How can retailers protect themselves from a “pay later” returns culture?

The Retail Gazette takes a closer look at the growth of pay later returns, and what retailers can do to protect themselves from this growing consumer trend.

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online retail sales

The concepts of “try before you buy” and “intentional returns” are nothing new, but with Asos now six months into a new partnership with Klarna and consumer familiarity with the process gaining traction each day, the myriad issues around delayed refunds are about to hit home for retailers.


Are retailers delaying the inevitable?

Last month a new research paper from Brightpearl found there could be an imminent “returns tsunami” on the horizon for retailers. According to the research, 76 per cent of consumers said they would “definitely” or “maybe” purchase more items if offered a try-before-you-buy option, allowing them to return them without ever paying anything at all.

There’s clearly plenty of appeal for consumers now able to turn their homes into changing rooms or to try on items in multiple sizes before finding the perfect fit. But expectations on retailers large and small to offer the same service will also result in mounting financial pressure, even for the largest of retail brands.

Klarna’s business has been going from strength to strength since it was founded in Stockholm in 2005. They’ve helped over 89,000 merchants embrace their deceptively simple idea of “buy now, pay later”.

Now one of Europe’s biggest banks, Klarna is becoming best-known for providing payment options for retailers. It operates by running a micro-credit check on customers, fronting their bill with a retailer and paying the merchant themselves. The customer then receives their goods and a Klarna invoice with 14-30 days to pay via credit or debit card.

However, the practices of Klarna’s first adopters (including ASOS, Topman and Schuh), have hidden dangers that could potentially overwhelm retailers as a huge surge of intentional returns may undermine profits.

With the pros weighing so heavily on the side of consumers, it’s likely the try-before-you-buy trend will have a major impact on both purchase behaviour and returns.


Just how much of an impact will it have?

It’s not something that’s happened overnight. Brightpearl’s report found that more than 40 per cent of retailers had seen a marked increase in “intentional returns” over the past twelve months, when customers deliberately over-order multiple items without the intention of keeping everything in the virtual trolley.

The research found 51 per cent of the retailers surveyed agreed that their margins are being strongly impacted by the process of handling and packaging returns and 72 per cent believe they will be squeezed even further as the try-before-you-buy trend intensifies.

Looking at the breakdown by age, this behaviour is set to become the norm – a full 50 per cent 18 to 24 year olds in the UK admit to buying multiple items with the intention of returning some. The trend is also more prevalent among female shoppers, with 28 per cent saying that they have bought more items than they intend to purchase, for the benefit of trying them before they purchase.

While the cost is certainly a burden, by embracing the behaviour and indeed encouraging it with try before you buy (just as Asos has done) retailers could also benefit. Most respondents believed that they would buy between two or three more items per month if try before you buy was an option, however the ramifications for merchants are far more wide-reaching.

While only 17 per cent of global retailers having already adopted the practice to date, the report predicts that by 2019, more than a quarter will offer this type of service to customers, with the trend likely to spread to technology, sports and homeware retailers too.

“For consumers, try-before-you-buy is a positive trend, removing another barrier to purchase,” Brightpearl chief executive Derek O’Carroll said in light of the study’s findings.

“The good news for retailers is that this will almost certainly lead to an uplift in sales. Our study indicates that shoppers want the option to order items such as clothes online but only pay once they decide to keep them, so it’s something that all retailers will need to consider to remain competitive,” he added.

“However, this trend could spell disaster for retail business owners if they do not prepare by having the right framework and solutions in place to manage returns. And, they’ll need to do so quickly as the trend becomes more widely adopted over the next year.

“Consumers will buy more, but retailers must be ready for a potential flood of returns. With shoppers indicating that they could return an extra three items a month on average, it could spell an unmanageable tsunami of returns for some merchants,” O’Carroll commented.


How can retailers protect themselves?

Consumers polled by Brightpearl indicated they would certainly buy more if the process is made easy, but could return an extra three items a month. When the average cost of processing a return is factored in, many retailers could find that this trend will at least triple the cost of returns if they continue to take no action. When a retailers’ successes and failures are often made in the margins, pay later returns could have a major impact on a brand’s ability to survive, thrive or indeed fail.

Retail Gazette spoke to Simon Willmett, financial director of business funding specialist Nucleus Commercial Finance, to find out how retailers can protect themselves from the risks pay later returns bring.

“While consumers enjoy ultimate convenience, choice and flexibility, retailers are grappling to get to grips with the impact that this new relationship has on their cashflow,” Willmett told Retail Gazette.

“The biggest watch area, particularly for smaller retailers, is when the payment terms they are giving to their own customers are longer than those that they themselves are beholden to by their own suppliers. Clearly, this has the potential to bring cashflow issues, with a financial gap emerging between incomings and outgoings.

“Part of the struggle related to this new service trend is that is very difficult to forecast spikes in consumer purchasing, and to understand how many ‘purchases’ will result in a return – business can be booming one minute, and then a complete nightmare the next.”

But Willmett also suggested that pay later returns aren’t entirely bad news for retailers, as long as they know how to work the system to their advantage:

“The process of selling goods for payment is more complex than it initially seems, and this ‘library’ type approach to items, with consumers effectively borrowing and then returning stock makes it challenging for retailers to forecast costs correctly when it comes to buying stock, merchandise handling, and maintaining a healthy inventory.

“To overcome these challenges, retailers might want to consider creating an ‘Open to Buy’ budget – essentially, avoiding buying all of their merchandise at once, by taking into consideration customer needs over a 12-month period.

“Of course, there are some positives to be gleaned from this. Retailers who prepare and can get ahead of the game can benefit from the ability to track returns. As in many other areas of business, making data driven decisions will put businesses in the strongest position for growth.”

From the research already emerging, it looks like pay later returns are much more than a passing phase and are instead likely represent a long-term consumer behaviour. Online retailers that put the processes in place now to handle their returns potential tripling in the next few years will be well-prepared for the impact on their margins. They’ll be able to embrace a new shift in e-commerce, without leaving themselves open to expensive returns processes that suit neither the business or their customers. But fail to plan, and it looks like they really will be planning to fail.

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1 COMMENT

  1. You have to wonder if these retailers have ever visited the real world. Firstly you need higher stock levels to make this work, secondly, a large percentage gets worn and returned (oh yes it does) Not to mention all the extra stock movements The consumer will be laughing at us. This will so end in trouble, or more likely a CVA .

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