The Growing Challenge of Retail Returns and Reverse Logistics

By Melissa Tatoris, VP, Retail. Retail returns, particularly in the e-commerce sector, have again proven to be a significant challenge in 2024.

In the US, 2023 ended with 14.5% of total revenue resulting in returns. Brick and mortar accounted for 10% while online returns accounted for 17.6%. Total returns surpassed $760 billion annually and retailers are increasingly feeling the financial strain.

And 2024 is shaping up to be even more staggering. Returns this year are projected to reach $890 billion. This represents nearly 17% of total retail sales

Rising returns—and the associated costs of reverse logistics—have become a critical pain point for retailers, especially in the post-pandemic era where online shopping has grown exponentially. The surge in online shopping has led to more flexible shipping and return policies, but the hidden costs of handling these returns—known as reverse logistics—are eroding retailers’ profit margins and operational efficiency.

How Bad Has It Gotten?

In 2024, the financial impact of rising returns has become severe. According to industry estimates, U.S. retailers are expected to lose over $100 billion annually due to return-related costs, including reverse logistics, restocking, and handling fraudulent returns. This number is likely to grow as e-commerce continues to expand, putting even more pressure on logistics, labor, and inventory management systems.

The impact is multifaceted, but here’s how bad it has gotten:

1. Escalating return rates

E-commerce return rates are substantially higher than in-store purchases, with some industries experiencing return rates as high as 30-40%. In the fashion sector, the trend of “bracketing,” where customers order multiple sizes or colors to try at home and return the rest, is exacerbating the problem.

During peak holiday seasons, these return rates spike, creating operational bottlenecks and inventory and broken size imbalances. The ease and expectation of free returns are fueling this trend, encouraging customers to over-order without financial consequences.

2. Soaring reverse logistics costs

The reverse logistics process—shipping, inspecting, refurbishing, restocking, or even disposing of returned goods—has become a major cost center for retailers. Handling these returns costs retailers on average $20 to $30 per return, causing the margin to drop 6 basis points due to factors such as transportation, labor, and restocking.

These expenses are particularly damaging for low-margin products or bulky items like furniture, which are costly to ship back. Additionally, processing returns adds to warehouse space challenges, slowing down the intake of new inventory during peak times like the holiday season.

3. Inventory challenges and profit erosion

Returned products often cannot be resold as new, especially for fashion, electronics, and seasonal items. Many items are either out-of-season by the time they are returned or have depreciated in value, leading to deep discounting or liquidation.

Retailers face the choice of heavily discounting these products to move them quickly, resulting in a loss of profits, or absorbing the costs of storing them long-term. In some cases, products are simply discarded, creating additional waste and lost revenue.

4. Environmental and sustainability pressures

The environmental impact of returns is significant, as returned products contribute to carbon emissions from transportation and add to landfill waste if they cannot be resold. In 2024, with growing consumer awareness and scrutiny around sustainability, retailers face pressure to reduce waste and improve their environmental footprint.

Failing to address the waste generated from returns not only impacts costs but can also damage a retailer’s brand image, particularly with younger, eco-conscious consumers.

5. Fraudulent returns and abuse

Return fraud, where customers exploit return policies for financial gain, has risen sharply, further driving up costs for retailers. In 2024, return fraud is projected to cost retailers billions, with tactics ranging from returning worn items (“wardrobing”) to purchasing items with fraudulent payment methods and returning them for refunds.

Another example is buying NWT from resale shops like Ebay and Poshmark and returning them to full line retailers where originally sold.  Retailers are tightening return policies, but doing so risks alienating legitimate customers who expect flexible, hassle-free returns.

6. Operational strain on resources

Returns create significant operational strain, especially during the holiday season. Warehouses and fulfillment centers are not only handling outbound shipments but also dealing with a flood of inbound returns, often using the same space and resources.

This dual demand leads to processing delays and increases in labor costs as companies hire additional staff to manage the backlog. Additionally, returns require specialized handling, further straining logistics networks that are already struggling with last-mile delivery challenges.

7. Impact on customer satisfaction and loyalty

While lenient return policies are meant to boost customer satisfaction, they can backfire if the return process becomes slow or cumbersome. Customers expect fast refunds or exchanges, and delays in processing returns or restocking popular items can lead to frustration and lost loyalty. Retailers that fail to handle returns efficiently risk alienating customers and driving them to competitors who offer a more streamlined experience.

In light of these challenges, balancing customer-friendly return policies with profitability has become a top priority for retailers, especially during peak shopping seasons.

How to Mitigate Returns

To mitigate returns, retailers need to consider why items are being returned. Key drivers behind the surge in returns include inaccurate product descriptions, poor fit (especially in apparel), and changing consumer behaviors, such as “bracketing”—ordering multiple items with the intent to return some. Categories like fashion, electronics, and luxury goods are most impacted by high return rates, compounded by the growing prevalence of return fraud.

Some ways to slow down returns include clearer product descriptions, improved sizing guides, personalized product recommendations, and incentivizing exchanges. Technologies such as AI-driven analytics and virtual try-ons are also being adopted to better manage returns and reduce operational costs, while maintaining customer satisfaction.

Another tactic is to identify high returners as a percent of purchasers and remove them from deeply promotional emails and campaigns. All intelligence reports such as RFM should now have return percent indicated for quick dashboard views.

Retailers are now recognizing that returns are not just a cost of doing business but a critical issue that can heavily impact profit margins. To mitigate these losses, many are investing in reverse logistics technologies such as automated returns processing, AI-driven fraud detection, and predictive analytics to better forecast return volumes and improve product fit. However, these investments take time to implement and will require retailers to strike a balance between customer satisfaction and operational efficiency.

The issue of returns will continue to be a major challenge into 2025 and beyond. If you are interested in understanding how Zeta models against returns and how you can mitigate with not only a return attribution score, but also with customer experience strategies, request a demo.