How online returns became a $212bn opportunity for venture firms

Americans returned about $212 billion worth of online merchandise last year — clothes, electronics, sporting goods and more that was often liquidated for pennies on the dollar or simply tossed in landfills. Despite the enormous waste and losses, retailers have long seen returns as a cost of doing business . Now, with companies looking to cut expenses as the pandemic-era shopping boom fizzles out, a host of start-ups with names like Loop Returns and Two Boxes has emerged promising to help retailers make the returns process more efficient — and even profitable. So far these firms are mostly working with smaller brands, such as Allbirds, hospital scrubs maker Figs and apparel seller Aviator Nation. But venture firms, seeing a huge mostly untapped market, last year pumped almost $200 million into so-called reverse logistics start-ups. That’s about 2.5 times more than 2021, according to data compiled by PitchBook, and a rare bright spot in an otherwise tepid fundraising environment. “The profit mechanics around e-commerce have to be re-thought, and returns are a massive part of that,” said T J Mahony, a founder at Vinyl Capital, which led a $4.5 million investment in Two Boxes that closed in November. “Right now, you pay to ship a product, pay to ship it back, pay someone to unpack it and typically throw it away. It’s low-hanging fruit,” Mr Mahony said. The $212 billion in online returns last year was double what it was in 2020 and more than fives times the amount in 2019, according to the National Retail Federation. Returns are especially endemic to certain categories, including direct-to-consumer brands that often sell apparel. These companies have return rates of up to 40 per cent, more than double the overall rate of 16.5 per cent. Loop Returns, founded about six years ago in Columbus, Ohio, says its client roster more than doubled during the first year of the pandemic, when brands struggled to keep track of the surge in online orders. Demand has skyrocketed in recent months, the company says, as retailers rush to cut costs . “What we’re seeing now is the opposite of growth problems: ‘How can I effectively manage my inventory because I can’t afford to have excess inventory on shelves?’” said Jonathan Poma, Loop Returns’ co-founder and chief executive. “Mentions of profitability and margins are popping up more in calls with new merchants.” Making returns easy is an important part of the sales pitch. Loop Returns software lets customers see their order histories on retail websites and select their preferred return method, including front-door pickup. More than half of Loop Returns merchants charge customers restocking fees, usually $10 or less, and so far there has been little pushback. “The repeat purchase rates are not materially changing,” Mr Poma said. The company raised $115 million in December, making it among the best funded, and processes roughly 1.5 million returns a month. Loop Returns says it now has almost four times as many clients as it did in early 2021 — about 2,200 companies. Loop Returns helped Australian women’s clothing retailer Princess Polly put in place an efficient and cost-effective return policy that lets shoppers buy the same item in multiple sizes to find the best fit. Allowing customers to try out the brand, even if it means returning some items, helps Princess Polly “understand what customers are really looking for”, said the company’s director of operations, Alexandria Collis. “It’s your opportunity to drive a positive customer experience.” Two Boxes co-founder and chief executive Kyle Bertin saw the need to overhaul the return process during his previous job at shipping software firm Flexport. Visiting warehouses, he often saw returned inventory piling up, especially in January when shoppers return unwanted holiday gifts. He says the process varies for each brand and that few workers are trained to handle returned merchandise. So last year, he started Two Boxes to help simplify and streamline the process. Two Boxes software gives warehouse workers step-by-step instructions on how to process a return, leading them through the product inspection process and helping them determine if the item should be resold as new or offered at a discount. Workers can process one returned item per minute, down from an average of three minutes to process each return before using the company’s software, he said. “Returns have gone from a nuisance to a nightmare” for retailers, Mr Bertin said. “There’s so little efficiency, it’s where we’re seeing a lot of demand.” Beyond returns, start-ups are helping brands resell used items to appeal to budget-minded and eco-friendly shoppers. The brands get to capture some business that might otherwise land on sites like EBay, Facebook Marketplace and OfferUp. In the US, spending on used goods grew to $289 billion in 2022 as shoppers looked to manage budgets amid rising inflation, according to a study by OfferUp. Recurate, founded in 2020, lets customers resell used items directly on the brands’ websites. “Inevitably, we think every brand will own their own resale channel,” said Adam Siegel, Recurate’s co-founder and chief executive. “Why wouldn’t they want to engage with their customers in the second, third or even fourth sale of their products?” Moosejaw, an outdoor gear and apparel retailer based in Madison Heights, Michigan, integrated Recurate into its website this year. Budget-minded shoppers can buy used tents, for example, directly from other Moosejaw customers, who get store credit for the sale. Previously, Moosejaw hosted blowout sales of used gear, where items sold for as much as 80 per cent off. “This new model allows us to sell that tent at its real market value,” Moosejaw chief executive Eoin Comerford said. While the company itself gets no direct profit from the resale, hosting the exchange helps Moosejaw earn customer loyalty. “We want to keep that tent out of a landfill, and we want to attract new customers,” he said.

How online returns became a $212bn opportunity for venture firms

Start-ups with names like Loop Returns and Two Boxes have emerged promising to help retailers make the returns process profitable