How reverse logistics makes the retail cycle go around

Episode transcript, edited for clarity.

Bill Thorne: Welcome to Retail Gets Real, where we hear from retail’s most fascinating leaders about the industry that impacts everyone, everywhere, every day. I’m Bill Thorne from the National Retail Federation, and on today’s episode, we’re talking to Tony Sciarrotta, executive director of the Reverse Logistics Association.  

Now, Tony is a new colleague of mine, as RLA recently became a part of the NRF family. So, we’re gonna talk to Tony about the impact of customer returns and the reverse logistics process, how it fits into the circular economy, and what retailers need to know about this increasingly important area of retail.

Tony Sciarrotta, my friend and my colleague. Welcome to Retail Gets Real.

Tony Sciarrotta: Bill, thank you so much. It’s an honor to be here. And it’s certainly been a change in the world for us to be a part of the National Retail Federation. And, it’s where the rubber hits the road in our economy.

Thorne: We’re excited to have you as a part of it, and I think we’ve just got to be really honest: Reverse logistics is an extraordinarily important part of the retailer’s life. I think it’s important for listeners to understand what is reverse logistics. Tell us a little bit about RLA.

Sciarrotta: So that’s the challenge, right? What is reverse logistics? In years gone by, when I tell my family what I do for a living, they’re very suspect. What’s that? The confusion comes in because reverse logistics sounds like the process of moving the goods, and for us at the Reverse Logistics Association, and for my career it’s a lot more than that. The Reverse Logistics Association is simply a community of — not simply — it is an important community, a global community of the retailers and the manufacturers who make stuff, and sell stuff, and get stuff back, and the many, many, many third-party solution providers or service partners who help them do something about the returns. They either move it, or they process it, or they refurbish it, or they repair it, or they recycle it, or they resell it. So that’s the community. That’s the community.

Thorne: Let’s talk about how, how big is that industry? What is the impact to retailers?

Sciarrotta: Well, the impact of the retailers alone, in North America alone, was estimated by the NRF to be $861 billion in 2022. Now, I’ve got the opportunity to have been in this a while. When I took over the RLA in 2016, returns were about $300 billion, so they’ve way more than doubled in just the last seven years. A lot of that attributed, of course, to the growth in ecommerce during the pandemic, et cetera. 

But generally speaking, since I’ve been doing this around the year 2000 … when I was at Phillips, when we were seeing what we thought were high rates, 8-9%, 10% return rates at brick-and-mortar retailers. But now that number, obviously, it’s at 16.5% estimated, so it’s more than doubled there as well. So the trend line is not good, and that’s why reverse logistics has to be focused more than just the movement of the goods. 

And by the way, Bill, we’re only talking about consumer returns at the moment, right? B2C, only in the United States. If you start to throw in B2B, we are north of a trillion-dollar industry just in North America. The B2B example, Bill, would be: We all work for companies, and we refresh our computers maybe every two years. Ten thousand laptop computers every two years, they go back into the reverse logistics supply chain, and something has to be done with those. So, it’s much bigger than the $861 billion. That’s just the B2C. But again, we’re talking about what the retailers have to deal with and face, and that’s a huge number for them.

Thorne: Yeah, no, it’s really interesting. We had a meeting recently, we call it the Communicators’ Network, which is all of our retail executive communicators, and we had the opportunity to sit down and have a conversation with Courtney Reagan from CNBC, the senior retail reporter. And she actually mentioned this. She mentioned the fact, she said, we don’t ever really think about. And I think it’s important that we start thinking about what happens to that red sweater that I buy, and I put it on, and I think, it’s not really what I want, and I return it. Where does it go from there? 

What happens, Tony, when a consumer returns a product?

Sciarrotta: Bill, that is where I could spend four hours talking about the many different things that happen. Let’s just say … we could talk about the trail in a moment, but let’s start out by saying, it depends.

Thorne: I would assume by product, it really depends, doesn’t it?

