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Reverse Logistics: The Hidden Cost Of E-Commerce

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The holiday season is here, and people are again flocking to Amazon to buy gifts. We resurfaced this story that peeked behind the veil of returns and their impact on industrial real estate because it is as relevant and interesting as ever. 

Chances are if you bought something from Amazon, you’ve also returned something from Amazon. In e-commerce, facilitating quick and easy returns is the cost of doing business. 

Jeff Venghaus, Jarret Venghaus

Reverse logistics have ballooned alongside e-commerce. With increasing online and mobile commerce, returns and reverse logistics strategies are a growing friction point in the supply chain. JLL EVP Jeff Venghaus spoke with Bisnow about how reverse logistics are impacting industrial markets.

Merchandise returns in the United States were valued at $260.5B in 2015, roughly 8% of total sales, according to the National Retail Federation. One-third of all products purchased online are reportedly returned, and the numbers are even higher in apparel. We're talking about a huge market here.

Forty-nine percent of retailers offer free return shipping, according to a fall 2015 report from the National Retail Federation. And 59% of retailers allow consumers to return products via any buying channel, a survey by Gartner Inc earlier this year revealed. Eighty-two percent of respondents expect to add the option to return via any channel in the next year.

How companies handle returns has a meaningful impact on the warehouse and distribution real estate market, Jeff (here with colleague and brother Jarret Venghaus) tells us. From the need for dedicated returns-processing space, to restocking, or the need to outsource some or all of this capacity to a third party, reverse logistics brings a unique set of opportunities and risks to the industrial real estate sector.

Here are three factors for companies to consider:

Managing returns in-house

Distribution center

How are they processed, from where (a store or dedicated logistics facility, or a portion of one), and are returned goods re-stocked into existing inventory? How will this impact future space needs and facility utilization?

Managing returns and orders from the same space is very difficult for so many complex and dull supply-chain-based reasons that we'll spare you from details. Not only is managing the operation difficult, but Jeff says it isn’t economically viable for many businesses because the margins are so different.

The cost of reverse flows is usually high, while comparably, the residual value of goods is usually low. Collection of goods is often expensive because of geographic dispersion. Transport cannot be fully efficient due to a lack of scale.

Outsourcing the returns process

Reverse Logistics: The Hidden Cost Of E-Commerce

For many companies, using a third-party logistics provider (3PL) to handle returns provides flexibility within the supply chain, mitigates costs and helps capitalize on external efficiencies.

From the industrial real estate perspective, the outsourcing of the returns process does not eliminate the need for space, it just shifts it to a different occupier. Outsourcing reverse logistics could provide a future boost to space demands from 3PL’s that offer these services, Jeff tells us.

An Allied Market Research report found that the global third-party logistics market is expected to reach $1.1T over the next six years. The result would be a 5.16% compound annual growth rate, according to the research firm. The researchers also found that trucking and rail freight will be the major modes of transportation over the next six years, with intermodal continuing to play an important role.

The need for rail lines and easy transportation access is the key factor when searching for distribution space. Jeff says that 3PL providers are also looking for proximity to major retail distributors to save on cost.

Some service providers are offering to aggregate return flows within industry sectors. In the textile industry, I:CO, a reverse logistics company, manages the reclamation of 700 tons of used apparels daily in 90 countries for large apparel brands such as H&M, Puma or Levi’s.

CoremanNet, a subsidiary of Bosch Group, has set up a dedicated logistics network and associated information system to manage the return flows in the automotive re-manufacturing industry. Return flows can also be consolidated with forward ones. In the city of Nantes, Veolia collects retailers’ waste by using available capacity of trucks once they have made their deliveries.

The costs of shipping returns

Reverse Logistics: The Hidden Cost Of E-Commerce

How companies bear the costs of returns (free or with a re-stocking fee), the frequency, the impact on valuable customer loyalty, and the final destination of a returned product is a complex supply chain issue. These components vary by retailer.

Companies must consider and properly account for how online purchases are returned to a physical store. If the costs of re-stocking or re-selling returns is too high, is a wholesaler or liquidator eventually a potential option to unload returned or unwanted inventory? Returns will continue to exert cost pressures on sellers if e-commerce continues to grow by double digits.

Reverse Logistics: The Hidden Cost Of E-Commerce

Further growth in e-commerce is inevitable and returns will increase apace. The need for logistics space to facilitate returns and reverse logistics is expected to increase as well.

Competitiveness in the global omnichannel marketplace will grow, so companies that create efficiencies for returns in their end-to-end supply chain—while leveraging their physical distribution network to help reduce costs—will benefit the most, Jeff says.