The Impact of Retail Returns on Commercial Real Estate
Pushing products through the supply chain is not complicated. Although there may be some bottlenecks at the moment, the entire global shipping system is designed to get goods to your doorstep. Do you know what is complicated? Returns. Delivering goods to consumers is a walk in the park compared to sending them back to the manufacturer. The logistics back-end bends back to accommodate generous return policies, which are widely exploited. The scale of the problem has become so great that it creates investment opportunities in the real estate world.
According to the Reverse Logistics Association, Americans return about $500 billion to $600 billion worth of goods annually, most of which were purchased online. Americans return about 10 percent of all purchases and about 20 percent of all online purchases. These amazing numbers have been growing every year since the 1900s. Money-back guarantees date back to the 18th century and were popularized by mail order catalogs such as Sears in the late 1800s. The idea is simple: offering money-back returns lowers the risk of a purchase, so a customer is more likely to buy something. The simple idea became complicated in practice from the start. The rise of e-commerce took the emerging topic and poured rocket fuel on it.
Ecommerce sellers quickly learned that one of the biggest barriers to buying online was the fear that for some reason it wasn’t what they expected. It doesn’t fit right, the color looks different in person, I don’t like the feeling. To address these issues that customers would typically encounter in a store, online retailers began offering generous return policies and promoting the policies through advertising and marketing. Money-back guarantees and free returns set a standard that every consumer expects today. As any economist will tell you, nothing comes for free. Most importantly, no returns. For over two decades, companies have borne the cost of free returns and increased the price of all goods to cover the cost. Return shipping costs are rising, creating opportunities for companies willing to invest in solutions. They all need real estate. That’s the problem, a reverse logistics supply chain requires an average of 20 percent more space and labor capacity compared to forward logistics, according to Optoro research.
searching the rubble
Let’s say you bought a pair of shoes online, they don’t fit you right and you want to return them. In an ideal situation, what happens next? You print a free return label and send the shoes back. Instead of a sale, the company is now losing money shipping both ways. All returns are loaded onto a trailer that arrives at the manufacturer’s facility. Now all these returns need to be sorted.
“It’s not efficient to open a trailer full of 26 pallets of returned goods that aren’t repackaged,” Tony Sciarrotta, executive director of the Reverse Logistics Association, told Planet Money. “You may have 1,000 items, each item is probably different. You get onesies. Onesies are a nightmare.”
Each item must be checked. Why was it returned? Is it damaged? Can it be resold as new? If it’s electronics, that’s not allowed. Clothing, one of the most popular items bought online, is notoriously difficult to validate as returns. Spotting stains, odd smells, tears, missing threads, and other defects is a labor-intensive process. Some products need to be tested to ensure they still work. Nothing is boxed, so even if it’s like new, it can’t just be put back on the shelf without reboxing. All of these processes take up space, labor and time that logistics facilities struggle to accommodate. It’s a foolish proposition to use some of the setup and labor to complete a sale that didn’t bring the company a profit and actually cost it money. So most major retailers don’t even try. The ideal situation just described is largely a fantasy. Retailers abandoned these processes years ago. This is where the investment opportunity comes in.
It’s hard to overstate how much product retailers like Amazon, Target, and Walmart are moving. To be honest, they’re not interested in returns. Why should they be? Returns are a loss. Limiting the loss is the best they can hope for. The cheapest path of least resistance is not to process returns. Most large retailers are turning to liquidation companies, a growing sector that’s gobbling up real estate.
“Customers really believe that the product will just go into the black hole or end up being resold brand new to another customer. And in many cases that’s not the case,” Albert Palacci, CEO of 888 Lots, a liquidation company, told CNN.
“Re-Commerce”
Some returns that are processed in-store end up on store shelves, and Amazon operates its own marketplace for used and refurbished products, but these are by and large exceptions. Most retailers throw all returns together in crates or pallets and don’t bother to sort them. This is where bankruptcy trustees come in, who buy the boxes wholesale without ever knowing exactly what’s inside. One company’s junk is another’s treasure.
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From there, liquidators either sort the products themselves or, more likely, have rabid buyers sort them. What started as an e-commerce purchase is turning into a brick-and-mortar frenzy. Bankruptcy trustees line up the crates and pallets of returns they’ve bought, open the store and watch the chaos ensue as small business owners rush to rummage through the crates to find the best items for individual resale. It’s about knowing what sells well. Air fryers can be flipped for a nice win. Most clothing items cannot do this. The calculus of putting returned goods online changes by the day, often by the hour, which is mostly done by small business owners who disassemble and dispose of returns via eBay, pawn shops and other resale markets. Liquidation shops are a steady stream of returns panned by profiteers in search of nuggets of gold like a flawless iPhone. What’s left after picking goes to landfill, about £5 billion worth of goods a year.
Liquidators fall under what the industry refers to as Third-Party Logistics (3PL). 3PL providers work alongside but outside the confines of retailers, using their own equipment, space and labor to transport returned goods for retailers. 3PL providers typically target Class B or second generation industrial sites offered at discounts, becoming a major driver of real estate demand in their own right. According to CBRE statistics, nearly 30 percent of industrial transactions over 100,000 square feet were executed by 3PL providers last year. Liquidated retail locations are also growing rapidly, how much is difficult to track as locations can close as quickly as they arise. All it takes is returns for stock that’s practically being given away. The industry attracts investors.
B-Stock, a B2B liquidation marketplace, raised $65 million from private equity firm Spectrum Equity to fuel its expansion. The platform was able to sell 145 million items on its “re-commerce platform”. That’s the equivalent of keeping 500 million pounds of goods out of landfill. “Retailers who deposit returns generally believe it makes good business sense,” Howard Rosenberg, CEO of B-Stock Solutions, told Insider. “However, companies that think this way usually don’t understand or appreciate the value of these products in the secondary market.”
Trade is an ecosystem and no ecosystem could function without decomposers breaking down the trash and discarded parts. E-commerce piling up mountains of returned junk has 3PL providers and bankruptcy trustees hungry for more. Like decomposers in nature, their true footprint is often hidden just below the surface. It may not be glamorous, but it’s a good life. As online shopping continues to grow, the importance of business breakdown of returns on the backend will also increase.