IT’S DECEMBER. THAT MEANS WE’RE IN THE MIDST OF THE
biggest retail period of the year—the holiday shopping frenzy. Part of
that will be an avalanche of goods purchased online. The National Retail
Federation estimates that there will be over $117 billion worth of e-commerce sales during the holidays. That’s about 10 percent more than in
the same period last year.
But as the story I wrote on reverse logistics (“Many happier returns?”
p. 39) explains, as much as 25 percent of these goods will be returned.
Returns are higher for merchandise bought online than for items bought
in stores, largely because items ordered online cannot be touched and
examined. Clothing and shoes cannot be tried on, prompting many
customers to order an item in several sizes and then
return all except the one with the proper fit.
Many of these orders not only were shipped to the
customer for free but may also be returned for free. It’s
what we have come to expect as consumers. Amazon.
com and other leading retailers have made online
shopping easy, and the customer rules. If the customer
wants free shipping, then free shipping it is.
But how sustainable is that model? Until recently,
Amazon was far from a profitable business. Many
retail investors are not as patient as those who backed
In preparing the article on reverse logistics, I spoke
to Bob Lieb, a professor of supply chain management
at Northeastern University. Lieb has long studied the
industry and had some interesting observations on the current state of
the online supply chain, especially as it concerns returns.
He says he remembers the events that led up to the bursting of the
original dot-com bubble of the late 1990s. “It’s really déjà vu going on
with e-commerce,” he says. “What killed many of the original dot-coms
was returns. With free shipping and free returns, many had 70 percent
returns, and it killed them,” Lieb recalls. “It’s not smart for dot-coms to
go down that path.”
As the saying goes, nothing is free, including “free” shipping and “free”
returns. Those costs have to be absorbed somewhere in the business, fur-
ther cutting into thin margins. To survive, dot-coms will have to offset
their free shipping and returns costs by smart supply chain management.
But not every business will achieve the necessary level of performance.
As Lieb puts it: “Just because you put an ‘e’ in front of a name does not
make it a viable business.”
It will be interesting to see if free shipping and free returns are sustain-
able practices going forward. If not, how many of today’s dot-coms will
see their bubble burst just as their pioneering predecessors did?
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