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January 7, 2019

Many happy returns of Christmas – £4.8 billion worth of online sales may be making their way back to retailers, distorting the official retail sales data for November upwards by about 0.5%

Forecasting Eye

 

According to the ONS, online spending as a share of all retail sales exceeded 20% for the first time in November 2018, accounting for 21.5% of total retail sales on a non-seasonally adjusted basis. On the other hand, traditional retail is in decline – total UK retail footfall dropped by 2.3% in the three months to November.

 

As the rise of online retail has accelerated, it has brought with it another shift – more frequent returns. Research from Barclaycard shows that 37% of retailers have seen a rise in refunds since 2016. There are no solid figures for the total extent of returns in the UK but the conventional industry estimate for the US is that  30% of products ordered online are returned, compared to just 8.9% in brick-and-mortar stores. The UK figure is likely to be similar.

 

Zalando, Europe’s biggest online-only fashion retailer, says 50% of products it sells come back as returns. In 2016, around 20% of firms had created a system for stock they couldn’t resell. A calculation by the firm Clear Returns quoted in the Financial Times suggested that online returns cost £20 billion a year in the UK in 2016, and one would expect the figure now to be much higher. When an item is sent back it will not immediately be put up for resale. Instead, it could pass through up to seven pairs of hands for assessment. By this point, the item may have been discontinued, or its original price been slashed, with the product being sold at a discount. Selecting and delivering an item cost retailers between £3-£10 in 2016; dealing with its return could cost anywhere between £20-£30. Again according to Barclaycard, a third of retailers in the UK have increased their prices to cover the cost of such returns.

 

Can retailers avoid returns? Consumer surveys suggest that this might be difficult. A survey of UK shoppers found that for 57% of customers, free delivery and returns is the most important aspect when shopping online. A separate survey found that 37% of retailers say providing free returns has led to increased customer satisfaction, while 44% think they must offer the service to keep up with the competition.

 

The questionnaire for the official ONS Retail Sales Index does not specify how to account for returned goods. We assume that companies use their own data. Without doing more research, (sadly the relevant officials have not been answering their phones!) we suspect that companies net off the returns they process in a particular month against the sales that they make in that month. What this means is that when on-line is rising as a share of retail sales, or in a very high sales month, the data may not be a good guide as to the underlying trends because of the extent of returns that are unlikely to be recorded until the following month, if at all.

 

We estimate that £19 billion would have been sold online during the Christmas period in 2018. At a return rate of 25% (allowing for the probability that Christmas presents are less likely to be returned), £4.8 billion of this may be returned.

 

Our estimate of how much this makes the Index of Retail Sales a misleading guide is necessarily tentative. But our rough calculation is that the 1.4% rise in seasonally adjusted retail sales in November over October might exaggerate the underlying strength of sales by 0.5 percentage points as a result of this.

 

 

Contact: Marina Mensah-Afoakwah mmensah-afoakwah@cebr.com, Douglas McWilliams dmcwilliams@cebr.com, or Cebr: 0207 324 2850

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