The Economics of Amazon Returns

Factual Questions
1

I just read an article in the Washington Post (should be gifted outside the paywall) about discount outlets that acquire and sell merchandise returned to Amazon, Walmart, etc.

How is it possible that Amazon makes more money by offloading returns of new merchandise to third-party liquidators for pennies on the dollar, rather than restocking them and reselling them for full price? The only wrinkle I can think of is the expense of repackaging and verifying whether the merchandise is in new condition, used condition, or was returned because it was defective. Is it really more expensive to incur that expense than to sell it off for a song?

There was one amusing line about a woman who bought something at Amazon for $18, returned it, then bought it again at a liquidator store for $10. I suppose it could have actually been the same physical item she had bought and returned.

2

I think people (including me) are unwilling to pay full price for something if it isn’t completely new and unmolested by another customer. One story to illustrate. Years ago I was an employee of Dell. We could get four coupons each year for a 17% discount on anything they sold. So one year I bought a new desktop for my brother. He declined the gift. So I called for a return. The person I spoke with offered a twenty percent discount (as I remember the amount) if I kept it. And then he offered another twenty percent discount. But we returned it. Note that the box was never opened.

3

Yes, it certainly must be when you consider the vast amounts of returned merchandise they get. They’re all about automation and getting things packed up as fast as possible, making packagers have to run to fulfill their quotas, etc.

As I’ve stated here before, one of my previous employers was an Amazon vendor - meaning Amazon bought our company’s products and sold them themselves out of their warehouses. They charged us a 20% premium on every order they placed with us to cover any returns, damages, and past-best-by dated products, no matter whose fault it was. So they already came out ahead on any returns even if they threw them away.

4

It probably depends on the product. If the product doesn’t work I doubt if they want to test it to verify. If the packaging is damaged it is difficult to resell as new. If the product is cheap then the cost of restocking might be as much as the value of the product–it might take as much time to restock 1 product as to stock 10+ copies of that SKU originally.

5

How is it physically possible to repackage?

A typical product (say, a cheap $30 headphone set) may have been shipped from a factory in China. It has a unique, hard plastic clamshell package , molded to precisely fit that item.Then the customer stabbed it and cut it with scissors in six places before they succeeded in opening it.
Then they unravelled the electric cord that wss tightly wrapped and stuffed inside the item, within its own sealed plastic bag, which they tore open using their teeth.
Then they return the item to Amazon in New Jersey.
How can you repackage it?

6

There are millions of items with hundreds of thousands of packaging methods. You can’t repackage in that scenario you described. But for every such scenario there are other scenarios where repackaging is possible. I’ve gotten plenty of things that were merely in a non-sealed bag inside a non-sealed (but closed) box with a barcode on the outside.

7

I’m not sure I understand what “they charged us a premium” means in this context. You had to pay them to buy your product?

8

I worded that weirdly. They took a 20% discount on every invoice to cover returns, damaged product, etc. Based on consumer calls we inevitably received (because shoppers didn’t understand they bought the product from Amazon, not us), returns were usually due to either product damaged in shipment or product past best-by date, both Amazon’s fault.

9

As indicated by @needscoffee, the “Economics of Amazon Returns” is that the Amazon supplier bears the cost of returned goods, and then some.

Further, a standard model distribution business would probably go out of business if 20% of it’s sold goods were returned. So to be viable the supplying business needs to built that cost of returns into their sales price. But Amazon don’t accept their suppliers charging more than for other distributors, or even demand a specified discount less. In the supply contract there may be punitive penalties applying. So the suppliers options are either to accept the margin squeeze for return of their products or to increase the prices for all their customers … or not sell through Amazon.

10

deleted

11

I used to work for a high end food retailer (still in existence but several corporate owners later)

We used to dump every return. It didn’t matter if it was fresh, frozen, packaged or prepared. Straight into the barrel it went.

The economics didn’t make any sense otherwise. Even packaged food (e.g. cereal boxes) we’d be concerned that it might be tampered with. Same with Health/Beauty Care items. Maybe more so. But our margins were huge compared with other grocery stores. 50%+ compared with 25%-35% for mainline grocers. Reputation was everything and was built into the base margin.

We carried a lot of items that you couldn’t buy at many other places (this is before natural and organic was everywhere) so we had a very liberal return policy as well. If your customer was willing to pay $7 for a box of cereal (2.5X Kellogg’s in 2001) you weren’t going to piss them off if they wanted to return it without a receipt because their kid saw something objectionable on the ingredients list.

12

This is really the crux. Amazon is the 800 ton gorilla in the room. Everybody else in the supply chain, including you, is paying for all those returns. But given the very low base cost of the massive amounts of Chinese crap Amazon sells, everybody still makes enough margin to make it worthwhile. IOW, they do make it up on the volume.

This also explains why Amazon is so blasé about fixing their delivery system so drivers get the packages to the right place every time, not just most times. It’s simply not costing them hardly anything when a delivery goes wrong. Everybody else has headaches, not them. They have authority without responsibility and everybody else has responsibility without authority. It’s a management maxim that stuff will get, and stay, screwed up so long as that’s true.

It’s also a management maxim that if you can engineer the situation so you’re the one with authority but not responsibility, then you win, and often win big. So there’s continuous jockeying up and down the management of any corporation as everybody tries to do this, and also continuous jockeying all up and down a supply chain to do the same. As by far the biggest player in every supply chain they touch, Amazon wins this tussle nearly every time.

Lest we think Amazon particularly evil in this, Wal*Mart is a long-past master of the same process.

