Edition 61
Returns Management is taking off in Chinas Online Shopping Era
by Haozhe Chen, Associate Professor, East Carolina University

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Not long ago, when Chinese consumers wanted to return the products they bought in stores, they might have to prepare a carefully thought alibi in order to face multiple store employees’ torturing inquisition, often resulting sadly bringing the original products back home. In the past, no retailer really cared about returns management. While most retailers would not hesitate in spending loads of money decorating the stores and training employees to be polite to customers to generate the sales, little attention was given to keeping customers happy after the transaction. As soon as the customer made the payment and the product left the store, business is DONE. Returns management was basically nonexistent in most retail managers’ dictionary. However, things are changing quickly thanks to the emergence and rapid growth of online retailing.

The booming online retail market in China
No one had expected online shopping to become so popular in China in such a short time frame. People had cited consumer purchase patterns and lack of secure online payment options as the major obstacles of online retail in China. To the surprise of many, China’s online retail market had grown to $210 billion for revenues in 2012 and a compound annual growth rate of 120 percent since 2003, compared to $225.5 billion in the U.S. in the same year (McKinsey). In fact, Forrester Research estimated that in 2013 China’s $294 billion had already passed U.S.’ $262 billion to become the world’s largest online retail market. McKinsey estimates that China’s online retail size will reach $420-650 billion in 2020. The country’s retail sector already is among the most wired anywhere – online retail accounted for about 5 to 6 percent of total retail sales in 2012, compared with 5 percent in the U.S.. The China Internet Network Information Center reported in June 2013 that the country had more than 270 million online shoppers, representing more than 45 percent of China’s total Internet users. The number will continue to grow in the coming years after online payment systems are well established and the mobile Internet becomes more popular. Forrester predicts that the number of online buyers in China will surpass the total population of the U.S. by the end of 2014.



However, despite rapid increases in the total number of online buyers and online spending per shopper, China remains a developing online retail market in terms of the proportion in the entire retail industry and penetration rate of online shoppers. Some country-specific characteristics are worth noting. Only a small portion of Chinese online transactions take place directly between consumers and retailers. Instead, most occur on digital marketplaces. What’s more, Chinese online retailing is not just replacing traditional retail transactions but also stimulating consumption that would not otherwise take place. A new report by the McKinsey Global Institute considered China’s online retail as a catalyst for growth. Online retail may catalyze a “leapfrog” move by the broader retail sector, putting it on a fast track to a more digital future. Online retail’s impacts on other industries such as logistics should not be overlooked either. For example, about 50% of parcels delivered in China (6.18 billion for the first 9 months in 2013) are created by the orders of online shoppers.

When discussing China’s online retail industry, it is difficult not to mention one company (Alibaba) and one day (Singles Day). Founded in 1999, Alibaba Group has grown into an e-commerce giant within a 15-year span. The Economist magazine estimated the company had a valuation between $55 billion to more than $120 billion in March 2013. Instead of selling its own products, Alibaba uses its web portals to provide platforms for e-commerce transactions. Besides its business-to-business portal (alibaba.com), Alibaba Group owns two flagship online retail marketplaces: taobao.com (C2C) and tmall.com (B2C). In 2012, these two retail portals handled $170 billion in sales, surpassing Amazon and eBay combined. It is estimated that Alibaba’ sales could rise to $1.6 trillion in 10 years. Its tabobao.com is already the world’s 12th most visited website in October 2013, and this site is expected to exceed Wal-Mart in coming years. Singles Day (November 11) in China began among various universities in 1990s and is a day of celebration for people who are single. The date is chosen for the connection between singles and the number “1”. Five years ago, Alibaba turned this day into a nationwide online shopping extravaganza by offering huge discounts. This unofficial holiday has become the world’s largest online shopping event. On Singles Day in 2013, Alibaba’s generated $5.75 billion sales, almost double the entire U.S.’ Black Friday and Cyber Monday combined sales of $3 billion in 2013. Nationwide, online retailers generated 180 million parcel packages on the Singles Day, with over 60 million processed on the same day.

Returns management in China finally gets attention
While returns management did not draw much management attention in the past, the situation is changing rapidly largely due to the growing online retail market in China. Both online shoppers and online retailers have now realized that product returns is an inevitable issue both buyer and seller should actively deal with. With the astonishing amount products being bought online, it is not surprising to see the increasing number of online product return complaints in different Chinese media outlets and social media. In fact, some media reported that the return rate was estimated at 25% during the Singles Day period in 2013 – with other estimates as high as 40%. Major Chinese online retailers don’t agree. Alibaba’s taobao.com denied the reported number but didn’t provide any return statistics. Another Chinese online retail giant JD.com reported 0.04% return rate in the Singles Day period, compared to its 0.4% regular rate. While it is difficult for outsiders to obtain accurate statistics of online product returns, one thing is certain: product return has become an integral part of online retail business. It is likely the trend will only become more prevalent in the future due to a number of factors.



