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The $270 Billion Cost of Store Returns

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Photos: Getty Images
Photos: Getty Images

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We've all been there: standing in the customer service line at Target, a strategically re-packaged curtain rod holder in hand and an elaborately detailed excuse about the whereabouts of the long-gone receipt. Most of the time, though, that excuse isn't even necessary. A staggeringly lax returns policy is guaranteed at plenty of big box retailers; Sephora will happily reclaim open mascara bottles and perfume for a full refund, and Nordstrom's we'll-take-anything-back policy is practically legendary.

Unopened packages can usually go right back on the shelves, but when stores like Sephora guarantee a full refund on products customers have already used, those items can't just be restocked and sold as new. Merchandise returns accounted for nearly $270 billion in lost sales in 2013, according to a report published by The Retail Equation in conjunction with the National Retail Federation. During the holiday season, the NRF estimated that nearly one in three gift recipients would return at least one item, and holiday returns during that time accounted for nearly $60 billion in lost sales.

So where does all that unsold merchandise end up? Back in 1991, the LA Times reported on a 6,000-square-foot Nordstrom warehouse in Anaheim, California that was solely dedicated to figuring out what to do with returned merchandise. In the early '90s, the company got in hot water with the state of Oregon over allegedly selling lipstick, shoes, and other used merchandise as new in its Oregon stores. Nordstrom ended up paying a $25,000 settlement to the state, although it admitted no wrongdoing.

Merchandise returns accounted for nearly $270 billion in lost sales in 2013.

Target routes its unsold merchandise in several different directions: "There are a variety of ways we address unsold product, including donations, liquidating to third parties, recycling and, when necessary, disposal," a Target spokesperson told Racked. "Goodwill is one of many partners that acquire Target merchandise as part of this process."

Goodwill largely relies on consumer donations to stock its shelves, but it will buy unsold merchandise from retailers at a discounted rate. "I would say, in any given year, a retailer calling us and saying we just want to do a raw merchandise donation to you—if we get five of those calls in a year, that would be a lot," says Michael Meyer, the VP of donated goods retail at Goodwill. "And of those five, it could be anything. If a retailer is going out of business, they might want to donate all of their store fixtures to us, having absolutely nothing to do with donating us merchandise that we would put on our sales floor."

In Target's case, Goodwill has an arrangement with the company to purchase its store returns or surplus goods. Meyer compared it to the same operation that discount retailer Marshalls would have with a full-price clothing retailer to buy surplus stock at a discounted rate.

Liquidators provide another way to funnel out returned merchandise. Liquidation.com stocks returned and salvaged goods from labels like Michael Kors, Louis Vuitton, and DKNY. It boasts that it saves one of its national retail partners from sending 100 million units of merchandise to landfill deposits every month.

But again, that option requires time and money, which companies don't have much of during this time of year. "If [the returns are] slightly not perfect and you don't have a process for it, it's more of a hassle then it's worth," says Brandon Levey, CEO and co-founder of Stitch Labs, an company that helps with inventory management for smaller retailers. "So you end up just throwing them into a box and saying, 'I'll get to it later, I'll get to it after the new year.'"

Retailers aren't always on the losing end of the returns deal.

Other times, it falls on that relationship between the retailer and the manufacturer to decide what gets done with returned product. "Typically retailers get money back from their manufacturers if their products don't sell," Jordan Speer, editor of retail trade magazine Apparel tells Racked. "It's a different arrangement for everybody and I don't know that everybody does it, but historically that's sort of been the arrangement. When retailers can't get rid of their merchandise, they charge back the brand for it." This includes not only returned merchandise, but all goods that don't move on the sales floor.

But retailers aren't always on the losing end of the returns deal. "Nordstrom, their thing is customer service," Speer says. "They've made that the face that they want to show the consumer, so whatever cost they eat, it's worth it for them for the reputation and the sales that they make." In an email, Nordstrom told Racked: "It's about creating a relationship with [the customer] for the long term and that commitment doesn't change with the seasons."

Update: This post has been amended to include a quote from Nordstrom regarding their return policy.