Inside the Hidden World That Handles Your Holiday Returns
For most retailers, the weeks leading up to Christmas are a frenzied crescendo of activity. But for Michael Ringelsten, the excitement starts after the holidays.
Ringelsten runs Shorewood Liquidators, which collects all those post-holiday returns—from unwanted gadgets and exercise equipment to office furniture and popcorn machines—and finds them a new home. Wait, what? A new home? Yep. Rejected gifts and returned goods don’t go back on the shelves from which they came. They follow an entirely different logistical path, a weird mirror image of the supply chain that brings the goods we actually want to our doors.
This parallel process exists because the cost of restocking and reselling returned items often exceeds the value of those items. To cut their losses, online retailers often turn to folks like Ringelsten.
I discovered Shorewood Liquidators through a rather low rent-looking online ad touting returned items from The Home Depot, Amazon, Sears, Wal-Mart, and other big retailers. I was surprised to find the items weren’t bad. Some were an out-and-out deal, like this comfy Arcadia recliner (perfect for my next Shark Tank marathon). Bidding starts at 99 cents for knickknacks or $5 for nicer stuff. The descriptions state whether there are scuffs, scratches, or missing parts.
“This recliner? It will definitely sell,” Ringelsten says. Shorewood employs 91 people who work out of a 100,000-square-foot warehouse in Illinois—a space that, after the holidays, is a Through the Looking Glass version of Amazon, selling unwanted gifts at rock-bottom prices. And as Americans buy more and more holiday gifts online, they’re also returning more, creating new opportunities for businesses prepared to handle what others don’t want. Call it “re-commerce.”
The Hidden World of Returns
UPS says last week it saw the highest volume of returns it expects to see all year, with people sending back more than 5 million gifts and impulse purchases. On the busiest day of that week, the shipper said, people sent back twice as many packages—1 million in all—than the same day a year ago.
But those returns often don’t return from whence they came. Instead, they’re shipped to returns facilities—some operated by retailers, others that serve as hubs for many sellers. Once there, the goods are collected, processed, and often resold by third-party contractors, including wholesalers and liquidators like Shorewood. These contractors often use software that determines the most profitable path, be it selling them to consumers online, selling them in lots to wholesale buyers, or simply recycling them. If none of these options is profitable, the item may well end up in a landfill, making the business of returns an environmental issue, as well.
The business of returns was for many years “the ugly stepchild of retail,” says Adam Vitarello, cofounder and president of Optoro, which makes returns logistics software. “It was guys with cowboy hats buying these things for pennies on the dollar, shipping them from one warehouse to the next. Now, we can use technology.”
Investing in Returns
This year’s post-holiday season will thoroughly test such tech. Though it’s unclear just how big the re-commerce business has become, the growth of online shopping in general has created a widening stream of returns in search of a new home. According to the National Retail Federation, Americans returned $260.5 billion in merchandise in 2015, with a little less than a quarter of that—$63 billion—coming from holiday sales. Research firm eMarketer expects a 5.7 percent gain in retail sales in 2015 once the data is compiled, with e-commerce’s portion expected to see double-digit growth. And the return rate for online purchases is about three times as high as for items bought in stores.
That’s in part because retailers cannot abstain from having a robust online presence, and online shoppers expect quick, no-hassle returns. “For a long time, retailers punted on the returns experience,” says Kevon Hills, vice president for research at StellaService, which evaluates customer service performance of online retailers. “From their standpoint, it was counterintuitive to invest in a part of the experience where the shoppers are asking for their money back.”
With retailers investing more in returns, they must also find a way to ensure they don’t hemorrhage money in the process. That’s where re-commerce comes in. Major retailers can’t resell returned items, even if they’re still brand new, says Shorewood’s Ringelsten. “You don’t know where the product went after it left your store, so you can’t put it back on your shelf.”
More to the point, people most often return things because they are defective. Retailers simply don’t have the bandwidth to deal with the suppliers. “It would be very expensive for a company like Amazon to handle returns,” Ringelsten says. “They would have to sort it out—and there are a million manufacturers out there.” What’s more, he says, manufacturers usually supply items to retailers like Amazon through a contract where it’s understood that items that may be returned will simply be liquidated.
According to Ringelsten, Shorewood Liquidators processed 180,000 items in its first year of business, four years ago. In 2015, the company processed 2 million items. Today, Shorewood receives about five truckloads of returned items daily, amounting to about 4,000 items. Employees sort them and make notes on defects and whether the item might be more valuable sold for parts. Everything is auctioned online, through eBay or Shorewood Liquidator’s portal. The company also sells pallet lots when it’s particularly busy, like after the holidays. This is often easier, when items might be sold as “salvage” or “uninspected returns” that wholesalers might take a chance on buying.
It’s much the same process with Optoro, though that company claims to have proprietary software that can determine the path for highest profitability for retailers. Optoro also has its own online seller portals for direct-to-consumer and bulk items.
Profiting Off Your Loss
OK, but how do these companies profit from stuff you don’t want? Ringelsten says Shorewood pays clients like Amazon and Home Depot between 5 and 20 percent of the full retail price of an item. The price varies with the nature of the product—electronics command a higher price than, say, plumbing. Shorewood gets as much as it can for the item, with an eye toward maximizing the margin. Volume is the name of the game. “It’s really one of these businesses where unless you’re doing a high volume, it’s hard to make money,” Ringelsten says.
If an item doesn’t sell at auction, it’s auctioned again or added to a wholesale pallet. Anything of zero monetary or recycling value—about 10 percent of the stuff Shorewood handles, Ringelsten says—is sent to a landfill.
Despite the success of the returns business, however, Hills says retailers have an even stronger incentive to reduce returns. Part of this happens organically as customers better understand what they’re buying, and from whom. “Maybe the first time you order from a company, you order four sizes. But the next time you order you know you’re a 6 versus an 8,” he says. “Retailers just have to bet on that return rate going down over time.”
That would be good for retailers and bad for re-commerce. But Hills doesn’t think third-party companies like Shorewood and Optoro will be in trouble anytime soon. Retailers, he says, are still working on making returns easier. It’s a competitive necessity for retailers that, at least for now, creates a virtuous cycle with re-commerce as the prime beneficiary. To get your business, online retailers need to make returns easier. Easier returns leads to more online shopping, which leads to more returns. When you send something back, Ringelsten will be waiting.