With consumers increasingly choosing to shop online (an already prevalent trend that has been accelerated by the COVID-19 pandemic), rising return rates are becoming a larger and larger threat – particularly for the fashion industry. According to Invesp, “at least 30% of all products ordered online are returned as compared to 8.89% in brick-and-mortar stores.”
High return rates create problems both financially and logistically for ecommerce sellers, posing issues for growth as well as sales margins. However, the extent of the damage often runs far deeper than this. After taking into account the cost to the retailer of the postal return, as well as expenses from the sorting and redistribution of merchandise, a lot of vendors will struggle to make any profit on the resale at all. In some cases, it’s preferable to absorb the cost and dispose of these items – at a cost to both the business and the environment.
As part of the Retail Without Borders Digital Series, host Dilyana Gramadarova (also Head of Partnerships at RWB) was joined by a special guest in an exclusive webinar to discuss this very issue. A visionary leader and co-founder of Oslo Digital, Filip Elverhøy joined us from The Green Deal Marketplace – an innovation in sustainable return management and resale aimed at tackling the issue of high return rates. In this session, multiple points were considered such as: what was the inspiration behind The Green Deal? How does it work? How do you balance the dilemma of sustainability vs profitability – is it possible to achieve strong profits in a sustainable manner? With more than 20 years of experience in ecommerce and retail, Filip gave us his insight into these crucial topics.
The Inspiration Behind The Green Deal
To begin with, Filip gave us a look into the composition of The Green Deal. He mentioned that Oslo Digital is working on innovation and digitalisation in general, but is mostly focused on ecommerce, VR and different kinds of pilots within that space. According to Filip, “Oslo Digital is a co-founder and co-owner of The Green Deal, the marketplace for ecommerce as a service.” The idea was born from two sides: on the one hand, businesses have observed “piles stacking up with clothing from the fashion industry”, an issue that nobody wanted to talk about. However, there have been pushes from the industry about how retailers do not focus enough on returns. As Filip says, “the trends are changing, and it’s all about customer experience – we see that we need to do something about this as well.” That’s what The Green Deal is for: taking a new approach on returns and shining a spotlight on an issue that has potentially been ignored or pushed aside, or at least not been a primary focus until now.
Filip also importantly notes that “the fashion industry is one of the most polluting industries in the world after oil and gas.” This is an extraordinarily crucial point, one which may not be very well known. When we think of pollution and harmful effects on the environment, often the first thing that comes to mind is an image of a factory churning out clouds of black smoke, a busy street full of cars doing the same or huge oil spills from rigs in the middle of the ocean. Rarely do we imagine that the clothing business is having a similarly disastrous impact. For example, “20,000 litres of water are needed to produce just 1kg of cotton”. Additionally, “200 tons of fresh water are needed to dye one ton of fabric”. To put this into perspective, there are 750 million people in the world without access to drinking water. As stated by Filip, the acknowledgement of this reality combined with a desire to reduce this waste is what is propelling the inspiration behind The Green Deal.
How does it work?
So, we’ve recognised that the retail industry is having a negative environmental impact, and high levels of returns are harming businesses’ profitability and growth. How, then, does The Green Deal aim to tackle these issues?
Filip gave us an example of a sweater to give us an idea of how it works. Let’s say that a sweater comes from Norway and has been returned; it will be taken to The Green Deal Warehouse. The sweater, along with the other returned products, are subsequently graded from 1 to 5, with 1 being brand new. Perhaps the product is missing a button, in which case according to Filip: “we may then pair it with a video on how to repair it and the customer gets a low price on the product because it’s missing a button and does the job themselves to repair it.” The product will then be resold in Norway and shipped to the customer directly.
To put it simply, there are three straightforward steps in the process. Firstly, the customer will return the product using the usual process on the business’ website. The return is then sent to The Green Deal and classified in terms of quality; this determines what the price to the new customer will be. Finally, the product is posted on The Green Deal Marketplace and resold, but is not repackaged in new plastic. In doing so, the logistical burden of re-stocking, re-selling (or indeed, discarding) the product is removed, while rescuing profitability.
At the time of writing, The Green Deal only operates in the Nordic region, particularly in Norway, but has plans to expand throughout Europe imminently.
Profitability vs Sustainability
We have established that both sustainability and increasing return rates are a rising concern for online retailers, with initiatives such as The Green Deal Marketplace emerging to tackle these threats head on. However, although in an ideal world we would all love to be more environmentally friendly and reduce waste, businesses are bound financially in that they still need to achieve strong levels of profitability. Furthermore, online retailers do indeed vary, particularly when it comes to product ranges in terms of price, costs and volume of sales. Therefore, it may not always be commercially possible for a business to take advantage of an offering such as that of The Green Deal. As mentioned previously, in some cases it makes more sense to destroy items at both a cost to the business and the environment.
So what businesses would be able to strike the right balance between profitability and sustainability, by leveraging returns and converting them into sales? According to Filip, this is going to depend on the type of product being sold. Retailers offering more high-end products (fewer sales at a higher price) would likely not benefit from The Green Deal. Similarly, businesses operating on the lower end of the pricing scale (such as products under £10) would also struggle to find value in The Green Deal’s offering. However, for ecommerce companies operating on a large scale within this range, it will be “definitely profitable” in Filip’s opinion. Medium-priced, fast-moving consumer goods seem to be the sweet spot.
The Future of Sustainability
To sum up, high levels of returns are a rising problem for ecommerce companies, shrinking their margins and limiting their growth. In addition, increasing return rates are also just one aspect of the sustainability problem, contributing to the fashion industry being one of the biggest polluters (as noted by Filip, 25% of clothing ends up in landfills without being used).
However, there are a lot of positive initiatives such as The Green Deal emerging to help resolve these sustainability issues. Although it can be very difficult to calculate emissions and sustainability has been primarily political and consumer driven thus far, during the last two years we have seen businesses looking further into it because they see that it will be profitable. For example, many businesses focusing on sustainability from both the US and European markets have experienced increasing traction and favour with consumers, thereby also being more profitable. According to Filip, “there is an undeniable trend there”.
However, the effectiveness of an offering like The Green Deal for you as a business can and will depend on a variety of factors such as price and scale. Therefore, it is important to conduct calculations for any retailer attempting to strike the balance between profitability and sustainability. Finally, Filip believes technology is making it easier for businesses to do more sustainable initiatives, but also thinks that it is mainly the people, consumers and political views that are the biggest influence currently.
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