Reverse Logistics – Returns Outpace E-Commerce Sales

Overview

Reverse logistics is the process of reintroducing products from end-users back into the supply chain, encompassing various activities like repair, resale, recycling, and disposal. This process is critical due to increased supply chain complexity, changing consumer preferences, environmental concerns, and rising costs.  

U.S. consumers returned $816 billion of merchandise in 2022, with returns rates outpacing e-commerce sales growth, impacting profits. The global reverse logistics market is estimated at around $950 billion, making it comparable to the entire U.S. domestic trucking market. Reverse logistics is not limited to retail but extends to various industries, with expenses related to reverse logistics representing a significant portion of manufacturers' revenues as well.  

Looking ahead, we expect more investment and innovation in reverse logistics due to the current market size and predicted growth trends. Startups have the potential to create value for transportation providers, retailers, and manufacturers by making the process more efficient and cost-effective. 

Pain Points

Traditional supply chains are optimized for moving products from suppliers to end-users, with standardized processes and high visibility. In contrast, reverse logistics lacks standardization, with limited visibility into when products will re-enter the supply chain. Returned products are often not neatly packaged and may require manual evaluation. As a result, reverse logistics is typically manual, inefficient, and costly, consuming more resources than outbound shipping. Reverse logistics also creates a significant environmental impact, with over 5 billion pounds of landfill waste generated from returns in 2021.    

The logistics tech industry has seen a rise in reverse logistics startups and VCs are bullish. Investment opportunities include improving point-of-sale returns, streamlining reverse logistics, and capitalizing on recommerce and recycling platforms, while returned items can largely be categorized into a handful of destination options, such as “new inventory,” “resale,” “liquidation,” “donation,” or “discard.”  

Most existing processes necessitate that all returns converge at a central warehouse for sorting, incurring substantial logistical costs. We believe if participants can either eliminate the need for returns or move the decision-making process further upstream in the supply chain, we can significantly reduce these logistical expenses. We see success coming from limiting the amount of product fully re-entering the supply chain, or even eliminating returns, rather than focusing solely on improving the efficiency of handling returns.  

Investment Opportunities  

Point of Sale Returns  

Investment opportunities in reverse logistics involve software solutions for returns management, particularly at the point of sale and return initiation for e-commerce retailers. These software startups often offer customizable customer-facing portals for retailers and provide customers with tools to start a return easily, print shipping labels, track their returns, and locate nearby drop-off points. They include features aimed at curbing returns by encouraging exchanges or upsells with instant refunds or extra store credit. Retailers can also use customer data to gain insights into return reasons and incorporate this information into product design and planning.  

First Mile Returns  

To make returns more convenient and reduce logistics costs, several companies have begun offering “no-box, no-label” returns at physical drop-off locations. Amazon began offering customers this option several years ago at Whole Foods and Kohl’s, and FedEx announced its intentions to launch its no-box, no-label returns service.   

Startups in this space are filling in gaps in service areas, offering retailers speedier recovery of returned items, and offering customers more flexible pickup options. Instead of a single pickup time or delivery window offered by large parcel companies, startups are sending their own drivers to pick up items anytime throughout the day.   

Warehousing  

Warehousing for reverse logistics often needs about 20% more space per item compared to order fulfillment. This is because of the added complexity of handling returns. To meet the demand for fast deliveries, retailers and logistics providers are setting up smaller fulfillment centers close to urban areas. This helps reduce transportation costs and meet consumer expectations for quick shipping. There is a growing overlap between third-party logistics (3PL) providers and flexible warehousing companies that handle both fulfillment and reverse logistics in the same locations. However, those who secure strategic real estate that minimizes transfer points and lowers transportation costs have an advantage. Given the limited availability of warehousing space and rising costs, repurposing existing facilities can be a promising investment opportunity.  

Recommerce  

With stricter regulations on greenhouse gas (GHG) emissions, resale, and recommerce marketplaces offer a double advantage for retailers. When customers return items, these items maintain their highest value when the energy and materials used in their production are preserved. This is an element of circularity. As there's a high likelihood of future regulations on Scope 3 emissions (those associated with the supply chain), retailers are starting to create secondhand resale platforms. Specialized platforms for consumers continue to emerge to allow retailers to sell returned items at reduced prices.  

Conclusion

We anticipate increased investment and innovation for reverse logistics considering the size of the market as well as secular trends. That said, unit economics remain challenging reflecting the relatively high labor and warehousing costs, as well as the lack of standardization. We believe participants who can mitigate the need for returns or move the decision-making process further upstream in the supply chain will significantly reduce these logistical expenses. We see success coming from limiting the amount of product fully re-entering the supply chain and mitigating or eliminating returns, rather than focusing solely on improving the efficiency of handling returns.

Authors: Burak Cendek, Todd Fowler, Ivy Nguyen