Shoppers are saying goodbye to free returns
American retailers are losing an absurd amount of money because of free returns. Some of them are finally doing something about it.
Abercrombie & Fitch, American Eagle Outfitters, DSW, H&M, J.D. Crew, Zara, and even Amazon now charge customers a return fee on select items.
While the fee structures vary, the goal is to minimize returns or at least lessen the impact of freight and labor costs, according to Retail Brew.
According to the National Retail Federation, retailers reported a return rate of 16.5% in 2022, a massive jump from 10.6% in 2021. Even worse, retailers told the trade group they expected 17.9% of merchandise sold during the holidays to be returned.
The retail industry said this practice cost them a staggering $816 billion in lost sales last year.
“Companies have been trying to figure out how to pull back on returns for a long time,” Zac Rogers, a business professor at Colorado State University, told Retail Brew.
“Everyone is looking at each other, and no one wants to be the first one to blink,” he said.
The pandemic seems to have sparked a sense of urgency, as the explosion in online shopping made free returns a financial burden for retailers. It’s not the only burden they face heading into the holiday season.
All signs point to a less cheerful holidays
According to the Conference Board, Americans plan to spend an average of $985 on holiday items this year, down about 2.1% from $1,006 in 2022.
The spending drop-off is even bigger for non-gift items, with the average consumer expecting to dish out only $330 compared to $393 last year, a 16% tumble.
Retailers report a lack of big orders heading into the holidays, which is usually a negative sign for the season, according to CNBC’s Supply Chain Survey.
Target and FedEx are among the companies lowering their outlook for the holidays. FedEx CEO Raj Subramaniam recently told CNBC that retailers haven’t begun restocking inventories yet, presumably because they expect weak demand.
Usually, retailers use steep discounts on popular items to lure shoppers back into their stores. But even that isn’t working because of higher costs.
“Retailers are finding that the items they rely on to bring people into the store and boost sales are costing them more,” said Noah Hoffman, vice president for North American Surface Transportation.
“That’s limiting how much they can discount, so we’re working with them to find savings elsewhere in their supply chains.”
Consumer spending slows
The outlook from retailers and shipping companies aligns with a growing consensus that the U.S. economy is downshifting in the fourth quarter.
Economists expect consumer spending—which powers two-thirds of the U.S. economy—to weaken heading into the holidays. The Atlanta Fed’s GDP Tracker shows fourth-quarter growth at just 2.1%, which is less than half of Q3’s impressive pace.
The consumer is expected to limp into 2024 as the weight of higher interest rates and bigger debt burdens forces them to think twice about what they buy.