Sciarrotta: Correct. Partly by product category, partly by retailer, and then there’s other factors. The factors are, for example, in the United States, we have a law that anything that’s been taken out of a box and plugged in with the plug, any product that’s sealed, once it’s been open, it can no longer be resold as new. 
Clothing doesn’t have that issue, but clothing has different issues. Your red sweater goes back, Bill. Does it go back to the forward facility where it goes back in stock? Does it go to a returns facility where they inspect it? Can they inspect for tears, rips, smells, et cetera, stains, and put it back on the shelf? Or does it go into liquidation? 

But you’re correct that every product, based on its UPC, should have a disposition attached to it. And part of it, Bill, is that manufacturers and retailers can’t always agree: What do we want a customer to do with the return? Do we want to get it back and resell it, which isn’t being done enough, or do we want to send it to a third-party partner who will liquidate it for us and collect some revenue?

So, what happens to that red sweater, Bill? It goes in the back room. It goes into what we call a Gaylord box. That Gaylord box gets shipped to somewhere that’s going to process it. It could be the retailer’s return centers like Walmart and Target and Best Buy and many others have. And I’ve been to them. They’re amazing. They separate it. But it’s all manual and that’s the that’s one of the big problems, Bill. Everything’s touched many times. 

So, your red sweater now has gone back to, let’s call it the Walmart return center or the Target return center. It’s separated by the UPC, and the disposition is determined. Maybe in your case, that red sweater is a brand name that has a high value, and it’s going back to the manufacturer, and they’re going to take it back. And that’s what we did at Phillips. That’s what we did at Sony. Many others do it that way. And at that point, the disposition, with really good software out there, can be made that this sold for $100 new, but it’s only worth X dollars on the secondary market. If that’s where it’s going to go. If we can’t put it back on a shelf, which is our hopeful number one. Put it back on the shelf as new. 

But it might be out of season, and there the disposition says, ‘Well, it’s too late for that sweater to be sold at retail stores.’ Now we put it into the secondary market and that decision is made where can we collect the most for that?

So, the trail involves, unfortunately, many touch points, and that is what the cost factor becomes. How many touchpoints this stuff is being handled by. But in many cases, Bill, your sweater, along with a lot of other fast fashion and other clothing, gets liquidated in bulk. So that Gaylord box, full of sweaters and shirts and whatever, is liquidated.

It’s manifested as to what’s in the Gaylord box, and it’s sold to liquidators or to secondary markets. So let’s clearly identify: A liquidator buys a truckload in bulk of whatever’s on there. The secondary market would be those retail chains like Big Lots, Ollie’s Bargain Outlets, the Bargain Hunt Stores, and then of course websites that also sell this stuff. So that’s the secondary market which actually collects a higher return than if you just liquidated in bulk. 

So, your red sweater now, because it’s a brand name goes one way. But if it’s not a brand name, it gets liquidated another way. What we hope most of all, Bill, is that it is circular. It is resold, repurposed donated if necessary, and that it doesn’t end up in a landfill in Africa or in the desert in Chile, where they have a mountain of clothing returns.
Thorne: I remember during the pandemic, but there’s been other times, where we’ve talked about what retailers are doing in terms of providing these returns to charities. Is that on the increase or has that always been the case? Or is that something new?

Sciarrotta: It is on the increase because it’s not always visible to retailers and manufacturers as a good avenue. To do a charity donation — doesn’t require — but generally your company has to be making a profit. So, you can take it as a financial advantage to donate to charity. Otherwise, if it’s not an advantage financially, then you might just want to liquidate it, and collect your pennies on a dollar and get rid of it.

And that’s the worst-case scenario. But charities to me are significant because, we referred to that mountain of clothing in the Chile desert in South America, and Bill, there’s clothing in there that has price tags on it from retail stores. Now, how is it that it was cheaper to send it to that desert in Chile than to use it for homeless shelters or charities in the United States in your own market?

