E-commerce orders may be harder to return during the holiday season as sellers seek to maintain profits

Direct-to-consumer companies as well as e-commerce platforms Flipkart and Amazon are likely to set higher standards for accepting returns than in previous festive seasons to preserve profit margins by eliminating reverse logistics, staffing and packaging costs, according to two executives aware of the developments.

Shashwat Swaroop, co-founder of Return Prime, a returns and exchange optimization platform owned by GoKwik, said product returns tend to spike by 30% in the last three months of the year as e-commerce companies typically run sales during major festivals such as Dussehra and Diwali, but not on weekdays.

Executives said common ways to restrict returns include shortening return periods, charging restocking fees to customers who frequently return items, offering only store credit and not allowing payment on delivery. In some cases, sellers may choose to go easy on loyal customers while limiting options for other customers, Swaroop added.

E-commerce companies, especially marketplaces, have been struggling to control returns over the past few years. Last year, Myntra introduced a fee structure that increased ₹199 to ₹299 for customers with higher return rates. However, with return rates rising, they are now scrutinizing consumer behavior more than ever before.

Amazon, Flipkart and Nykaa have yet to respond Mint Seeking comment on this matter.

A growing problem

Managing product returns has become increasingly cumbersome for e-commerce companies. Initially a way to lure customers, returns could cost Indian e-commerce companies $20 billion to $30 billion in revenue by 2025, according to Return Prime. Indian e-commerce is expected to be worth $188 billion by 2025, according to Brand Equity India Foundation, citing Grant Thornton estimates.

Although e-commerce sales have increased 38% during the pandemic, return rates have doubled. One founder of an online clothing company who asked not to be named said return rates were even higher during the holiday season.

“Deals on online platforms lead to increased impulse purchases, so there is a greater likelihood of buying something you don’t really like or need. In terms of clothing, customers may also buy something to wear only to attend events,” the executive added.

Reverse logistics can be very costly. Between picking up the goods, shipping them back to the warehouse, doing quality checks and ultimately refunding them, companies often lose profits, said Satish Meena, a consultant at Datum Intelligence.

“Returns typically account for 10-12% of the entire product cost, leaving brands with very little margin. In some cases, brands may have to pay out of their own pockets to facilitate returns,” Meena points out.

According to Datum Intelligence’s 2024 Festive Sales Report, the largest online purchase category during the festive season is fashion, followed by groceries and personal care.

The most returned items are fashion products, including accessories, handbags and footwear. Personal care and electronics products can be returned only in special cases if they are defective or damaged during shipping. In the quarter ended June, the net sales volume (NSV) of Nykaa’s fashion business accounted for 30% of its gross merchandise volume (GMV).

“A higher ratio is better because it shows that the brand is losing less on each returned order,” said Meena of Datum Intelligence. While NSV includes discounts and cancellations, it can be a good indicator for assessing the profitability of a company’s returns.

Difficult to implement

To be sure, consumer product companies are unlikely to implement aggressive strategies to curb returns, and will instead take a more gradual, subtle approach.

“Returns and exchanges are key value drivers for online companies. Many consumers will choose to shop online only if they have the option to return products,” Mina said, noting that any major policy changes could have a direct impact on sales.

Return Prime’s Swaroop said eliminating returns altogether could lead to a drop in GMV of up to 50%, and that almost 85% of shoppers remain loyal to companies that offer easy returns.

However, many companies are building return-related costs into their pricing. E-tailers including Nykaa and Myntra now charge customers a platform fee for possible order returns.