13

When I was a truck driver my employer had a contract with a large department store with shops all over. They had a pretty liberal returns policy and they sold a wide variety of goods. We used to go to their “Returns Warehouse” to pick up goods that were being shipped out to wholesalers.

All the goods were delivered there by their own transport directly from the stores, or, for larger items like washing machines or TVs, direct from the customers.

They had a large team working there - several hundred I guess - and operated a kind of triage. Some goods could go back to the stores as “new” after testing and checking. Some was sold online as slightly damaged (a dent or scratch for example) and we picked up the rest for delivery to people whose main customers were market traders.

Part of the warehouse was given over to a stock of “original” packaging. So if Mrs Smith returned her new fridge because she didn’t like the colour. they could re-pack it and sell it as new.

14

There was an article in The Atlantic a while back, discussing how efficient logistics are for distributing good from the supplier to the purchaser, but how challenging it was to send them in the opposite direction. It was not limited to Amazon. One behavior they mentioned was for people to order on-line several different products in different sizes and colors, thinking they would just send back the ones they didn’t want. Seemed as though that resulted in a great deal more waste than when folk use to buy/order from brick and mortar stores or individual retailers. it is not uncommon to hear of people who contact Amazon about a return, and are refunded their money but are tod not to bother sending the unwanted product back.

15

I think that depends on which individual retailers or stores you are talking about - if I’m ordering clothes or shoes either online or by mail from a particular brand say Clark’s shoes or Old Navy, I can usually be pretty sure which size will fit me , at least after my first order. If I’m ordering from a store/catalog that sells clothing and shoes from many different brands, including some nobody ever heard of then what happened to me last week will happen - I read the measurements , ordered in the size that seemed correct and the dress I received didn’t fit me. Maybe it was manufactured a little small, or maybe I’m just shaped differently - but that fact that I needed a larger size for that dress doesn’t tell me anything about my size in any other dress I order from Amazon. Which is going to lead to more returns.

16

An article years ago on the destruction of Main Street America quoted one mom-and-pop store mentioning that WallyWorld because of volume retailed box items (toasters, blenders, TV’s, etc.) lower priced than the small store could order wholesale. Wally also had a habit of becoming a source’s major buyer, then squeezing them for bigger discounts than anyone else.

i don’t doubt that Amazon also knows this trick.

I ordered an iPad case a year ago, and got a 30-foot dog chain. I got the instructions t send it back, but I’m thinking… for some items, it hardly pays to send it back. They have a distribution center that takes out packages by the truckload, but each return has to be handled by Purolator or FedEx as an individual package, collected, sorted and delivered. Particularly if the item is sourced elsewhere, not one of the Amazon supply centers, is it worth receiving and redirecting the package?

I also recently bought a Roomba. It almost went back - kept going in small circles, compalining about the bumper - until I realized the bumper was jammed on one side; a bit of prying freed it and it’s now cleaning my house. But if I’d been a bit less tech savvy, it would have gone back. How much time and experimentation would Amazon personnel put into trying to diagnose and fix a $300 item, particularly electronic ones?

(Reminds me of the article about the US Post lost mail shop. They had a gizmo to slice open letters, and suck the envelope open; the operator had maybe 2 or 3 seconds per item to decide if the contents might have information to properly redirect that item. Otherwise, it was trash.)

It’s a sympton of our disposable society. We don’t usually repair things - we replace them. Things are not made to be repaired, and spare parts that actually fit are rarely available. Even when we do try repairs, the time to diagnose anything other than elementary problems becomes too expensive. “Computer won’t boot” may be anything from a loose power cord to an overheating chip because the heatsink fell off to a faulty chip or dead capacitor. By the time you spend diagnosing, disassembling, then hunting down the problem, finding spare parts, testing, redo the burn-in test - even on a $600 item, paying a qualified technician probably exceed the original cost, not to mention the profit margin.

As mentioned above, even simply repackaging a product enough to be acceptable “refurbished” if it is functional could exceed the cost of the item for simple items - particularly when this now means they get sold at a discount. Even clothing - re-sorting and repackaging, even needing to wash iron or fold some items if badly handled during returns - hardly worth it when many clothing items are so cheap. CTV Marketplace did a show a while ago on warehouses full of discarded Amazon returns just piled up in heaps to the ceiling - I suppose sending them to surplus resellers is at least a step in the right direction.

17

Amazon will allow some items to be returned to Whole Foods or UPS Stores with out the packaging. They scan the bar code on your phone and they go in a big bin to be returned in bulk.

I recently got a microwave oven from Amazon. It came poorly packaged and was definitely a return from someone else. It didn’t work at all when I plugged it in. I was not pleased. They had me put in back in the box emailed me a label to tape on it and someone came and picked it up. I was less than careful with how I repackaged it so there was probably some broken glass when they got it back. They immediately shipped a new one which was clearly actually brannd new and it worked fine.

18

IMO …

A portion of them asking for stuff to be returned is NOT because that saves them money versus letting you keep it. It probably costs them more to accept the return, even if they immediately drop your package into a dumpster unopened.

What they are doing is providing some brakes on the consumers getting the idea that ordering the wrong stuff means getting free stuff to keep. So then they start ordering the “wrong” stuff and complaining in hopes of keeping it for free.

The problem with Amazon doing the economically efficient thing and letting you keep mistakes is that it encourages the conmen amongst us to run wild, and encourages the incipient conman who lives inside each of us to become manifest.

So they’ll spend some money and effort to put the brakes on that tendency.

19

what I found with Walmart, and small places like Temu, is if it’s small cost they just give you credit, no return needed

20

I should also point out that another cost to Amazon for returns is making sure that nothing in the items sent to surplus resellers includes paperwork or labels identifying the original buyer.