The Economics of Store Returns

by JT McGee

store returns“About 80 percent. Maybe 85%.”

That was my girlfriend’s response to an easy question – what percentage of your purchases do you return to the store?

My girlfriend has this awful habit of returning damn near everything she buys. It’s genetic; her mom does it too. Sometimes I think it’s a game to see who can return the most in any given week.

You’d think there were an Olympic medal to be won at the rate they take perfectly good stuff back to the store.

Store Returns: Inefficiency at Work

Apparently store returns are a huge waste of time and money for stores. According to an article on CNN Money, retailers expect customers to return as much as $46.28 billion in inventory directly related to holiday sales. Another article by Chain Store Age, a publication for retailers, says that retail chains will lose as much as $3.5 billion to store return fraud in the post-holiday return season.

In 2008, customers returned 8.7% of all goods sold. That was up from 7.3% in 2007, according to the NYTimes.

I still can’t fathom why anyone would need to return 8.7% of all that they purchase. This year, I didn’t return a single item to the store. People like my girlfriend certainly bring up the average quite a bit.

retail sales, store returns
Chart courtesy of CalculatedRiskBlog.

From Store Returns to Dollar Stores

A quick Google search for “store returns” yielded this site: CloseOutCentral.com. On it you can find merchandise by the truckload sourced from liquidation sales as well as piles of returned merchandise.

I welcome anyone to click on over to the “Dollar Store” tab. And I always wondered how dollar stores managed to get so much stuff so cheaply. Dollar Tree Stores, Inc. reports their cost of goods sold comes to less than $.65 on the dollar. With sales, general, and administration costs at 24.23% of revenues, the company manages a fat gross margin of $.115 on every $1 item. OM NOM NOM.

If you’re thinking higher-end, you have to pony up! But there are some good finds, like this lot of 320 decks of playing cards for $112 at ViaTrading. Or how about 100 pairs of assorted branded shoes for $1899 per lot, or $18.99 per pair? That puts Payless Shoes to shame, and they don’t even sell name brands.

Anyone interested in 400 pairs of scissors for $100? That’s only $.25 per! You’ll never run out.

Industries Solving Simple Problems

It’s amazing to me how a whole industry can arise from a very simple problem. First, overzealous shoppers return their stuff to stores. Then stores sell the returns onto wholesalers. Wholesalers sell the inventory in complete lots, or full pallets to individuals and businesses.

Those businesses sell returns to new customers at a fat discount to the original price, either through dollar store-like retail shops or swap meets and flea markets.

I always thought most of the products returned went back to the store shelves. Maybe they do. But at some point a dent or scratched box corner is probably too much brand drain for a business. At that point, the merchandise takes on a whole new life for a new customer ready for discount.

{ 12 comments… read them below or add one }

PKamp3 January 2, 2012 at 11:30

Got any data on male vs. female returns? I have exactly the same experience… I returned maybe one thing in 2011 while my wife returns stuff on a regular basis. I know that her family returns a lot more items than my family does, in general.

I wonder how it shakes out?

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JT McGee January 4, 2012 at 07:40

Just anecdotal data. Since women buy more than men anyway, we can safely say they return more than men, too.

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Financial God January 2, 2012 at 13:29

The worst is when unscrupulous stores sell returns as if they were new… some computer stores do this and then they attempt to blame the customer when parts or missing or there are problems.

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JT McGee January 4, 2012 at 07:41

That’s especially annoying for electronics. Electronics are a category where if I buy something I’ll be very annoyed if “new” isn’t actually “new.”

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Jeffrey Trull January 2, 2012 at 17:25

8.7% is unreal! I hardly return anything since, but maybe I’m just more careful than most about buying in the first place.

I’m not surprised that returned merchandise ends up in the hands of liquidators. Buyers mangle the packaging all the time, and that makes it much harder to sell at the original retail stores I’m sure.

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JT McGee January 4, 2012 at 07:42

See – that’s what I was thinking. When you see it as a percentage 8.7% just seems huge! So even if returns are discounted by 25% on average, you’re looking at 2% of each purchase going straight to losses from returns.

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101 Centavos January 2, 2012 at 17:32

You’re right, MM. The sheer waste of it all is something we don’t normally think about. Besides the reduced value of the merchandise, the very act of returning items (the car trip, the standing in line, etc) is highly inefficient. In other many other countries, there’s a simple no-return policy. You bought it, you keep it , and tough nuts to ya.

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JT McGee January 4, 2012 at 07:43

I wouldn’t mind a no-return policy, since it seems I’d benefit disproportionately in terms of lower prices due to lower overhead and COGS.

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Corey @ Passive Income to Retire January 2, 2012 at 18:37

Yeah, I am one who keeps that percentage from being higher. I hate having to return items.

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JT McGee January 4, 2012 at 07:43

You and me both!

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Mike - Saving Money Today January 4, 2012 at 11:03

My wife isn’t quite as bad as your girlfriend but she does return a bunch of stuff. She has a habit of buying several different types of an item and then deciding which one to keep while returning the rest. She bought like 4 winter coats for my daughter to see which one fit best and then returned 3 of them.

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Dannielle @ Odd Cents January 8, 2012 at 21:33

I only return stuff if I go somewhere else and find the exact same thing a lot cheaper. Generally, I’m very cautious about what I buy, so I don’t make any impulse purchases.

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