And that’s becoming a big thing, Bill, hyper-local dispositioning. Don’t send it from Detroit to California or California to Florida. Use it in your own market. And that’s where charities are becoming a bigger player. 
So, you’ve got your secondary market retailers, you’ve got your liquidation and you have charities as different avenues of disposition. Anything to avoid sending it to a landfill. And unfortunately, Bill. Landfill — they’re estimating that up to 70% of landfill activity now is from return goods that are being thrown away.

Thorne: 70%?

Sciarrotta: That’s what the academics are showing on some of the different research that they’re doing. Yes, it’s scary.

Thorne: Yeah, it really is. So how does that handle, a landfill? Is that going to be there in, you know, 3010? 

Sciarrotta: Probably as long as plastics will be there, Bill.

Thorne: I am sure that there are companies that are doing right by reverse logistics. What are they doing right?

Sciarrotta: The companies that are doing right are following a trail that was really, maybe, blazed by the auto industry. You can easily buy used cars. You can easily buy parts for used cars. You can keep a car running for decades, right? That next step was the electronics industry because of the fact that they were getting the stuff back that plugged in. And here’s the nightmare of returns: About 90% or more of return goods have no fault found, no failure, no technical failure. Nothing’s wrong with the product. Imagine all that stuff coming back. Nothing wrong with it. So you’re paying costs. 

The electronics companies, in particular, these are high-value items — whether it’s a television, a DVD player, you know, all of those, high value. We had to do something at Phillips, and what we learned is we needed to refurbish it. In many cases, you don’t have to repair it. You just test it. It tests good. You learn to repackage it better. You learn to find certain partners to liquidate it through. The electronics industry has led the charge here. 

Now, let’s be clear, it’s partly based on legislation that said you have to — you can’t resell this new. But also, number two, Bill, in the last 20 years — data. Data that’s being kept on those products has to be clearly wiped out, otherwise massive lawsuits occur, right? The data was left on a computer, and somebody got it, and destructive things can happen with the privacy issues we’ve got. We used to just liquidate things as is. Then we said, ‘No, we’re taking everything back from everybody because we’re protecting our brand name, and we’re protecting our brand from being sued for data being left on a product.’ 

So, the electronics industry has gone down that way. Now we hope to see the fashion industry going in that direction as well: of finding ways to recover these products. And you asked for some company examples. Of course, the HP, Samsungs, the Dells of the world — who are all board members on our association. They’ve learned how to do this. 

But now you’re starting to see — and I love this — I love companies like Patagonia, North Face, Columbia, Adidas, Nike. They’re taking the stuff back as well. Eileen Fisher Apparel, they’re taking stuff back from consumers, giving them a small credit of some kind and saying, ‘We’ll give you a credit on new.” But then they turn around and they’re doing something good with that. In the case of Eileen Fisher Apparel, they are donating it. Fixing it up, donating it to women’s shelters.

In the case of Nike, for example, they might take back … Bill, if one of your kids or you happen to own a pair of Air Jordans they’re wearing out, you say, you look on Nike’s site, they say, ‘We’ll give you a credit. Send it to us. Give you a credit. You can buy a new pair.’

Patagonia and these other higher-end clothing manufacturers are also doing that. So, they’re taking the trail that’s been blazed, as I said, by the auto industry, then the electronics industry, and now they’re recognizing that it’s more circular to take these goods back and offer them back to their consumers. 

It used to be believed, Bill, even retailers, the primary front-line retailers would be concerned that these goods would show up being sold cheaper for less somewhere that’s a competitor. But since there’s so much seasonality in clothing, it really wasn’t the issue, and now most retailers are considering that it is more circular, and then the manufacturers are also recognizing, ‘Hey, we can make a difference by taking it back ourselves.’ And they are. So those are some names of some good companies, good examples of doing things right.

Bill, we’ve become aware in the last few years that recycling is no longer the best thing to do. Recycling. Bill, it drove me crazy because I’m a big fan of recycling. But ultimately recycling can use more energy to do something with it than to do new. Certainly, in the case of plastic bottles, where maybe only 5% of those things are being recycled because it takes energy and it costs money to do that and collect it, and so on. So recycling is now last on the list of what to do with return goods. 

