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How Amazon plans to solve its massive returns problem

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Amazon is handling a growing number of returns that pose a huge problem for the e-commerce giant and the planet.

A National Retail Federation survey found that a record $761 billion in merchandise was returned to retailers in 2021. This amount exceeds what the United States spent on national defense in 2021, which was $741 billion.

Amazon wouldn’t share its overall return figures, but in 2021, the National Retail Federation estimates that 16.6% of all merchandise sold during the holiday season was returned, up more than 56% from the previous year. last year. For online purchases, the average return rate was even higher, at nearly 21%, compared to 18% in 2020. With $469 billion in net sales last year, return figures from Amazon are probably amazing.

Returns in the United States generate 16 million metric tons of carbon emissions during their complicated reverse journey and up to 5.8 billion pounds of landfill waste each year, according to returns solutions provider Optoro. .

“We’re talking billions and billions and billions of [dollars of] waste that is a byproduct of consumerism gone mad,” said Mark Cohen, director of retail studies at Columbia Business School and former CEO of Sears Canada.

“Reverse logistics is always going to be nasty because the merchandise, in most cases, cannot be resold as it was originally,” Cohen said. “The fastest way is in a dumpster, in a landfill.”

Amazon told CNBC it doesn’t send any items to landfills but relies on “energy harvesting” as a last resort.

“Energy harvesting means that you burn something to produce heat, to produce energy. And you rationalize the disposal of goods as a conversion from one form of matter to another,” Cohen said. . “To the extent that they do that, I don’t think they fully reveal it.”

Amazon said it was “working toward a goal of zero product disposal,” although it did not set a target date for achieving that goal.

“We encourage a second life on all products we receive,” said Cherris Armour, Amazon’s North American returns manager in an exclusive interview with CNBC.

“And that takes the form of selling the majority of the items we receive. They’re resold as new and used, or they go back to the seller or supplier, or we donate them,” Armor said.

Energy recovery, Armor added, only applies to “items that we cannot recover or are not recyclable” for legal or hygienic reasons or product damage.

Armor first joined Amazon 12 years ago, starting as a night operations manager at a fulfillment center in Indianapolis. She said the goal of zero product disposal was something they had been talking about at Amazon for many years.

Cherris Armor, Amazon’s North America reverse logistics manager, poses with two other Amazon employees at a fulfillment center in Phoenix, Arizona, in November 2021.

Amazon

Easy returns are good business, but so what?

Researchers found that consumers like easy returns.

An oft-cited 2018 survey of 1,300 online shoppers found that 96% would return to a retailer if they had a good returns experience, and 69% were deterred from buying if they knew they would have to pay the return fees. In 2019, Amazon expanded free and easy returns to millions of items.

“Amazon has really been a game changer in the world of reverse logistics because of the ease of their returns,” said Zac Rogers, who handled returns for an Amazon subsidiary called Quidsi from 2010 to 2012 before becoming a professor. Supply Chain Management Assistant at Colorado State University.

“So now your more traditional retailers like Walmart or Target are implementing similar policies because that’s a really big part of how you compete on the retail side,” he said. . “It creates brand loyalty, makes you more likely to sign up for [Amazon’s] Prime, and Prime is really what keeps this company spinning.”

Amazon now allows returns at 18,000 locations, including the ability to drop off items without a box or tag at Kohl’s, UPS and select Whole Foods stores. There’s a Try Before You Buy program for Prime members designed to make clothing returns even easier, with return labels already included in the box. At the extreme of easy returns, Amazon is increasingly allowing customers to keep certain “returned” items while refunding them.

“If I tell you to keep the product, instead of counting the cost and the carbon effect of taking it back, I look better as a company, right?” said Tony Sciarrotta, executive director of the Reverse Logistics Association. “Let people keep it and it won’t count against us. But now, as a consumer, what do I do with this stuff, right?”

Amazon now has to solve the problem of what to do with the background returns.

Amazon spent nearly $152 billion on logistics in 2021, nearly a third of all net sales. That’s up from $119 billion in 2020. Returns factor into those costs, so anything Amazon can do to reduce those costs will help the company’s bottom line.

“They’re going to do it for their own interests, although they say it in the name of saving the planet,” Cohen said. “But ultimately their action will be based on the economics of what we see.”

To that end, in 2019, Amazon launched a donation program that allows US sellers to automatically donate excess and returned merchandise to a network of 100,000 local charities through a partnership with nonprofit network Good360. The organization works with around 400 companies, including giants such as Walmart, CVS and Nike, but says Amazon is its biggest donor.

Good360 says it coordinates with local charities for direct pickups at more than 230 Amazon locations, helping Amazon save on transportation costs as gasoline prices hit record highs. Nonprofits pay Good360 a fee to help cover transportation costs.

They also agree to certain rules before they can access donations from Amazon.

“They won’t resell these items, put them on online auction sites, take them to local flea markets or that sort of thing. So protecting the integrity of our donors’ brand is really at the heart of what Good360 does,” said Shari. Rudolph, Development Director and Marketing Director of Good360.

There are also potential tax deductions that can accompany a donation to a nonprofit.

“Some programs are available,” Rudolph said. “I have no visibility into what, if anything, the Amazon team is profiting from.”

Regina Freeman, Good360 program operations manager, handles Amazon returns in Baltimore, Maryland in September 2020

Jim Halling Photography

Secondary market

There is also a secondary market boom which makes it easier to make money on used items. Amid growing pressure from younger buyers wanting sustainable buying options and a supply chain backlog resulting in a shortage of new products, Colorado State’s Rogers calculated the size of the secondary market of 2021 at $688 billion, compared to $649 billion in 2020.

As used items became a potential revenue stream, Amazon launched two new programs to repatriate returns in 2020. It now gives sellers the option to liquidate returns, sending them to major third-party liquidators such as Liquidity Services to auction them on the secondary market.

Also in 2020, Amazon began offering some sellers a rank and resell option for returns. With this option, Amazon evaluates the returned item and gives it a rating – like new, very good, good or fair – then resells it on special sections of its site. There are warehouse deals for used goods, Amazon Renewed for refurbished items, Amazon Outlet for excess inventory, and a tongue-in-cheek daily deals site called Woot! who sells a “bag of shit” for $10. Amazon even offers its customers gift cards to trade in their used Amazon devices, which it can try to refurbish and resell.

“We hope these programs will help give a second life to more than 300 million units a year,” Amazon’s Armor said.

It’s just smart business, explained Rogers, the former Quidsi employee.

“Assuming a 20% return rate, that’s $93.8 billion in returns. If instead of getting pennies on the dollar from a salvage merchant, you could get maybe 30 cents on the dollar through a strategic targeted disposition, that brings us up to $28 billion,” Rogers said.

“At $28 billion, with Woot or Amazon Outlet, it now makes a lot more sense because we’re really starting to get a return on investment,” he said. “Before, when we were on a small scale, it was like, ‘It’s trash, get rid of it.’ Now, when we grow, they evolve to the point where to monetize those returns, it would actually be irresponsible not to.”

But reverse logistics experts say the best way to reduce waste and reduce return costs is to prevent it in the first place, and then create disincentives for returning goods.

“The industry as a whole would bow to Amazon in the blink of an eye if Amazon started charging for returns because it would give them air cover to do the same,” Cohen said.