These were the top ecommerce stories from the first day of NRF’s flagship event.

AI is on everyone’s mind

As expected, AI came up in nearly every conversation. In a session on Salesforce’s AI features for retailers, vice president and general manager of retail Rob Garf pointed out that AI itself isn’t new in retail. Brands have been using AI to make personalized recommendations for years. That’s primarily what drove the 17% of all holiday orders attributable to AI in November and December. That’s just the beginning of what AI can do for retail, Garf said. Now, generative AI is emerging, to be followed by autonomous AI and eventually artificial general intelligence, Garf says.

Salesforce also introduced some new AI tools for its clients at the conference through the Einstein 1 Platform. The consumer-facing Einstein Copilot gives consumers products recommendations with generative AI based on their location, preferences, and other data.

For retailers, Einstein 1 uses generative AI to build a customizable ecommerce web page. Merchants can create new pages that mirror existing branding. Salesforce will also use AI to analyze returns and inventory data and find trends that retailers can use to make strategic decisions.

The emerging consensus around AI seems to be that retailers might feel apprehensive about AI and its many potential uses, but they can’t afford to ignore it. Because much of the technology is so new, it can be difficult for retailers to find talent to work with it, Ekta Chopra, chief digital officer at e.l.f. Beauty said. “Everyone is an AI expert and no one is,” she told attendees. 

E.l.f. Beauty ranks No. 950 in the 2023 Digital Commerce 360 Top 1000. The Top 1000 is a ranking of North America’s leading retailers by online sales.

Omnichannel rules retail

The line between online and in-store retail continues to blur, at least for retailers. “Everybody needs to think like an omnichannel retailer,” if they want to be successful, Michelle Gass, incoming Levi’s (No. 192) CEO, said. Gass pointed to her tenure at Kohl’s (No. 23). During her time at the helm, the retail chain began accepting Amazon (No. 1) returns in stores. The partnership was a boon to Kohl’s business, she said, bringing new customers into stores. 

John Furner, Walmart U.S. CEO, (No. 2) echoed the point. Last week, Walmart announced several app updates that would also impact how customers shop in stores. For example, at Sam’s Club members can now skip checkout by scanning items and paying on their phones.  Customers will no longer have to wait in line while an employee checks their receipts to confirm purchases, the retailer announced. Sam’s Club is rolling out AI and computer vision technology that will automatically confirm purchases so consumers can walk right out of the store.

FedEx announced a commerce platform

FedEx president and CEO Raj Subramaniam revealed new plans for an end-to-end commerce platform for retailers using its proprietary data. The new platform is called “fdx.” Subramaniam said it will help retailers track the four most important areas of ecommerce across the customer experience: demand, conversion, fulfillment and returns.

The shipping carrier says it will launch fdx in fall 2024. FedEx is offering previews to interested retailers now, and demonstrating some of the technology at its NRF booth.

See the other NRF stories Digital Commerce 360 is following here. 

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FedEx is a shipping carrier for 478 retailers in the 2023 Digital Commerce 360 Top 1000. The Top 1000 is a ranking of North America’s leading retailers by online sales.

FedEx introduces fdx

FedEx called the new platform “fdx.” Subramaniam said it will help retailers track the four most important areas of ecommerce across the customer experience:

• Demand
• Conversion
• Fulfillment
• Returns

“FedEx is transforming into a digitally-led business powered by our extensive physical transportation network, leveraging our scale and insights from moving 15 million packages per day,” Subramaniam said. “Through fdx, we will enhance our longstanding relationships with merchants of all sizes to help them optimize and grow their businesses through digital intelligence.”

The primary benefit of fdx over other ecommerce technology vendors is that everything lives in one platform, FedEx says. A single unified platform is more efficient than a siloed approach with many vendors and technology systems, Subramaniam told the audience at NRF. 

For example, FedEx can connect clients with high-value customers through ShopRunner, which it acquired in 2020. It can also give retailers delivery estimates to share with customers on product pages and in the cart, which it says will increase conversion.

FedEx has access to extensive data from its huge delivery network that it can put into practice for retailers to help them make strategic decisions across their business, it said. 

Fdx will be “FedEx 2.0,” Subramaniam said. The digital network will be built on the extensive physical network FedEx already owns. 

Fdx and returns

FedEx says the new fdx platform will also include a way to manage returns. It will “streamline, configure, and manage digital front-end return experiences, data exchange, and physical transportation for returns in one platform,” according to the press release. 