Now I’m not talking about consumables, obviously, like those plastic water bottles. That’s a whole different discussion we won’t go into. But let’s stop throwing away good apparel, good electronics, and let’s find a way to reuse it. And if companies start to examine, and especially the retailers, if you start to examine your end-to-end costs, and then weigh it against the business opportunity to create your own secondary market, you’re going to start reaching customers that you may not have reached before. 

Now that may not be a company’s goal. The vision for the retailer may be to only sell new, but at least find a partner that you can trust to use it for a secondary market reseller, rather than watching that stuff go to landfill.

So recycling is last on the list. Finding good partners. This is a job creator, Bill. They hire people in a returns warehouse to separate the good from the bad, from the ugly. They can resell the good on Facebook Marketplace, on Craigslist, on eBay. There’s such high demand for it. The economy’s been through its rollercoaster, so people are being a little cautious about buying, so who wouldn’t go looking for a pair of Nike Air Jordans for half the price or less, even if they’ve been pre-loved?

Pre-loved is one of the fun terms we’re using, Bill. Pre-loved, certified, pre-owned. Those are some of the terms being thrown out there now, and we love it, and the younger generation seems to be okay with it. Bill, you and I, we may have, when we were in college, maybe we went to the Goodwill store to buy a pair of jeans instead of buying new, because we were being economical. There’s a lot of that going on and, there’s a demand out there for that secondary market. 

The challenge, Bill, is that some of what I’m preaching here can sound a bit anti-capitalistic, because I’m encouraging companies to stop worrying about selling more, but creating this secondary value market, because it’s good for communities. It’s good for the states. It’s good for our country. It’s good for the planet.

Thorne: Yeah, it’s one of those things, Tony, it’s kind of a good time for this. I say that in the sense that people, the focus on sustainability. It has been — I don’t want to say it’s a new phenomenon — but it has been a newer phenomenon within the industry. I remember back when I was with Walmart — and we’re talking about probably around 2015, around that time — there was this whole sense that we needed to start thinking about sustainability. Our role, retail’s role, our brand’s role, in addressing that. In addressing how we can be sustainable and help the environment and at the same time save money so people could live better. So, sustainability, because of that rising recognition and awareness, I would think that that has been a real boost to RLA’s efforts.

Sciarrotta: It has been, and it’s funny you mentioned Walmart because when I was at Phillips, of course, one of our bigger accounts. [Walmart was] one of our biggest offenders. We had return rates in a 12%-15% range. For an electronics company, that could be the death. 

I worked with the Walmart people who got me to understand that 99% of the people don’t walk into a Walmart store to buy something to have to bring it back. When you start with that understanding: People don’t buy things to bring them back. Well, then what’s going wrong? And that’s why we get all these non-defective returns. I’m so proud that I’ve worked with the Walmart team, the leaders there to figure out how to reduce returns. 

We took return rates down from 11% to 4% within five years at Walmart. When you’re doing $500 million a year in business with them, that’s a big number. So there’s an important focus by Walmart and other retailers to be engaged in the sustainability aspect of selling it so that people don’t bring it back. And there’s not enough attention paid to that. That is part of sustainability. It’s also part of circular economy, which is, of course, the newer, bigger buzzword. It’s kind of like sustainability on steroids, right? 

And that’s because companies like Walmart forced companies like Phillips to figure out why are people bringing things back when there’s nothing wrong with them? And Bill, it was about packaging. It was about the instructions. It was about the inside materials that were being used. Everything played into that. And that’s what I learned at Phillips. And I learned that if you’re going to be in reverse logistics, it’s really about returns management. And you really are touching every department in your company, whether it’s marketing, whether it’s advertising, whether it’s finance, whether it’s service. 

