Sears: The Return On Returns

Diane Petro is returning an aqua blue sweater bought as a holiday gift for her 9-year-old granddaughter.

Wrong color. “She’s very particular,” Petro explains.

PDF DownloadTwo people stand in line ahead of Petro at this Sears store in Yorktown Heights, N.Y. But their transactions move slowly. By the time she gets to the counter, Petro already is annoyed.

The service agent, without looking up, takes Petro’s white plastic bag and utters a single word: “Receipt?”

“It’s in the bag,” clips the grandmother, in response.

The agent processes the transaction, gives Petro her cash back and drops the sweater atop a pile of other returned merchandise. The agent’s bored expression never changes. Petro walks out. The next customer steps up.

Processing returns like Petro’s isn’t a glamour job. Dealing with mad, complaining customers is often unpleasant and always underappreciated. The reason a retailer is in business, after all, is to sell products, not take them back. Historically, it’s been a money pit for retailers, as the goods get sent back to suppliers (in hopes of getting refunds), destroyed or dropped in landfills.

But at Sears, returns aren’t a lost cause. Sears makes money on them.

“Returns can actually be profitable. That sounds crazy, but it’s true,” says Dale Rogers, a professor of supply-chain management at the University of Nevada in Reno. “It has become an objective for a lot of enlightened firms.”

Retailers joke that there’s nothing slimmer than an emaciated fashion model-unless it’s the industry’s profit margins. Indeed, Sears’ net profits from both retailing and financial services were just 1.8% of sales last year.

But here’s why handling returns well can fatten profits: Not only can a company more systematically hound suppliers for credit due on returned goods, but stuff that at a disorganized retailer would be donated or thrown out-chalked up as a loss-can efficiently be sold in alternate outlets.

Getting there isn’t easy. Before Sears rebuilt returns, it—like most retailers—had no companywide process. Every store did it differently and considered it a low priority. Returned products were stuck in a back room, then shipped to suppliers piecemeal every two months or so. Individual store managers were responsible for sending the goods to the right place and following procedures set up in supplier contracts.

One manufacturer might want returns sorted by type of product-pants, shirts, sweaters. Another might want them shipped back only when the pile hit a certain dollar value or number of units. Store managers had to know or find this information for Sears’ 10,000 suppliers, do the right paperwork and chase after each supplier for appropriate credit on goods sent back.

Multiply this scene by the hundreds or thousands of stores that a major retailer may run—Sears has 2,900 outlets in the U.S.—and you have disorder that leads to financial disappointment.