Viewpoint | Creating Resilience
’Tis the Stressful Season for Holiday Gift Returns
A holiday surge in online shopping is expected to cause a backlog of product returns, compounding supply chain headaches for retailers.
16 Dec 2021 8 Minute Read
Reverse Logistics & Industrial Real Estate
Retailers continue to fulfill e-commerce sales despite being challenged by supply chain constraints, shipping delays, skyrocketing transportation costs and labor shortages. The National Retail Federation (NRF) predicts a 13% year-over-year increase in online sales during the 2021 holiday season (November and December) to $222.3 billion.
According to reverse logistics provider Optoro, two out of three consumers will return at least one gift during the holiday season.1 Given a higher-than-average return rate for online sales, at least $66.7 billion worth of product returns will be pushed back into the supply chain—a process commonly known as reverse logistics. As a result, retailers and logistics operators must decide what to do with returns of apparel, toys, electronics and many other items to recapture product values and minimize waste.
CBRE Research, CBRE Supply Chain Advisory and Optoro reverse logistics experts answer the most frequently asked questions about the holiday returns process and provide key industrial real estate solutions.
Answers to the Most Frequently Asked Questions About 2021 Holiday Returns
Q: If availability of online sale items is limited this holiday season due to supply chain disruptions, higher transportation costs and labor shortages, could there be fewer returns and less reverse logistics volume?
A: NRF forecasts a 13% year-over-year increase in 2021 holiday online sales to $222.3 billion. CBRE Supply Chain estimates that at least 30% or $66.7 billion worth of holiday purchases will be returned, also up by 13% year-over-year and by 45.6% over the previous five-year average.
Figure 1: Historical & Projected U.S. Holiday Sales & 2021 E-Commerce Sales/Returns
Source: National Retail Federation, CBRE Research, Q4 2021.
Many consumers began holiday shopping earlier than normal this year in fear of retailers running out of inventory due to supply chain disruptions. A recent survey by Optoro found that 41% of consumers planned to shop earlier this year than last, meaning retailers are likely seeing returns sooner than usual at a time when their fulfillment operations are typically still focused on forward logistics. Earlier holiday returns of top-quality merchandise could be put back on the shelf or made available online before Christmas, thereby giving retailers an opportunity to make more sales at full margin and reduce returns.
Q: Given the looser COVID restrictions compared with last year, will in-store returns increase?
A: There likely won’t be an increase in returns to retailers’ physical stores. Optoro surveys found that that the number of consumers who preferred returning items to stores fell to 40% in 2020 from 67% in 2019, likely due to pandemic-related fears. This year, Optoro reports that while 39% of consumers prefer to make returns directly to a retailer’s physical store, an increasing number prefer to drop off e-commerce retail returns at a third-party store, similar to Amazon’s program offering return service at Kohl’s stores.
Q: What is the average cost to return an item?
A: Although many customers expect free returns, the cost is significant for retailers. Optoro estimates that, on average, it costs $33 or 66% of the price of a $50 item for retailers to process a return—up from 59% last year. There are many factors contributing to the high cost of returns, including transportation, processing, discounting and liquidation losses.
Figure 2: Reverse Logistics Costs, 2021
Source: Optoro, 2021.
Providing customers with the option to return online purchases to stores can lower call center, transportation, processing and discount costs. Maximizing opportunities to resell returned items is key to avoiding losses on liquidated returns. Ultimately, investing in technology to help retailers more efficiently process returns can reduce value erosion and waste. By automating the returns process, retailers can shorten the time it takes to receive and route returns back into stock or to a resale channel. Quickly moving returns back into inventory allows retailers to preserve seasonality.
Q: What happens when an item is returned?
A: The return process for an online order includes item pickup, handling and the many “touches” needed to move the item back into inventory. Phone or online queries sometimes can help retailers assess the returning item’s condition and direct the customer to ship back to a distribution center or directly to the manufacturer, thus bypassing the store.
Physical returns allow the store to assess whether the item is defective or if it’s in good enough condition to put back on the shelf at full price or mark down.
If shipped, the item is typically returned either to that store’s distribution facility, to a centralized returns center or to the manufacturer. Once received, items are again assessed and some defective products may be repaired or refurbished. Excess and out-of-season products may be sold with additional warranty through a discount retail channel or liquidator, while some items in new condition may be put back in stock.
Remaining returns are typically either sent back to the vendor for credit, donated, sold in bulk to resellers or destroyed.
The Complicated Flow of Reverse Logistics
Source: CBRE Supply Chain Advisory, 2019.
Q: Where are returns facilities concentrated?
A: A reverse logistics facility requires an average of up to 20% more space and labor capacity per item than a forward logistics facility. Typically, second-generation space is preferred over modern, Class A facilities. Lower ceiling heights are acceptable since the varying sizes of pallet loads make them difficult to stack or safely store in high racks. Industrial markets that have large supplies of this type of warehouse space include Columbus, Central New Jersey, PA I-78/81 Corridor, Memphis, Nashville and Inland Empire, making them ideal locations for returns facilities. These six markets also have a combined 84.6 million sq. ft. of industrial space under construction (19% of the total amount underway in the U.S.). As occupiers absorb newly constructed buildings, they will leave a greater portion of Class B space available to reverse logistics operators.
