GWLRA research identifies reverse logistics as a growing factor in commercial real estate requirements for retailers and warehouse/distribution networks. (Courtesy GWLRA)

Vancouver-based online furniture maker and retailer Article was having a problem with some of its deliveries in New York – a situation which created issues with its last-mile logistics.

The company’s Sitka sofa is nearly 100 inches in length. During deliveries in Manhattan, Article discovered some customers were ordering the couch for delivery to buildings with elevators too small to fit the Sitka, said CEO Aamir Baig.

Article eventually developed a database to alleviate the problem: “We know there are certain buildings in Manhattan (where) it’s not going to fit in the elevators,” Baig told RENX in a recent interview.

However, in the interim it faced a reverse logistics problem. The phenomenon is a growing concern for retailers and distributors as consumers buy more products online, have them delivered to their homes, then return them for a seemingly endless variety of reasons.

It is likely going to worsen, too. North American online sales are expected to grow by another $656 billion by 2023.

The situation is impacting companies’ real estate requirements. The process of receiving and dealing with returned items is contributing to the already significant demands for light industrial real estate, i.e. distribution centres and warehouses, according to new research by GWL Realty Advisors (GWLRA).

Article, to manage returns and other shipping problems, has also launched an in-house service called the Article Delivery Team during the past year, Baig said.

“We have our own trucks running in New York and L.A. and Vancouver,” he said. “Logistics and the final-mile delivery piece stood out as a bit of a sore point. Even though a lot of the problems were not because of us, they were still our problems.”

In the past two years the company has reduced its return rate from double digits (per cent of sales) to a low single digit, Baig said, though he declined to provide specific numbers.

“We needed to take control”

“We needed to take control of the whole process, starting from appointment scheduling through to delivery and returns,” Baig said.

Reverse logistics often includes several steps like assessing the item, re-stocking it, sending it to a liquidator — or even destroying it. It costs more to take back a product than it does to send it out, because the process requires more labour.

“As e-commerce has started to grow across Canada, a lot of the focus has been on forward logistics,” said Anthio Yuen, GWLRA’s director of research services and strategy.

However, some products sold online can have a 75 per cent return rate. This is especially prevalent in the apparel industry; customers will purchase one item in several sizes and return the ones they don’t want, often free of charge in a retail landscape that is increasingly competing to keep online customers happy.

“Retailers are really having to pivot and that power shift is really starting to move toward the customer,” he told RENX. “It’s a penalty-free situation right now where a lot of retailers offer free returns and you can go from there.”

Yuen said most Canadian retailers use third-party logistics firms for shipping and returns. Those companies need more space in already tight industrial markets in Toronto, Montreal, Vancouver and, increasingly, also in Calgary.

In its report, GWLRA cited research by Allied Market Research, which put the global reverse logistics market value at $548 billion in 2017. It estimates that number will balloon to $796 billion by 2025.

Returns can catch retailers by surprise

“The foremost challenge (in reverse logistics) is keeping up with the growth, said Deloitte Canada partner Alan Taliaferro, who leads the company’s logistics and distribution program.

“Since e-commerce is growing by double digits every year and retail is not, it’s easy to get caught off guard in this small corner of the warehouse as the returns start to pile up,” he said on a call from a logistics centre in Guadalajara, Mexico, where he was helping to launch a new automated storage and picking system for pharmaceuticals.

“As the volume increases, more investment in automating parts of the process could be justifiable,” he said. “It’s just as important for your budget to plan for returns growth as it is for sales growth.”

Taliaferro agreed return rates vary dramatically depending on the type of product.

“It can be anything . . . because in something like shoes, people buy two or three different sizes and then try them on and then return the rest,” he said. “The more fashionable the product, the higher the percentage of returns.”

He said the best strategy for a retailer could be to require in-store returns by customers. “If you make that return free, then when they get to the store, they’re likely to buy something else,” he said.

Taliaferro said his firm designs warehouses to include a reverse logistics area to process returns. Those spaces usually represent five per cent, or less, of the total logistics centre space.

A holistic approach to logistics

Article, the furniture company, recently ranked as Canada’s fastest-growing retail company for the second year in a row in the annual Growth 500 by Canadian Business.

Unlike third-party partners, having its own delivery team allows Article to solve common customer inquiries on the spot, such as rescheduling delivery appointments or shipping alternate product sizes or colours, Baig said.

In its Vancouver shipping system, delivery times were reduced by 2.5 days compared to outsourced delivery partners. Article also reduced its negative feedback from customers by about 75 per cent.

Baig said reducing returns requires a holistic approach to quality management, product education and data management.

“There was a dining chair that used to get returned a lot,” Baig said. “We looked into the reviews and there was a constant pattern around people complaining the chair is too narrow.

“That turned around into a design modification. We made it two inches wider, and lo and behold, the return rates dropped and the satisfaction rates went up.”