Subramaniam confirmed that the shipping carrier will process returns without boxes at FedEx locations. That news comes just a few months after rival UPS announced its acquisition of Happy Returns, which processes box- and label-free returns at UPS stores.

When will FedEx launch fdx?

FedEx plans to launch fdx in fall 2024. The carrier is also offering previews to interested retailers now. Potential clients can also visit FedEx’s booth at NRF to learn more ahead of the launch. 

See the other NRF stories Digital Commerce 360 is following here. 

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That meant being creative with where merchants shipped orders from, and where consumers could pick up their online orders. And even when everything goes right, consumers are still bound to return some of their orders — especially after the holidays. In fact, shipping carrier Pitney Bowes plans to add almost 1,000 drop-off locations through a partnership with PackageHub as the current holiday returns season peaks.

Below, we recap some of Digital Commerce 360’s most insightful coverage about fulfillment and delivery in online retail from the past year. These stories highlight meaningful fulfillment trends among online retailers in 2023. Most notably, they include in-store and curbside pickup, retailers shipping from stores, outsourcing fulfillment to other companies, and the impact returns have on all these processes.

What we learned about fulfillment and delivery methods in 2023

How merchants cut shipping costs

In an era where online shoppers expect free shipping, retailers need to find more profitable shipping approaches, such as by changing packaging, negotiating with shipping carriers, changing shipping schedules or outsourcing fulfillment to a 3PL.  

Home Depot customers opt for ship to home — if the wait isn’t too long

Home Depot invests in its supply chain to cut costs and speed up delivery. As a result, more customers are opting to ship their orders to their homes. 

Keeping customers updated during the shipping process can make or break the experience 

Retailers say more communication is always better around fulfillment as consumers increasingly expect accurate, regularly updated information on their online orders.  

Pickup takes different forms, yet isn’t worth it for some retailers

Committing to curbside pickup — or breaking up with it

Retailers scrambled to launch curbside pickup during the pandemic. But now that many consumers resumed in-store shopping, retailers must determine if offering curbside is still worth it. 

Will alternate package pickup points take off?

Some retailers allow online shoppers to ship products to locations other than their stores or shoppers’ homes. The alternate fulfillment option can reduce package theft and offer convenience, but leaves the customer experience at pickup outside of the merchant’s control.

Office Depot delivers on 20-minute BOPIS promise

The office supply chain can have an order ready for pickup 20 minutes after shoppers order it online 98.9% of the time. 

Walgreens commits to pickup and delivery customers: ‘they spend more money with us’

Lindsay Mikos, senior director, retail omnichannel at Walgreens, told Digital Commerce 360 more than half its digital orders are same-day pickups. The retail chain’s omnichannel services were critical during COVID-19, but now, Walgreens customers continue to want the convenience of shopping online and either picking up in-store or having orders delivered to their homes. 

Tractor Supply 2022 conversion for BOPIS and curbside is 60% higher than home delivery

In 2022, Tractor Supply Co.’s conversion for buy online, pickup in-store and curbside orders was 60% greater than home delivery. 

Some retailers save on costs by shipping from store

Why some retailers use — and avoid over-using — stores as fulfillment locations

Today’s shopper is a hybrid in-store and online shopper. Retailers face logistical and fulfillment challenges to ensure inventory is there. Three retailers strategize how to divide orders between warehouses and stores to efficiently meet shopper demand. 

Apparel retailer Vince ‘pulls the lever’ on and off to use stores to fulfill orders

Apparel brand Vince LLC invested in software to navigate buy online, pick up in-store services, resulting in a 7% increase in BOPIS sales. 

Destination XL Group uses stores to help promote its website

Big and tall men’s apparel retailer DXL increased online sales 9.9% in fiscal 2022, which ended Jan. 28, compared with 2021. By cutting back on the brands it carries and selling private-label merchandise on marketplaces like Amazon.com, the retailer plans to continue to expand its ecommerce presence. 

Aviator Nation automates returns, uses stores to fulfill online orders

The California 1970s-inspired leisure wear brand Aviator Nation decreased its refund rate 11% by automating returns. The retailer also fulfills online orders through its 17 store locations. 

Outsourcing fulfillment can make it faster and cheaper

What is 4PL, and does your ecommerce business need one?

Family farm Palouse Brand cut fulfillment costs by 20% by working with Ware2Go, a fourth-party logistics UPS company, to streamline shipping. 