Nature of online retail. Different from shopping in traditional brick-and-mortar stores, online shoppers cannot see or touch the products in person. This often results in a high level of uncertainty or anxiety. Shopper may hesitate to pull the trigger when making online purchase decisions simply because of the risks involved – unless they are confident that the product can be returned if they are not happy. This is a particularly relevant factor when considering that most Chinese people are risk averse. Therefore, product returns has become a pre-transaction consideration rather than a afterthought. In order to create sales, online retailers now have to incorporate return policies into their business strategies and develop the necessary capabilities to handle these product returns.

Fierce competition. Today’s consumers, including Chinese consumers, are well aware of the abundance of choices. To buy the same product, they can choose between in-store and online purchase, among different websites, and even from thousands of online sellers at the same online marketplace (such as taobao.com). Unless a retailer’s price and customer service stand out, it is really difficult to secure a stable and long-term customer base. Increasingly, returns management is considered an important element of customer service. Therefore, many Chinese online retailers are using returns management as a competitive weapon to win over customers.

Government regulations. Along with the increase of consumers’ awareness of the need to protect themselves, the Chinese government is also making efforts to better regulate the retail market in a multi-channel environment. In October 2013, China passed the Law on Protection of Consumer Rights and Interests, which explicitly requires that retailers who sell through online, TV, telephone, and catalog formats must accept unconditional returns from customers within 7 days after the sale. This new law will be effective starting March 15, 2014. Although implementation details still need to be determined, the new government policy has gained very wide media coverage in China. Unquestionably, it will fuel the growth of product returns in China.

Online retail infrastructure developments. Today, major Chinese online retailers have developed detailed return processes on their websites to share with customers although how efficiently and effectively these processes are implemented is still unknown. In addition, some innovative solutions have been developed and become standard practices. One such example is “return shipping insurance”. Chinese statistics showed that 42% of the online product return disputes are caused by disagreement on return shipping. Therefore, return shipping insurance was first launched in China in 2010 and now it can cover both the buyer and the seller. Some key features of this service is low cost (usually less than $0.50), ease of purchase (can be selected in the online checkout process), and fast reimbursement (within 72 hours after the claim). Almost everyone agrees that this is a win-win-win situation because consumers, online retailers, and insurance company all benefit from such service. Infrastructure improvements like this can certainly help the healthy growth of returns management.

Chinese online retail returns’ challenges
Although returns management has taken off in the Chinese online retail environment, there are still significant challenges that cannot be overlooked.



Lack of sufficient understanding. Online retail is relatively a new concept in China, and returns management is even a stranger term for most Chinese online retailers. Knowing the importance of product returns does not mean fully understanding the proper process for handling returns. Very few Chinese online retailers possess expertise in returns management and most are still in the exploration stage. In this situation, established foreign companies’ practices often become templates for learning. However, the fact that the practices work well in Western countries do not necessarily mean they fit the Chinese market well. A long learning period can be expected.

Lack of reliable system support. Compared to developed countries, Chinese online retail still lacks many fundamental support elements. In an online shopping environment, the purchase/sell history and financial strength of both the seller and the buyer are equally important. Although major Chinese online retailers have made commendable effort in developing a system to ensure fair and smooth transactions, such system still have many loopholes to take advantage of. Issues do occur on both sides of the transactions. Buying from small online retailers is still considered risky for many Chinese consumers. In fact, most of the complaints regarding product returns are related to small online retailers. Therefore, a lot more work is needed to perfect the existing system.

Lack of logistics support. Logistics has been considered a bottleneck to further growth of China’s online retail. During peak seasons (such as Singles Day), China’s logistics network is overburdened with packages resulted from online shopping. If forward logistics is already an issue, it can only be imagined how much more challenging it is for reverse logistics related to returns management. In fact, very few Chinese online retailers have developed efficient logistics networks to effectively handle product returns. Most of the current returns management is still basic with erratic operations.

Bright future of returns management in China
Despite all the challenges, returns management in China has gained great momentum and generated significant impacts on the entire retail sector. McKinsey suggested that because of the digital disruption, China’s retail industry will probably follow a trajectory different from that of retail sectors in other markets by skipping certain stages. The same can be expected for returns management. Although China’s returns management lags behind that of developed countries, progress in online retail returns may act as a catalyst for the returns management of the entire retail sector. Online retailers’ practices may prompt brick-and-mortar retailers to adjust their strategies. For example, Walmart initially had a 30-day return policy in China, but now has changed to 90 days. In order to compete with online retailers, some traditional Chinese retailers are considering the multi-channel approach for both creating sales and handling returns.

In a broader sense, China is developing into a consumption society. The growth of returns management in the retail sector will only expedite that process because consumers in any region of the country can easily access, buy and return products online. McKinsey estimated that by 2020, as 15 to 20 percent annual growth rates (before inflation) continue, China’s online retail could generate $420 billion to $650 billion in sales, which will equal that of the United States, Japan, the United Kingdom, Germany, and France combined today. With this in mind, it is hard not to believe that returns management in China will have a very bright future.

RLM
Dr. Haozhe Chen is an Associate Professor of Marketing and Supply Chain Management in the College of Business at East Carolina University. He has published about 30 academic articles on various supply chain and logistics topics, and he is an active member of Reverse Logistics Association. He can be reached at chenh@ecu.edu.

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