Mastercard reports in spite of hurdles from supply chain disruptions and a Covid-19 resurgence, retail sales were up 8.5% between November 1 and December 24, vis-à-vis the year before. But once holiday season concluded, another kind of work commenced.
A robust holiday shopping season resulted in retailers being inundated with returns and exchanges. In the process of accepting returns, termed a “reverse logistical process,” retailers are presented with an untidy headwind that accounts for more than 10% of total supply chain costs.
It’s a challenge that impacts both retail and real estate strategies, according to a recent report from Savills that is focused on reverse warehouse space.
The report spotlights a number of intriguing findings. First, it indicates two-thirds of consumers are expected to send back at least one gift from the 2021 holiday season. The overall return rate for all retail purchases averages 10.6% but the return rate for the steadily growing e-commerce retail sector is almost twice as high, averaging 18.1%.
Another finding is that reverse logistics requires 20% more warehouse space when compared to forward logistics and that so-called “second-generation” facilities are adequate to meet the demand. Returns processing does not typically need a state-of-the-art distribution center. That’s good, because second-generation space is abundant, representing the majority of inventory in North America’s tightest industrial markets.
In Northern New Jersey and Los Angeles, second-generation space represents more than 50% of the space inventory. The rent discount to newer construction can be steep. It equates to 33% in the Inland Empire and 25% in Seattle, providing substantial value alternatives. Opportunities for reverse logistics aren’t limited to second-generation warehouses. Manufacturing buildings and converted retail stores are other options.
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The best locations for reverse logistics are near consumer households and retail stores. Proximity to recycling centers and other specialized infrastructure is also key.
“Reverse warehouses are distribution centers where returned merchandise must be inspected and sorted manually,” says Mark Russo, Savills North America head of industrial research. “Returns operations involve many touches, making them disruptive and necessitating separation from forward logistics.
“This requires accommodation within a specific area of a warehouse or in a stand-alone specialized facility. Returns can also be contracted to a third-party logistics provider or can be processed in co-warehousing space on a short-term basis, since typical space demand is highly seasonal.”
Reverse logistics has become increasingly important over the past two years, due to the fact the pandemic supercharged growth for e-commerce, with its much higher return rate. The major recent consumer trend has been a shift in spending from services toward goods. A growing percentage of those goods are being returned, Russo says.
A positive returns experience is a critical driver of customer satisfaction and retention. That means an efficient reverse warehouse operation is essential to that positive experience. “It is a key component of building a successful brand,” Russo says.
“On the flipside, reverse logistics is both labor and space intensive, which makes it expensive. The cost to process some returns can be more than the profit margin on the product. This explains why you are starting to see online retailers issuing refunds, while letting people keep lower-priced items.”
So far, reverse warehouses haven’t been successful in generating needed efficiency through automation. As mentioned, inspecting and sorting returned items defies automation because it is exceptionally manual in nature. But that could be changing.
“Looking ahead, we predict that advancements in robotics will eventually reduce the labor intensity,” Russo predicted. “[That] will also change the calculus for what types of buildings and locations make sense for a reverse warehouse.
“But we aren’t seeing that yet.”