As orders mount, online men’s skincare brand outsources fulfillment, sells on Amazon

As demand grows, online retailer Black Wolf Skincare opts to outsource its fulfillment services and expand its reach by selling on Amazon. 

PacSun pilots RFID to improve inventory accuracy, reduce split shipments

With products tagged with RFID, PacSun store employees can quickly count inventory several times a week, a large increase from a few times a year. 

Retailers expect returns after holidays, but how do they handle them?

Online returns outpace in-store in 2023, NRF report finds

Online sales have an even higher rate of returns than in-store sales in 2023, according to a report from the NRF and Appriss Retail. And about 13.7% of returns (of online and offline orders) were fraudulent.

Retailers are in for a ‘tsunami’ of holiday returns this year: Salesforce

Holiday returns typically spike following Cyber 5, and then again right after Christmas, says David Sobie, CEO of Happy Returns.

How returns can be a retail ‘superpower’

A returns management CEO explains the valuable data behind returns. 

Retailers revisit return policies ahead of the holiday season

Retailers give shoppers an average of 30 days to return their products, and a large majority of retailers plan to make their return policies stricter in 2023, according to Salesforce data. 

Loop processes 60,000 returns a day during 2022 holiday season

The return-management software company said Dec. 27 was its busiest day, with 68,000 returns processed that day. 

Amazon will charge for some UPS returns, warn customers about frequently returned items

Some customers will have to pay a $1 fee to return orders at a UPS store if they have other options closer to home. 

Holiday returns decline as retailers raise fees

Return fees are more common, but extended returns windows are, too. 

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Together, the companies announced the launch of a new returns drop-off network, consisting of almost 1,000 PackageHub shipping locations. Those drop-off points will expand options for Pitney Bowes. It already offers no-label returns at 30,000 postal locations, according to its official numbers. The announcement states that the network will add “hundreds more” locations in the near future.

The no-box and no-label returns will be available to ecommerce brands using Pitney Bowes. These include the dog toy and treat retailer Bark, direct-to-consumer shoe brand Rothy’s and online marketplace Uncommon Goods.

Bark ranks No. 187, Rothy’s ranks No. 237, and Uncommon Goods ranks No. 910 in the Top 1000, Digital Commerce 360’s database of the largest North American e-retailers by online sales. Among retailers in the Top 1000, 10 use Pitney Bowes for fulfillment services. Meanwhile, 63 use it for international ecommerce services, and 104 use it as a shipping carrier.

Rising importance of drop-off locations for returns

Among the benefits Pitney Bowes is pitching with the expanded network are reduced exceptions during processing, fraud reduction, and consumer convenience. 14.5% of all retail sales were returned in 2023, according to a December report from the National Retail Federation and Appriss Retail. The report showed that returns for online orders outpace those for in-store purchases. It also estimated returned merchandise in 2023 to be worth $743 billion. Of that total, $101 billion was lost to returns abuse and fraud.

Image credit: Pitney Bowes

“Ecommerce returns are among the fastest-growing costs for retailers — costs that are sure to increase given the historic levels of online shopping we’ve seen this holiday,” said Gregg Zegras, EVP and president of global ecommerce at Pitney Bowes, in the announcement Wednesday. “We have the longest-standing ecommerce returns service in the industry — and now, with the launch of this network with our partner, PackageHub, we have access to their network of premium drop-off locations across the U.S., making this the most comprehensive returns service, capable of lowering the cost of returns while simultaneously improving the consumer experience.”

Staying competitive with no-label and box-free returns

No-label and box-free returns have also been offered as options at Amazon and Happy Returns. UPS announced plans in October to acquire the latter. That deal made Happy Returns drop-offs possible at 12,000 UPS locations. Pitney Bowes will hope to stay competitive against options like those and Amazon’s network, which includes Amazon Fresh, Kohl’s and Whole Foods locations.

“By aligning with Pitney Bowes, we are poised to deliver a premium returns experience to both merchants and consumers through PackageHub Returns, ensuring a mutually beneficial outcome,” said Brandon Gale, CEO of PackageHub. “The Pitney Bowes’ returns approach seamlessly complements our strategic vision, and we eagerly welcome them in the PackageHub family. We believe this partnership offers an incredible value-add to our ever-increasing network of PackageHub store owners.”

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Alleged international fraud organization REKK committed “systematic refund abuse,” Amazon claimed in a lawsuit filed in the U.S. District Court in Seattle. The returns described by Amazon in the suit took place over nearly a year, between June 2022 and May 2023. 

