Returns Management in the Digital Era: Profitability, Technology, and Customer Experience

The rise of e-commerce has transformed retail, unlocking new opportunities for growth and customer engagement. Yet, it has also introduced a persistent and costly challenge: returns management. For non-grocery retailers in particular, the surge in online shopping has led to unprecedented return rates, straining profitability, complicating operations, and reshaping customer expectations. In the digital era, effective returns management is not just a logistical necessity—it is a strategic imperative that touches every aspect of the retail value chain.

The Growing Challenge of Returns in E-Commerce

Returns have always been a part of retail, but the scale and complexity have grown dramatically with the shift to digital. In categories like apparel, return rates can reach 30% to 50% of all online orders, compared to single-digit rates in traditional stores. This spike is driven by factors such as the inability to try before buying, inconsistent sizing, and evolving consumer behaviors—like ordering multiple sizes or colors with the intent to return most of them. The result is a significant drain on margins, with each return incurring costs for shipping, processing, restocking, and, in some cases, markdowns or liquidation.

The challenge is compounded by rising customer expectations for free and frictionless returns, as well as new health and safety regulations that require returned items to be sanitized and quarantined before resale. For example, some cities have mandated that returned goods must be sanitized and held for up to 72 hours before being put back on the sales floor, further slowing inventory turnover and increasing operational costs.

Operational and Technological Innovations in Reverse Logistics

To address these challenges, leading retailers are reimagining their reverse logistics operations. Innovations include:

Centralized Returns Processing: Many retailers are investing in dedicated facilities or processes to handle returns more efficiently, reducing the burden on individual stores and speeding up the process of getting products back into inventory or into secondary channels.
Dark Stores and Hybrid Fulfillment Models: The rise of dark stores—retail locations closed to the public and used exclusively for fulfillment—enables more efficient handling of both outbound and inbound logistics. Hybrid models, where stores serve both as customer-facing locations and mini-fulfillment centers, allow for greater flexibility in managing returns and inventory.
Contactless and Automated Returns: Technologies such as self-service kiosks, mobile app-based returns, and automated lockers streamline the returns process for customers while reducing labor costs and minimizing in-person contact.
AI and Data-Driven Optimization: Artificial intelligence and machine learning are being deployed to analyze returns data, identify patterns, and optimize processes. For example, AI can help predict which products are most likely to be returned, enabling better demand planning, inventory allocation, and even dynamic pricing or promotions to move at-risk inventory more efficiently.

Reducing Return Rates Through Digital Experience and Personalization

While operational efficiency is critical, the most sustainable way to improve profitability is to reduce the volume of returns in the first place. Digital tools and data-driven strategies are at the forefront of this effort:

AI-Powered Sizing and Recommendations: Retailers are leveraging customer data and AI to provide more accurate sizing guidance and personalized product recommendations. By analyzing past purchases, returns, and browsing behavior, these systems can suggest the right size or style, reducing the likelihood of a mismatch.
Augmented Reality and Virtual Try-On: Especially in apparel and accessories, AR tools allow customers to visualize products on themselves before purchasing, increasing confidence and reducing the need for bracketing (ordering multiple sizes or colors).
Enhanced Product Content: High-quality images, videos, and detailed product descriptions help set accurate expectations, minimizing surprises that lead to returns.
Customer Segmentation and Return Policies: Some retailers are using data to identify serial returners and adjust policies accordingly, such as offering incentives for in-store returns (which are less costly) or flagging accounts with excessive return rates for review.

Navigating Health, Safety, and Regulatory Requirements

The pandemic has introduced new complexities to returns management. Health and safety regulations now require additional steps, such as sanitizing returned items and holding them before restocking. Retailers are exploring technologies like ultraviolet light sanitation and improved tracking systems to comply efficiently. These measures, while necessary, add to the cost and complexity of returns, making it even more important to optimize every aspect of the process.

Strategies for Improving Profitability

Returns management is no longer a back-office concern—it is a boardroom priority. To improve profitability, retailers should:

Invest in End-to-End Returns Analytics: Understand the true cost of returns, including the impact on margin after multiple cycles of return and resale. Use this insight to inform product design, merchandising, and pricing strategies.
Optimize Reverse Logistics: Centralize and automate returns processing where possible, and leverage technology to route returns to the most profitable channel—whether that’s restocking, resale, or donation.
Enhance the Digital Experience: Use AI, AR, and data-driven personalization to help customers make better choices up front, reducing the likelihood of returns.
Align Return Policies with Business Goals: Consider tiered return policies that reward loyal, profitable customers while discouraging excessive or unprofitable returns. Encourage in-store returns to reduce shipping costs and drive additional sales.
Collaborate Across the Value Chain: Break down silos between merchandising, supply chain, and customer experience teams to create a holistic approach to returns management.

The Publicis Sapient Approach

At Publicis Sapient, we help retailers tackle the returns challenge through a combination of digital optimization, supply chain modernization, and customer experience innovation. Our expertise spans the design and implementation of AI-powered recommendation engines, omnichannel fulfillment strategies, and data-driven returns analytics. We work with clients to build resilient, agile operations that not only reduce the cost of returns but also turn them into an opportunity to deepen customer relationships and drive long-term profitability.

In the digital era, returns management is a defining challenge for retailers. Those who invest in the right technology, processes, and customer experience will not only protect their margins but also build the trust and loyalty that underpin sustainable growth.