How Amazon Returns Work

Returns are a major headache for customers, and they drain companies of millions of dollars in unwanted inventory and extra labour. Returns create billions of pounds of waste and create entire walls of shame in warehouses around the world. But Amazon is trying to change all of that.

Where Amazon absolutely leads is in trying to be the easiest, the lowest friction return experience for the consumer and thereby win customer loyalty and increase customer purchases while they tackle some of these other big institutional infrastructure problems around returns.

From robots to in-person returns, the world’s most valuable company is redefining the returns process. And as e-commerce grows, smaller companies are finding ways to make money off returns. We wanted to find out how does Amazon process returns, and what’s the company doing to protect the environment and its bottom line. Returns are by far the largest challenge to e-commerce and I think to commerce in general for both retailers and manufacturers. As more consumer spending is shifting from in-store to online, it’s really just exacerbating the size of the returns problem that we all have to deal with.

Across the entire Amazon marketplace, you know, they now sell over 800 million products! So this is a scale that the world has never had to deal with before. There’s even an annual conference devoted entirely to solving the problem created by returns. Namely, inefficient reverse logistics is a huge loss for companies. In a traditional brick-and-mortar store, we might have average return rates of 8 to 10%. But in e-commerce, it’s totally common to see 20 to 30% of all purchases get returned.

Forrester research estimates that e-commerce will see $207 billion dollars’ worth of returns in 2019. Amazon is about half of e-commerce, so slightly more than $100 billion dollars in returns happen in North America just with Amazon. So that’s a huge expense! And the returns process matters to customers. According to data compiled by Invesp, 79% of consumers want free return shipping; and 67% check the returns page before making an online purchase. All this has led to the current trend of free return shipping, which is now offered by almost half of retailers.

Where the challenge is: Can you do it in a way where the unit economics don’t kill you? The difference with Amazon is they have the scale and they’ve trained their investors to accept that in the beginning they may do things at a loss. What that gives them the flexibility to do then is to invent. They bring a lot of talent to the table and they figure out how to optimise and create efficiencies that will allow them to have the unit economics work to their favour; and ultimately get those margins back.

The complicated reverse logistics journey starts when you decide to return an item. Amazon gives you 30 days from the day you receive an item to bring it back or put it in the mail. Generally, you get 30 days. And generally, they give your money back and even include paying for shipping both ways. Which inspires other companies to have to follow suit. And with every return, Amazon wants to know why.

  • 34% say the size, fit or colour was wrong.
  • 21% say the item was damaged, broken or no longer functional.
  • 14% say the item wasn’t as described.
  • 10% simply didn’t like it.
  • 9% changed their minds.
  • 5% didn’t arrive in time/late.
  • 4% intended to return when purchased.
  • 3% others.

If Amazon sees on their scoring system that you’re a customer that abuses the return policy, it is possible that they’ll charge you a fee for that out-of-reason return. Whereas for a good customer, they might continue to offer that return for free. Whether a return is free also depends on the method you choose for that return. That menu is going to vary slightly depending on your geography and the item.

A popular thing that they’ll do is you put it back in the box, you seal the box. And we’ll send someone to your house to pick up the box; and they’re going to charge you for that option. However, if you live in a place where there’s literally no other options, they may offer that for free. But in most cases, they’re going to say, “If you bring it to a UPS store, it’s free”. But for certain items where the logistics costs way outweigh the potential value of that item; if you’re not someone that they’ve identified as a return abuser, they very likely are gonna tell you to just not worry about the return.

The returns process is now so easy that customers have been caught gaming the system. One man reportedly scammed Amazon out of $370,000 by sending back boxes of properly weighted dirt instead of the returned products. Amazon has also banned customers who appear to be conning the system by making too many returns. In all, return fraud cost to the retail industry $18 billion in 2017!

 You have a secret credit score that says how profitable and how good a customer you are for that retailer. A particularly egregious and common version of this is there’s a huge spike in TV sales the week before the Super Bowl. And there’s a huge spike in TV returns the week after the Super Bowl. So increasingly, your own behaviour can impact the returns experience that you get.

But even those items that are legitimate returns can create a lot of pressure, specifically on Amazon workers. For every package you return from your doorstep, there’s a delivery driver who has to pick it up and get it started on the journey back to the warehouse. It’s those boots on the ground that cost Amazon the most. As more of Amazon’s overall volume gets shifted from UPS and the US Post Office to Amazon’s own delivery network, they’re also able to handle a lot more of the returns themselves. The logistics of picking something up at someone’s house and taking it back to the fulfilment centre are actually harder and more expensive than the logistics of delivering something to the home.