Amazon ranks No. 1 in the 2023 Digital Commerce 360 Top 1000, a database of North America’s leading retailers by online sales. 

How the fraudulent refunds worked

REKK’s scheme centered around ordering products through Amazon’s marketplace, the ecommerce giant asserted. Then REKK charged a fee to get the person who ordered the product a refund without actually returning the product, the suit says. For example, one defendant is said to have placed an order for five iPads. Then, through an Amazon fulfillment employee, REKK altered Amazon’s systems to falsely reflect that the iPads were returned, triggering refunds. In addition to the stolen iPads, REKK was paid hundreds of dollars for facilitating the theft, per the lawsuit. 

In another case, REKK is said to have impersonated an Amazon customer ordering two MacBook Air laptops. The group then falsified a police report stating that the products were never delivered. Again, REKK was paid a fee for facilitating the crime. 

REKK carried out the fraudulent returns through the cooperation of Amazon employees, according to the lawsuit, which names seven former employees. Amazon alleges REKK finds employees through Reddit, LinkedIn, and Telegram. The group then uses these social channels to advertise itself to potential customers. The REKK subreddit, since taken down, described its services in a screenshot shown in the lawsuit. “Refunding is when you buy a product and then trick the company into thinking you have returned the product,” the post read.

Who was recruited

REKK recruited one then-employee at a Chattanooga fulfillment center, Janiyah Alford, to approve returns for products that were not actually returned. REKK initially offered Alford $100 per fraudulent return, according to screenshots of text messages in the court filing. Amazon alleges that Alford approved 76 fraudulent returns between February and May 2023 in exchange for a payment of $3,500. The returns caused Amazon to refund more than $100,000 to REKK members. 

Alford told The New York Times that messages asking her to join in the return fraud included her home address and addresses of family members, which she interpreted as a threat.

Another former employee at the Chattanooga center, Noah Page, approved fraudulent returns of 56 items, per the suit. He received $5,000 in exchange for the returns. Amazon says Page’s actions caused more than $75,000 in refunds to REKK members.

Uncovering the fraud

Amazon says it spends more than a billion dollars annually to fight fraud. In 2022, the retailer spent $1.2 billion and employed 15,000 people to find and eliminate fraud, according to the lawsuit. One Amazon investigator ordered an iPad Pro for $2,066.99, then filled out REKK’s service request form through Telegram. The investigator paid $309 to a PayPal account associated with REKK. The investigator then received a refund for the full cost of the iPad.

“When fraud is detected, as in this case, Amazon takes a variety of measures to stop the activity, including issuing warnings, closing accounts, and preventing individuals who engaged in refund fraud from opening new accounts,” Amazon vice president Dharmesh Mehta said in a statement. “This lawsuit serves as a clear and strong message to bad actors that Amazon will not stand for attempts to damage the integrity of our store.”

The scope of return fraud

Fraud isn’t a new threat for Amazon. However, the retailer’s investment in tracking down this case shows how big the problem has become, says Eleanor Ritchie, product manager of return abuse solutions at fraud prevention vendor Signifyd. 

This case “shows that there’s enough of a scope here at the world’s largest retailer that this is no longer just the cost of doing business,” she says.

Fraudulent returns make up about 8%-10% of total returns in online retail, according to Signifyd’s research. In 2022, online returns surpassed $200 billion. Signifyd estimates about $20 billion of those were fraudulent. 

The REKK case is likely not an isolated incident, Ritchie says.

“We have to assume there are more fraudulent attempts happening here that they [retailers] aren’t necessarily onto quite yet. This is just the most egregious example we’re seeing in this particular lawsuit,” she says.

Ritchie says she believes REKK and similar groups are targeting other major ecommerce retailers alongside smaller retailers.

Quantifying returns abuse can be difficult because many retailers have a poor definition of what a fraudulent return is, Ritchie says. As return fraud starts showing up on retailers’ bottom lines, they will likely start investing in monitoring returns more closely. Retailers, especially Amazon, aren’t likely to tighten up their returns perks across the board because customers value them, she says. Instead, she expects to see retailers use machine learning and other AI tools to track returns more closely and make intelligent assumptions about who might be committing fraud.

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Happy Returns manages returns for online retailers through kiosks called Return Bars. Customers use Return Bars to send back purchases from online retailers. UPS will acquire the vendor from PayPal, which purchased it in 2021.

