to delivery in  2028?

Sophia:

I think we see some key themes that are not really disappearing in the industry. So sustainability, we touched on this earlier, that's not going to go anywhere. So as we said, really start investing in that now, really start looking at it. Globally, almost four in five shoppers are going to value green delivery options when they're ordering online, so that's up 5% actually from last year. So again, each year it's just getting more and more important. There's going to be around the sustainability piece, out of home deliveries. So if you really think about deliveries, pre-pandemic people were working in offices so when they would get deliveries, they would get it delivered to work. So carriers would go in delivering a lot of parcels to maybe an office building. Pandemic comes, now everybody's gone home, now it's one parcel to one home, one parcel to one home.

It puts a lot of pressure on carriers, it really does. And online shopping's only getting more and more. How does the whole network scale like that? So a lot more retailers and a lot more carriers will be pushing this out of home deliveries and going back to workplaces or going back to maybe your local news agency and you have to go and pick it up there, again, reducing that carbon footprint. The re-commerce trend as I mentioned, so second hand, all of that, that's not going anywhere and that's just getting more and more popular. I think another area that we're going to see is just diversification and options. Customers demanding more and expect more and they want choice. So you have to offer choice. I roll my eyes at retailers when I only get a standard delivery. Three to five days, you're like, ah, are you serious? Come on. I want options. I might not choose it, but I want options.

Amie:

I want the option to be able to get it faster if needs be.

Sophia:

Exactly. Gone are those days. So make sure that you invest in that. Is there express? Is there same day? Is there standard delivery? And then as I just mentioned there, same day. Same day is becoming a lot more popular and businesses are really trying to figure out. It only suits certain businesses to be fair, but customers again, want that and there is an expectation. We're seeing apparel really changing, and what I'm hearing out in the industry a lot is that apparel will soon be as quick as your groceries, a DoorDash and you can go and get them in a couple of hours there. There'll be times where you're out, maybe you're at a wedding and I don't know, your shoe breaks, and then you can just go on your phone and you can order a new pair of shoes and it'll come within an hour. So that's where apparel is going and the expectation. So I see that being very interesting in how that's going to work. But that's some key trends.

Amie:

And that’s a wrap for this episode of Retail Untangled. A big shout out to Sophia Pope from ShipStation for sharing such valuable insights. There will also be a link to ShipStation’s recent report in the show notes. And of course, if you’ve enjoyed this episode, be sure to subscribe to our podcast on your preferred app and kindly take a moment to rate and review. Until next time.

Outro:

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