Who Suffers When You Return Those Christmas Gifts

December 24, 2015, 3:00 PM UTC
Views Of Early Black Friday Shopping At Macy's
Shoppers pay for items at a Macy's Inc. store in New York, U.S., on Friday, Nov. 23, 2012. Discount store shoppers are prepared to wait in long lines on Black Friday, though they are skeptical about whether they'll get the best deals of the season. Photographer: Peter Foley/Bloomberg via Getty Images
Peter Foley — Bloomberg via Getty Images

It’s a well-worn online-shopping hack: Order the same dress in three different sizes and then return the two that don’t fit. Why not, when free returns have become de rigueur (shipping included)? By some estimates, about 30% of women’s fashion and shoe purchases are later returned.

But one person’s savvy online shopping—or ill-fitting holiday present—has become an industry’s multibillion-dollar money pit.

Data from global consulting firm AlixPartners show that fashion items alone generate 32.2% of all the labor costs retailers incur in January, the peak period for returns, to run their e-commerce facilities—including receiving packages and restocking the items. That’s nearly seven times the cost incurred by nonfashion items. The total cost of all returned goods is estimated at $260.5 billion (with a “b”) for the year, according to the National Retail Federation.

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Some stores are better positioned to foot those restocking bills than others. Luxury brands like Nordstrom (JWN) and Neiman Marcus have high markups that help absorb shipping costs. But it’s costlier for mid-tier stores like Macy’s (M) and Kohl’s (KSS) if they have to shell out $6 in shipping when a customer sends back a $40 pair of leggings.

What to do? Increasingly, retailers have set up their stores to allow shoppers to drop off returns on-site, as well as pick up online purchases. Kohl’s CEO Kevin Mansell told analysts in November that not only does the tactic save on shipping, but 20% of customers who come in to pick up purchases buy a little extra something while they’re there. Pricey returns may be a modern problem, but the solution is an old one: Sell more stuff.

A version of this article appears in the January 1, 2016 issue of Fortune.

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