“By combining Happy Returns’ easy digital experience and established drop-off points with UPS’s small package network and footprint of close to 5,200 The UPS Store locations, box-free, label-free returns will soon be available at more than 12,000 convenient locations in the U.S,” says UPS CEO Carol Tomes in a statement. 

Happy Returns says it has more than 10,000 locations, many of which are through partnerships with retail chains Ulta, Petco, and Staples. It works with 800 retailers and has grown revenue to 10 times 2020 levels, Happy Returns says.

Happy Returns charges retailers a monthly service fee for handling returns and a per-item fee that varies, depending on the processing work required. Retailers with return kiosks benefit from the increased foot traffic, which can lead to browsing shoppers and potential sales.

“In recent years, the growth of Happy Returns has accelerated, and we’ve built an enterprise-grade solution. This new chapter is a natural next step for Happy Returns and allows us to harness the power of the UPS network to transform the returns industry,” says Happy Returns CEO and co-founder David Sobie.

Returns are a growing part of the retail business

Returns can be costly for retailers. Companies pay an average of $26.50 to process $100 in returned merchandise, The Wall Street Journal reported in May. In 2022, about 16.5% of retail purchases were returned, totaling about $816 billion, according to the National Retail Federation. 

In 2022, 45.7% of retailers in the Top 1000 offered online returns processing to consumers. That’s a slight decrease from 47.4% in 2021. The Top 1000 is Digital Commerce 360’s ranking of the largest online retailers in North America.

2024 Top 1000 Report

Analysis of North America’s leading 1,000 online retailers. Includes over 175 charts, rankings by annual web sales, benchmarking data, and growth analyses by category and merchant type.

View Details

Consumers have come to expect easy online returns. In a Bizrate Insights and Digital Commerce 360 July survey of 1,017 online shoppers, 52.3% cited free return shipping as one of their top five considerations when making an online purchase. However, relatively few consumers say they’ve used a return kiosk. In the same survey, 5% of respondents said they’d used a Happy Returns kiosk or similar service for a non-Amazon purchase. Another 7.1% said they’d dropped a return off at a retailer like Walgreens, which offers a similar service. 9.7% have returned an online order to a mall-based pickup and return center.

UPS serves more than half the Top 1000

532 online retailers in the Top 1000 use UPS for their fulfillment — either exclusively or in combination with other carriers. 65.6% of Top 1000 sales come from retailers using UPS.

More than half of web sales in the Top 1000 come from merchants using UPS for at least some of their shipments. The cumulative 2022 web sales of Top 1000 retailers using UPS is about $669.98 billion.

However, hundreds of the 532 online retailers using UPS to ship items do not use it exclusively.

75 merchants in the Top 1000 exclusively use UPS for their shipping. Those 75 accounted for $24.97 billion in 2022 web sales.

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The tool uses generative AI to “reflect how [a clothing item] would drape, fold, cling, stretch and form wrinkles and shadows on a diverse set of real models in various poses,” senior direct of product for Google Shopping Lilian Rincon wrote in a statement. Rincon says the tool is inclusive of a wide variety of shoppers, with “ different skin tones, body shapes, ethnicities and hair types.”

Several brands from Digital Commerce 360’s Top 1000 online retailers in the U.S. are already compatible with Google’s tool. Consumers can try on clothes from Anthropologie (part of Urban Outfitters Inc., No. 30), Everlane Inc. (No. 271), H&M, and Loft (part of Ascena Retail Group, No. 33). More brands will be added in the future, Google says.

Experts predict fewer returns

Virtual try on tools could significantly cut down on returns. Fewer returns might lead to savings for ecommerce retailers, CEO at ecommerce growth agency Heur Chris Raven says. 

“Not only will this help brands cut costs and free up time, it will also be positive for the fashion industry’s negative impact on the climate,” he said, due to less waste of returned clothing and savings in shipping costs. 

Menswear retailer Otero found success using a different AI fitting room tool from Perfitly. Customers create avatars based on their own body types to try on clothes before adding them to their carts. Otero’s return rate is well below the industry standard at 3%, founder and CEO Steve Villanueva previously told Digital Commerce 360. Villanueva attributes what he calls a “ridiculously low” return rate to Perfitly’s accuracy. There have been some bumps in return rates as Otero and Perfitly tweaked the questions and avatars, he said. But it never exceeded 9% and always settles back between 2 and 3%. That’s far below the industry standard, Villanueva said.