Amazon has one big way to relieve the pressure on its drivers, and its bottom line: use YOU for the delivery. In July, Amazon expanded its partnership with Kohl’s to allow items to be returned without a box at any of Kohl’s 1100 stores for free. If they have to go to a hundred consumers’ houses and collect one box for a return, that’s much more expensive than having those hundred consumers all go to one Kohl’s.

Kohl’s needs traffic. Retail traffic is down. You’ve got to find a way to get people in the stores. They are now getting the Amazon customer into their store who then has money in their pocket after a return. It’s a great opportunity! So far, Kohl’s said results are promising. “The net impact of the traffic and sales we’re getting and then considering the support that we’re leveraging. So in terms of the support inside of our stores, reverse logistics, all of that is expected to be a positive EBIT contribution for 2019… we see this as a profitable venture for the company.” – Michelle Gass, Kohl’s CEO.

If the cost of me handling the return, which by the way they’re gonna help pay for, is lower than getting another pair of shoes sold to the person walking in, then it’s ultimately a net gain. In the world of Amazon partnerships, this Kohl’s deal is almost unique in how favourable it is for both parties.

According to data compiled by Invesp, 62% of customers are more likely to shop online if they can return an item in-store. With Amazon, you can also return items in-person without a box to one of 2800 Amazon Hub locker locations. Which can often be found at Whole Foods or college campuses. Depending on your location, you can also return items in person at UPS stores and a growing number of Amazon Books and Amazon 4-star stores, although this sometimes does cost a fee.

Other retailers are trying to catch up with Amazon’s in-store return options. Walmart has actually created a separate return line so that you don’t have to wait in line behind other people trying to get Walmart service. Target has set up dedicated e-commerce space in the front of the store.

At Nordstrom’s Local stores in New York and LA, you can now return items purchased online from other retailers like Macy’s and Kohl’s. And FedEx announced that consumers can now drop off their online returns at thousands of Walgreen stores. And print their return labels in store too. UPS also unveiled a similar partnership, allowing pre-labelled returns at 1100 Michaels stores in the US.

Amazon and everybody else are constantly trying to enhance that, you know, user experience and figure out how do you best do that. But you still have the reverse shipping. You have to pay for that shipping to go back. You have to deal with the item itself. How do you file it away? How do you deal with it? This creates another big challenge.

The reality is it often ends up in a place of limbo. A place that some retailers call “The Wall of Shame”. Sometimes we’ve seen it as high as like, you know, 50 – 60 thousand square feet of just all items that are just returns, all mistakes, all the stuff in there. And we’re talking about thousands of items. We sometimes talk about millions of dollars in inventory that is just sitting there and it’s just costing them too much to try to fix that issue that they just push it aside.

It’s at the wall of shame where LA-based start-up inVia says its 400 robots deployed in US warehouses are making a big difference. The robots can be programmed to process returns in a way that’s custom to the needs of a company. Customers would approach and say “What can you do to just fix my wall of shame?”. That’s what inVia wants the most. So with their robots, as the items come back they’re actually able to go in and file them away so they’re taking away that pain point of moving the items back.

inVia is now programming its robots with separate software entirely devoted to returns. For example, after Christmas, there might be a lot of Christmas returns which nobody’s probably gonna order till next year and they’ll go file it away pretty far away. These robots are meant to offer competitors an alternative to Amazon’s Kiva robots, which were used by stores like Walgreens, Staples and The Gap before Amazon bought Kiva in 2012.

A major difference: inVia’s robots can handle small totes up to 40 pounds. Often carrying one individual item, while Amazon’s robots move entire 1000-pound shelves all at once. inVia says this more finite control helps cut down on one big reason for returns – the warehouse worker accidentally boxing the wrong item. They only present the person with one item. If you look at the Kiva case, you have a big rack with a bunch of items. There’s a guided pointer that points you, but you still can make a mistake. You know, you’re trying to move these things in seconds. So with inVia robots, workers are only presented with one choice, so there’s a very low probability of making a mistake.

Amazon says its Kiva robots are not used in areas that handle returns. inVia wouldn’t disclose if it’s been approached by Amazon about acquiring its robotic return software but did confirm it’s been in talks with a lot of Amazon’s competitors. So far, inVia’s robots are being used in Rakuten’s US warehouses and smaller companies like discount e-commerce retailer Hollar.

