Did that tackle box from Amazon leave you with too many puzzling lures? Or did those trendy lightsaber chopsticks fail to get a desired chuckle from your favorite on-the-go diner?
Holiday gift returns have become a big business, fueling the growth of the third-party logistics industry to handle the load. A new report from real estate brokerage giant CBRE said third-party logistics providers now represent the biggest leasing parties of U.S. industrial space, accounting for nearly 31% of all industrial leases of 100,000 square feet or more in the first three quarters of the year.
In the past four years, third-party logistics providers, many of which provide reverse logistics services, have leased more than 100 million square feet of bulk warehouse space annually, according to CBRE.
For holiday gifts that fell short this season — including those purchased online — more third-party logistics providers are stepping in to help get those unwanted items back to the retail shelf within an ever-shortening return window.
"Returns tend to be relatively steady as a percent of total sales from retailers this time of year," Joe Dunlap, managing director and global head of CBRE's supply chain advisory group, told CoStar News. "As the revenue increases for our retail clients, their return rates increase proportionately. It's a good and a bad story with respect to our retail clients are growing, but the total volume of returns is growing as well."
The National Retail Federation, an industry group that tracks the retail industry, expects holiday sales to reach record levels this year, growing 3% to 4%, which translates to $957.3 billion to $966.6 billion. Meanwhile, e-commerce sales are predicted to increase 7% to $273.7 billion, the industry group said. CBRE calculated the maximum value of online returns to reach $82.1 billion this year based on a return rate of 15% to 30%.
That anticipated spike of returns, which have been on the rise simultaneously with retail sales, has its own real estate undercurrents, with third-party logistics providers needing more space to process these no-longer-needed goods, Dunlap said.
Some of the top third-party logistics companies are household names, including UPS, FedEx, DHL and GXO Logistics. The industry's market size has grown 2.25% in the past year, becoming a nearly $259 billion industry, according to a report by research firm IBISWorld.
The sheer amount of returned goods varies by retailer, Dunlap said, with brick-and-mortar retailers seeing fewer returns with a return average of 8% to 10% since consumers are able to try on clothing or touch a product before making a purchase. Meanwhile, online retailers see nearly double the number of returns, accounting for upward of 20% of their sales as consumers are left to guess at clothing sizes or realize the goods were not what they expected, he said.
During the holiday season, there's an e-commerce spike as consumers seek to find online treasures for their loved ones, Dunlap added, which then increases the likelihood of a return. The trek for a sought-after product can also be perilous, from the warehouse to trucks to planes, which if something is damaged, could also lead to a return.
Some retailers are able to handle returns themselves with a standalone return center, while others seek third-party logistics providers to help them manage the process during what is considered to be a seasonal period, Dunlap said. The rise of e-commerce is expected to continue, he said, with this part of the retail industry anticipated to account for more than 30% of sales by 2030. In turn, Dunlap said he anticipates reverse logistics needs — and the real estate needed to support that business — to continue to increase.
"The percent of returns to holiday sales is going to steadily grow and this will be a component in driving up demand for space from our clients," he said.
Colliers' U.S. Director of National Industrial Research Craig Hurvitz echoed Dunlap's sentiments, adding that e-commerce keeps expanding year over year with those online sales accounting for 15.6% of retail sales during this year's third quarter. Online sales are expected to account for more than 20% of retail sales by 2027, he said, with the real estate requirements to handle the logistics of returns growing as well.
"Both factors will positively impact demand [for industrial real estate] in the future," Hurvitz told CoStar News.
Rising Costs
One wild card to this growth: Retailers pushing back on returns.
To curb excessive returns, Hurvitz said some retailers have begun charging a fee to return purchased goods. Others have instituted new policies with shorter return windows. Those actions already have seemingly had an impact, with online returns dropping last year to 17%, compared with the prior year in which there was a 22% return rate, according to the National Retail Federation.
Optoro, the technology provider that helped shape the online return report with CBRE and owns Express Returns, estimates the cost of returns in the United States has risen by 50% or $149 billion since 2018. Those returns can wipe away as much as 50% of the sales margin, with the average cost of returning an unwanted item being 27% of its purchase price.
Along with costs, returned merchandise creates 9.5 billion pounds of landfill waste annually, according to Optoro, which tracks return waste. This waste is equivalent to 10,500 fully loaded Boeing 747s, the company said.
To combat the rising cost of returns and waste, Optoro found that the majority of retailers revised their return strategy this year to include additional drop-off locations, charging for returns, allowing customers to keep certain return items and providing an online returns portal. Of the retailers surveyed by Optoro, 44% increased their return and restocking fees, which is becoming a growing trend. Meanwhile, most consumers favor retailers with lenient return policies and 44% of consumers said that free shipping on returns was important.
Express Returns teamed up with Staples to provide return services in more than 1,000 of its stores in 2020. Likewise, Happy Returns, based in Atlanta, is expected to offer its rival label-free return services to more than 12,000 locations upon the expected closing of its acquisition by UPS. These partnerships only add to the return business boom and create more places to offer convenience for customers.
Optoro CEO Amena Ali said in a statement that returns, once considered to be taboo in retail, are becoming the norm and "smart retailers have realized that returns are a revenue opportunity" with the right technology and strategy not only cutting costs and limiting waste, but delivering an experience to win over customers.