Generative AI can make recommendations to customers

Google’s new AI tool can suggest specific products based on customer preferences. Rincon compared the ability to a worker in a store bringing customers choices based on color, style, pattern, and price. So far, the capability is only available for women’s shirts, Google says, but it can recommend products across brands, unlike in a physical store that’s limited to in-stock inventory.

Google uses AI to recommend similar products across retailers.

“I don’t believe that AI is a passing fad and in order to grow with the current climate, brands must lean into these new technologies and use them to their advantage,” CEO of apparel retailer SilkFred Emma Watkinson said. SilkFred is preparing to launch a similar service that can make outfit recommendations to customers.

Generative AI like Google’s new tool gives retailers the “holy grail” to tailor experiences to clients on a one-to-one basis, Robert Brown, managing director and client executive at digital strategy consulting company BDO, told Digital Commerce 360. AI generates “massive” amounts of data about consumer preferences and needs that retailers can turn into future conversions, he said. The data can also be used to improve loyalty and membership programs. 

Potential downsides

Though innovations in AI could boost sales for ecommerce brands, there could also be some negative side effects. “Many people will be deterred by new technology which could potentially see a brand lose customers,” Raven said. Some potential customers could be intimidated and decide not to learn the new technology, he said.

Otero faced the same issue at first. When it first implemented Perfitly, not many customers used it, Villanueva said.  Making the avatar the entry point of the site was key to fixing the “up-front complexity” in Otero’s products, Villanueva said. Once customers saw how the retailer’s shirts were designed proportionally to fit their body type, they were much more likely to buy, he says. Otero’s conversion rate is 3%, he shared.

Brown points out that the data generated from retailers using AI, which can be a huge boon to retailers, is also a potential downside. Retailers have the opportunity to misuse data and lose consumer trust, he said. “The more you know about customers, the more possibility there is that people will take advantage of that,” he told Digital Commerce 360. 

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Before viewing any clothing, customers first answer three questions about their body size and shape to create an avatar.

“The first thing you do is pick these data points that create your virtual avatar, and then that virtual avatar travels with you through the entire site,” founder and CEO Steve Villanueva said. “So whether you’re picking a polo or a T-shirt, this size, or this color, whatever your avatar wears, you can see it on.”

Perfitly’s AI avatar fitting room

Otero uses Perfitly, an AI fitting tool that allows consumers to visualize clothing on their bodies. Perfitly is based on the idea of recreating the fitting rooms in brick-and-mortar stores, CEO and co-founder Dave Sharma told Digital Commerce 360. It works differently from many other fitting tools on the market that recreate a 3D garment in 2D, Sharma said. 

Some fitting tools “utterly ignored what the garments are made of. A jersey dress versus a silk dress with exactly the same dimensions is going to look and sit very differently,” he said. “There’s no interaction with the human shape and understanding of what the thing is actually going to look like when it gets to you.”

Perfitly creates a 3D avatar of a consumer from user-submitted full-body images with about 98% accuracy, Sharma said. Consumers can then digitally try on different garments and sizes, with the ability to rotate and zoom in on the avatar. The AI makes size recommendations and displays the clothing using 3D digital assets the retailer provides that take into account properties of the fabric including weight, stretch, and density. The tool can also create avatars based on data inputs from customers, as in the case of Otero.

TaylorMade-Japan’s Perfitly Avatar

Sharma’s goal with Perfitly is to reduce returns and grow conversions by mimicking the in-store shopping experience. He says Perfitly increased conversions 80% on average, from 4% to 7.2%, and reduced returns 67%, from 28% to 10%.

Otero uses Perfitly to sell menswear

Otero, which sells clothes for men with heights between 5’4” and 5’10”, made Perfitly the centerpiece of its ecommerce business. When customers enter the website, they must input data about themselves to create an avatar before viewing products. Making the avatar the entry point of the site was key to fixing the “up-front complexity” in Otero’s products, Villanueva said. Once customers saw how the retailer’s shirts were designed proportionally to fit their body type, they were much more likely to buy, he says. Otero’s conversion rate is 3%, he shared.

Otero’s return rate is well below the industry standard at 3%. Villanueva attributes what he calls a “ridiculously low” return rate to Perfitly’s accuracy. There have been some bumps in return rates as Otero and Perfitly tweaked the questions and avatars, he said, but it never exceeded 9% and always settles back between 2 and 3%. That’s far below the industry standard, Villanueva said.

