Like Returning Gifts? Thank the Market
Earlier this week I returned a pair of indoor/outdoor heated slippers that I purchased online from a niche retailer as a Christmas present for my wife. The problem was that they resembled outdoor boots more than they did indoor slippers. As I started to search for the retailer’s policy on returns, I steeled myself for a time-consuming and costly process of perusing ambiguous and closely packed text and then undertaking the arduous and messy task of repackaging the item and engaging a shipper to return it. As it turned out, the return process was a breeze.
I began by viewing a three-minute online video on the retailer’s returns page, which clearly specified the steps I needed to take, beginning with printing out a prepaid FedEX shipping label. As instructed, I then repacked the item in the same two boxes that it was shipped to me in and affixed the prepaid shipping label to the shipping box. Both the gift box containing the slippers and the shipping box were deliberately constructed and sealed so that they were not mangled or otherwise damaged when they were initially opened. After entering my zip code on the webpage, I was shown 15 locations of FedEx “unstaffed” Express Drop Boxes and “staffed” Fedex Ship Centers and FedEx Onsite partners, including a Walgreens pharmacy, within a 3 mile radius of my home. I drove to a ship center less than two miles away and was back home within 45 minutes of starting the whole project. I did have to pay the shipping and handling charges but I was given the choice of free shipping if I accepted my refund in the form of a gift certificate for 110% of the purchase price of the returned item.
The ease with which I was able to return the product was not the result of a happy accident or the unique policy of a niche retailer. It was the product of fierce competition that is raging between online and brick-and-mortar retailers this holiday season. One retail consultant called returns a “battleground” among online retailers, whose holiday sales have grown almost 14% over 2016 sales to $107 billion. Returns for the entire retail industry, including online and traditional retailers, are expected to equal roughly $90 billion over the next few weeks.
Traditional retailers have a huge cost advantage over their online competitors in handling returns. In-store returns cost on average about $3.00 per item to process and, if in good condition, are available for resale within one day. Items shipped back to online retailers, in contrast, cost $6.00 apiece to process and are not available for resale for at least four days. In addition, consumers strongly prefer the convenience and personal service provided by in-store returns. Furthermore, it is estimated that merchandise purchased online is three times more likely to be returned than merchandise purchased from a brick-and-mortar store. Finally, traditional retailers also enjoy an incidental benefit of in-store returns that helps offset their already low processing costs: customers returning undesired gifts sometimes make additional purchases.
Online retailers have begun to compete vigorously and ingeniously to overcome their severe cost and service disadvantages with respect to returns. For example, Amazon.com has established a network of “locker” locations, including 400 stores in its Whole Food grocery chain, where consumers can personally return items purchased online. In Chicago and Los Angeles, Amazon has even made arrangements with Kohl’sCorp. to have the latter’s department stores accept returns of online purchases on its behalf.
Traditional retailers have not sat on their hands but thrown themselves into the competitive fray by further streamlining their own return and refund processes. Walmart has set up in-store Mobile Express kiosks, which it claims allows customers to complete the return process within 5 minutes and receive their refund in a day or so. Walmart and Target do not charge for returns and give the customer the choice of returning the merchandise in person or, as I did with the heated slippers I returned, printing a prepaid shipping label and dropping off the item at a designated shipping location. Kohl’s and J.C. Penney have implemented a similar return process, but the customer is charged for return shipping.
FedEx has fueled the competitive rivalry among retailers by establishing 10,000 drop off centers for returns this year, at Walgreen’s pharmacies, Kroger’s and Albertson’s grocery stores, and its own storefronts, among other locations.
This competition in returns is just one aspect of the concept of “rivalrous competition” expounded by Austrian economists. For Austrians, competition entails not only vigorous price cutting, but intense competition along multiple dimensions including product quality, branding, locational convenience, after-market services, warranties and guarantees, return policies, and so on. For example, airlines compete to the inch in the pitch (roughly “legroom”) and the width of seats. Lighter and less bulky materials are being used to cushion seats and magazines pockets are being transferred from the bottom to the top of seats to “stretch” legroom without actually displacing revenue generating seats. Top activewear and sportswear producers, such as Under Armour, Adidas, and Nike, compete primarily by building brand cachet and loyalty through their association with sports leagues, teams and stars. But there are still 2,000 producers in the industry, including private label and value brands. The industry may be soon turned upside down by Amazon’s purchase of bankrupt American Apparel. The giant online retailer is juicing the brand by featuring it prominently on its website. Overall, Amazon is on track to sell more clothing than Macy’s this year and has collected a tremendous amount of data on consumer buying patterns, but it must still translate this data into a product line that appeals to consumers. Upscale restaurants still compete on ambience, service, food quality and locale but increasingly in the last decade or so they are embracing brand competition via their association with or ownership by so-called “celebrity chefs” who gained notoriety on the Food Network. Nonetheless, in a fiercely competitive market, like New York City, home to 50,000 eateries, TV stardom does not guarantee a profitable restaurant venture as is attested to by the recent rash of failures of New York City restaurants owned by famous chefs.
Although no one could have predicted that fierce competition would break out this year in retailers’ return policies, it is explained within the framework of rivalry among entrepreneurial firms. This rivalrous competition, emphasized by Austrian economics, is an unpredictable and ceaseless process that operates throughout all dimensions of a good and is ultimately driven by consumer preferences and demands. It is continually revolutionizing practices and policies in all industries and not just prices. Not only are the demand curves for given goods continually changing, but entire markets themselves, which include all aspects of the good from branding to return policies, are constantly disintegrating and being remade with new supply and demand curves by the competitive process in the service of consumer preferences. This is a far cry from the textbook model of “perfect” competition which still holds center stage in neoclassical economic theory. In a perfectly competitive industry, ownerless firms run by managers “compete” by producing fixed and homogeneous goods and mechanically changing their price according to a fixed formula. This model of competition implies that any kind of non-price competition is “monopolistic” or “predatory” and diminishes consumer welfare. Drat! I guess I would have been better off spending a couple of more hours reading instructions, phoning the retailer, repacking, and searching for and engaging my own shipper in returning my wife’s Christmas present.