The US shopper drives the economy for about 70% of the GDP is related to some aspect of shopping or people buy lots of stuff. For the retailer, selling the merchandise at reasonable margins is an art and science. There are formulas to follow, it is an art because people are involved and when the customer leaves with the merchandise hopefully they are happy. Life is good.
In an article by Siddharth Cavale and Arriana McClymoe of Reuters, the only thing not so good on the horizon is the return policy. Retailers wanted to encourage sales because of all the stories about supply chain problems they decided to extend the holiday purchases return policy from 30 days to 60 or 90 days. Analysts expect returns will be in the $112 billion to $114 billion in the coming weeks. The online returns are expected to be $43 to $45 billion.
The issue is does the return policy included shipping costs, cleaning fees and repackaging which means margins go down for retailers.
Consider a sweater price at $100. Most retailers margin on the sweater is 33% or $33 (when the sale is on they reduce the margin). If a shopper purchased the sweater on line, the margin drops to $17 because of shipping fees, according to Alix Partners report from May 2020.
If the customer returns the sweater to the store and it is not resold, the retailer loses $25 in margin. The lost margin goes to $31 if it had to collect from an on line purchase and return it from a customer’s home to distribution centre.
Linking to dividend paying stocks, when you look at retailers stock and see how they benefited from increased holiday (Thanksgiving to Christmas) sales, consider the costs of returns before you jump for joy.
There are more questions than answers, till the next time – to raising questions.