Q: What product segments will see the biggest reverse logistics costs?
A: High-value electronics like laptops, tablets and cell phones will see the highest reverse logistics costs per item. The electronics segment has historically seen costs that are as much as 15 times higher than other product segments due to size, testing, refurbishing and online-sales-platform fees. Lower-value segments like apparel and general merchandise have much lower reverse logistics costs, but relative to the retail value of the unit they are much higher than electronics.
Q: How are returns being managed more effectively?
A: Some retailers are offering customers the option to keep or donate unwanted items rather than returning them, neither of which allows the retailer to recoup the item’s value. Another option is to make returns processing more efficient by implementing an automated decision-making process that routes returns to the next most profitable channel.
Retailers are increasingly attempting to balance consumer demand with sustainability, while still providing a returns experience that protects brand and customer loyalty. Returns produced 5.8 billion pounds of waste and 16 million metric tons of CO2 emissions in 2020, according to Optoro. Thus, reverse logistics is both a cost control and an environmental imperative.
Industrial Real Estate Solutions
With record retail sales and rising employment, there’s been a corresponding increase in both online and physical store sales. Warehouse space availability is extremely limited, with 23 U.S. industrial markets having vacancy rates below the national average of 3.6% as of Q3 2021. More retail sales means more returns and heightened demand for warehouse and distribution space, especially during the holiday season. E-commerce growth will result in more than 1.5 billion sq. ft. of new warehouse and distribution facility construction over the next five years, according to CBRE Econometric Advisors. Demand is expected to keep pace, especially for Class A space, with projected online sales equating to more than 450 million sq. ft. of net absorption. Markets with affordable second-generation space will attract the most demand to handle the surge in returns.
External Factors at Play
Carrier capacity constraints and higher trucking rates mean that retailers with reverse-logistics facilities closest to consumers are better positioned to offset rising costs. Nevertheless, labor shortages make it challenging for retailers to keep up with the volume of returns, regardless of available warehouse capacity. These factors are driving demand for automation software. Also, a clear process for determining what to do with returned items (i.e., determining whether to resell or discard) needs to be in place to help reduce warehousing processing costs and space requirements.
3PLs are Growing Their Footprint
Many retailers—especially those with a thin supply-chain network—use third-party logistics providers (3PLs) for returns management to free up premium space for forward logistics. This has contributed to 3PLs accounting for 30% of large industrial leases (100,000 sq. ft. and above) in 2021, up from 26% last year. Size requirements have also grown for 3PLs, increasing by 2.5% year-over-year to an average of 246,186 sq. ft. as of September 2021.
3PL activity will continue to grow as retailers outsource reverse logistics to reduce costs and avoid the hassle of finding space in record-tight markets with limited labor. CBRE Research forecasts 3PLs’ leasing market share will rise to 35% next year.
Figure 3: 3PLs Capture Larger Share of Industrial Leasing Market
Source: CBRE Research, August 2021.
As an alternative to using 3PLs, there may be an increase in on-demand, flexible warehouse space offerings to manage the reverse logistics process. There are only a handful of flexible space providers, including FLEXE, Cubework, Stord, Chunker and Flowspace. These companies connect retailers with warehouse providers, some of which provide fulfillment services on a pay-as-you-go basis. Given the current market dynamics and external factors at play, on-demand warehousing has the potential to scale and directly compete with the 3PL industry.
Retail & Logistics to Intersect with Technology & Design
Some retailers are redesigning distribution and fulfillment strategies to enhance the multichannel experience, paving the way for a new hybrid store model that can handle multiple forms of fulfillment and inventory control, as well as reverse logistics. For this to occur, a portion of the store’s overall footprint must be utilized for storage, sorting/packing and shipping/receiving. The hybrid store’s design will have a major returns-handling component and customers will be encouraged to bring returns to the store.2
The Bottom Line
Earlier online shopping this holiday season has extended the period in which consumers make returns, creating reverse logistics challenges that effective real estate and supply chain management can only partially address. Having well-located warehouse space is critical, yet the process by which returns are managed needs more sophistication. Providing consumers with better information and services prior to the point of sale, such as product specifications, sizes, videos and virtual try-ons, could help reduce the amount of returns. The solution starts with consumer-use data, product/packaging design and operational data to better understand why an item was returned and how that should effectively influence the retailer’s product offerings.
Retailers can also adopt creative solutions to cut down on returns, such as augmented reality that allows customers to try on or test items before they receive them. This is already transforming the shopping experience in the cosmetics and apparel sectors.
A positive return experience is highly important for customer retention, so retailers and logistics operators are hard-pressed to get this right in the 2021 holiday season and beyond.
Special thanks to Optoro, a Washington, D.C.-based reverse logistics provider, that collaborated with CBRE on this report.
For more information on holiday trends, please see CBRE’s 2021 U.S. Retail Holiday Trends Brief.
1 “Three Magic Moments for Creating Loyal Customers,” Optoro, 2020.
2 "The Future Hybrid Store," CBRE, December 8, 2020.
Brief | Creating Resilience
November 10, 2021