Returns can be an expensive problem

Returns can be costly for retailers. Companies pay an average of $26.50 to process $100 in returned merchandise, The Wall Street Journal reported in May. In 2022, about 16.5% of retail purchases were returned, totaling about $816 billion, according to the National Retail Foundation. Average return rates are higher for apparel, at 24.4% according to a study from Coresight Research. Size and fit are the largest reasons for returns, driving 53%, according to the study.

Those returns can lead to further lost profits, if garments are out of season when they’re returned, Sharma said.

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Costs associated with websites, mobile apps and omnichannel services like in-store pickup contributed to the decline in retail profit margin, according to accounting and consulting firm Deloitte. Profit margin decreased to 6.7% in 2019 from 9.7% in 2012. That rebounded to 8.6% in 2022, helped by pandemic-fueled demand for goods over services and government stimulus checks, says Lupine Skelly, retail, wholesale and distribution research leader at Deloitte.

Lupine Skelly, retail, wholesale and distribution research leader, Deloitte

Profitability — as defined as median EBITDA [earnings before interest, taxes, depreciation and amortization] — was lowest for retailers in such non-discretionary categories as grocery, drugstores and warehouse clubs. It was highest for such discretionary categories as apparel, home goods, department stores and specialty. Retailers that sell primarily online and other direct marketers were in between.

“Online isn’t super profitable,” Skelly says. “It’s still a costly business unit for retailers.”

Higher costs played a big role in the 2012-2019 decline in retailer profitability Deloitte uncovered from an analysis of 99 publicly traded retailers, Skelly and Deloitte U.S. research leader Rodney R. Sides explained in a 2021 article in the MITSloan Management Review. A recent update based on an analysis of 86 public retailers — the number declined due to bankruptcies — showed profits bounced back during the pandemic, Skelly tells Digital Commerce 360.

However, Skelly says, retail executives Deloitte interviewed recently are concerned that profits could be pressured again in 2023 by higher costs due to inflation and consumer resistance to paying higher prices. That, she says, makes it essential that retailers focus on containing costs, including those associated with online sales.

How retailers can cut costs and boost profits

Skelly highlighted three areas where retailers can contain online-related costs:

• Free shipping: “Free shipping can’t last,” she says. “It’s getting to a breaking point.” She encourages retailers to waive shipping fees only for their best customers or as part of loyalty programs.
• New online features: Retailers should take a hard look at adding new online services that often involve fees to technology providers. As an example, she cites the growing popularity of buy now, pay later. She says BNPL services typically cost up to 50 cents per transaction plus 10% of the value of the sale. “That can add up pretty quick,” she says.
• Returns: Returns can cost retailers 15%-30% of the sale value in handling fees, which is ruinous for online retailers that only make about 5 cents in net profit for every dollar of sales, Skelly says. She says tools that help online shoppers visualize products can cut returns by 40%, and “return bars” run by vendors that take returns for many online merchants can cut costs by 20%. She also advises retailers to credit shoppers quickly for their returns as calls from consumers wondering when they will be reimbursed are common, and each call typically costs about $5.

Merchandise and selling costs for different retail categories

The costs associated with selling online show up in Deloitte’s analysis of return on assets. Profits as a percentage of invested assets kept declining for online retailers and direct marketers during the pandemic, even as they bounced back for other retail categories.

Online and direct retailers also spent the highest percentage of their revenue on selling, general and administrative expenses. That likely reflects the costs associated with operating websites, marketing online and printing catalogs.

However, those direct-to-consumer retailers on average spend the least on merchandise as a percentage of revenue.

For most retailers, the cost of goods sold as a percentage of revenue declined in 2022 from 2019, after rising during the earlier period. The exceptions were retailers in the grocery and drugstore category, a likely result of persistently high food prices in recent years.

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Overall, SG&A expenses and cost of goods sold add up to 90.5% of revenue for internet retailers and direct marketers. That’s less than the 93.9% for highly competitive, low-margin categories like grocery and drugstores. However, it’s above the 88.6% for higher-margin categories like apparel and home goods.

But in all retail categories, profits are tight, which means containing costs is a priority. And while the Deloitte analysis was based on publicly traded retailers, which tend to be larger companies, Skelly says smaller retailers likely are being squeezed even more by rising costs, given that they typically lack the technology resources that can reduce costs.

“I would assume smaller players are probably seeing this even more,” she says.

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