That position … I was really amazed when a consulting company came to Phillips and said, ‘We can create this whole thing for you and reduce your returns.’ And they had the returns person in the center of all these different silos to focus on how to reduce returns. But I loved it because they called them the return czar. 

So, proud of the work we did at Walmart. And again, Bill, that was a very simple example. The instruction book was in 12 languages and 10-point font and things like that. So the focus has to be also on improving that customer’s experience, and that’s where the retailer plays in. What was on the shelf at Walmart or any other retailer stores with the little bullets, the stars of what the product’s all about, that makes a difference. People read something and they say, ‘Wow, I’m going to buy this and it’s going to do this for me.’ And they take it home and it does that and they’re happy. But if it doesn’t do what the sign said, or the box said, or the advertising said, they’re not happy. They bring it back.

Thorne: First of all, this is our first conversation. This will not be our last conversation. We’ve got a lot of things to talk about as it relates to reverse logistics and its benefit to the consumer and its benefit to our members, retailers, large and small. But this one we’re going to bring to a close. But I’ve got two questions for you, and the first is, what is the best career advice you ever received?

Sciarrotta: Well, I spent half my career in sales and marketing, and I don’t know that I got good advice in that. But when I was picked out of a hat (I felt like I was picked out of a hat by some consulting people and the senior management at Phillips) and they said, ‘Go fix the returns problem,’ the best advice I got was that what we’ve been saying: That a return is a reverse sale. Something went wrong for that person. Figure out what went wrong. Don’t figure out how to stop the returns or get rid of them. Figure out what went wrong. Push it upstream. And I was able to do that by using some significant influencing skills that I’d learned in sales and marketing, and I learned to push it uphill a little bit. So that was really great advice, and it’s been the focus and the drive for me. What went wrong for the consumer? And most important — we didn’t use this term, Bill — how can you, as a manufacturer and a retailer, exceed a customer’s expectations? If you do that, you not only reduce returns, but you build loyalty, right? You build loyalty. And that’s what we really want to do at the end of the day. That was great advice from one of my mentors.

Thorne: That’s pretty fantastic. I have to ask you this question as well, because you’ve been around retail for a long time. What excites you most about the future of retail?

Sciarrotta: This covers a lot of ground, Bill, but the future of retail is about violation of all of our privacy. Because as companies learn more about us, they learn to suggest the right stuff. They learn that if you’re shopping online and you’re buying Johnston and Murphy shoes. And you used to buy Samuel Hubbard and they were size 12 that fits you. But Johnston and Murphy, it isn’t a size 12. It’s a size 12 and a half. Imagine a little window that pops up and says, ‘Hey, just so you know, this might not work for you.’ But ultimately, as they get to know us better, maybe they’ll recommend that we buy what we need instead of just things that we might want. And I’m excited about that.  

The other one though (let’s throw a mention in about clothing is) this little thing about avatars. You and I, Bill, we go on screen and, H&M or Macy’s says, ‘Hey, pick your avatar and this’ll help you get the right size clothing.’ So there’s some cool stuff coming there. But really, to me, it’s about personalization. Learning about you. Taking care of you for what you might need, really, versus what you want. And that I think at the end of the day helps all of us. 

And by the way, the retailer also being the front line now for returns. I love the engagement that the NRF is helping promote and that we are starting to see more of figuring out how to take care of the customer. Making them happy doesn’t mean making it easy for them to return. Making them happy means exceed their expectations. Surprise them with whatever you ship to them or whatever they buy. A follow up phone call, a thank you note. All these amazing things that are old school, but coming back again.

Thorne: I totally, totally, totally agree. Tony Sciarrotta, it has been such a pleasure talking with you. Thank you for joining us on Retail Gets Real.

Sciarrotta: Thank you, Bill. It’s been a pleasure.

Thorne: And thank you all for listening to another episode of Retail Gets Real. You can find more information about this episode at Retail Gets Real. I’m Bill Thorne. This is Retail Gets Real. Thanks again for listening. Until next time.