Once return items are sorted by human or robot, it can still be a major problem to find the best use for them. This can lead to a huge surplus of inventory, wasted fuel emissions and unnecessary packaging to handle it. In a nutshell, returns are hard on the planet.

As much as five billion pounds of waste gets thrown away as a result of these returns that can’t be resold. So to put that in perspective, that’s 250,000 garbage trucks full of goods that people bought. Half of which from Amazon, and then ultimately had to be thrown away because it couldn’t be resold.

The environmentally unfriendly disposal of unsold and returned inventory has made big news. Burberry famously revealed that it incinerated 28.6 million pounds of unsold and returned products – a practice it’s since stopped.

It was reported that a single Amazon facility sent 293,000 products to a garbage dump in just nine months. And after a documentary found Amazon destroyed three million products in France, the country vowed to outlaw the destruction of unsold consumer products by 2023.

What’s super interesting is consumers are increasingly sensitive to environmentally unfriendly disposal. Even when destroying the product is the best economic option, retailers are having to pivot away from that because consumers don’t like doing business with these ecologically unfriendly companies.

In response, Amazon launched a program called Fulfillment by Amazon Donations where donations became the default option for all sellers when they choose how to dispose of their unsold or unwanted products stored in Amazon warehouses in the US and UK. That’s entirely the result of customer sentiment pivoting away from Amazon.

According to Narvar’s 2019 consumer report, 52% of shoppers said they would go in-store to return items if it helped reduce the environmental cost of returns. Amazon also has a program called Amazon Warehouse, which sells renewed goods at a discounted rate. Another big tool Amazon uses to help cut down on wasted inventory: a massive amount of data on customer behaviour.

They can look at information about you and other folks like you, and they can then have, you know, their technology can make predictions that says “Hey! This product, there’s gonna be others that want it!” There’s demand for it. So if they get it back to the region where it was shipped, they actually think they can ship it to a buyer in that same spot.

But then there’s all that packaging waste created by returns, which Amazon is trying to reduce. Kohl’s and the Amazon pickup locations generally are using poly bags and other kinds of containers when they aggregate all of these returns together to dramatically use less packaging. Amazon has also replaced many cardboard boxes with more lightweight plastic mailers. Although these mailers aren’t recyclable in kerbside bins, it claims the plastic mailers have reduced packaging waste by 16% and eliminated the need for more than 305 million shipping boxes in just 2017. CEO Jeff Bezos pledged to make Amazon carbon neutral by 2040.

While Amazon works to cut down the waste and high cost of returns, there’s a whole other side to it: a growing market for companies and individuals that make money off returns. It’s sort of a new business that kind of started from this e-commerce that nobody ever thought of. One example is a company called “Happy Returns”. It has 700 return centres at malls and inside stores where customers can come return items from about 30 popular online stores.

“Happy Returns” gets paid by its retail partners to aggregate all its returns. Saving money on that last-mile delivery person who would otherwise need to make multiple stops. It claims to save e-commerce retailers 20 to 30% on shipping costs. The store or mall also pays “Happy Returns” a fee, hoping the concierge service will bring shoppers into its stores.

There’s also a market of third-party companies that buy returns in bulk, repackage them, sometimes with added accessories, and resell them for a profit. So you can go to some of these third-party companies and buy things that have been returned, kind of almost like a salvage process. And the really fascinating thing is some of that ends up back on the Amazon marketplace.

There’s also a growing number of companies specialising only in reverse logistics. GENCO for example, was bought and rebranded as FedEx Supply Chain. It helps liquidate returned inventory by sending it to smaller markets like Brazil. It finds a market or place for donation for products that won’t sell in the US. For example: The Super Bowl champions t-shirt of the losing team.

And of course, there are discount retailers like TJ Maxx that buy returned and unsold merchandise in bulk, and then mark it up before selling to consumers. We should be absolutely paying attention to the returns market. There are significant economic opportunities for companies that are able to help retailers with this problem. Meanwhile, Amazon itself is still working to make returns more profitable by making the process easier and keeping its customers coming back.

Amazon is definitely not perfect at this whole returns process, and there are places where other retailers might be more ecological or do something better. But on the whole, Amazon is driving a lot of the innovation in the returns market – more so than reducing their costs. They’re saying “Let’s make it really easy and hassle-free for customers to return” and that will make customers trust them more and be more confident of buying from Amazon instead of its competitors.


This video was played in class during the WSQ Order Fulfilment and Returns Processing course.