Market Analysis Summary
QuickReturns will target Web-based retailers (“e-tailers”), paper-based catalog vendors, and click-and-mortar retailers in the business-to-consumer space. Through the late 1990s, the e-tailer segment experienced spectacular growth that is expected to continue over the next five years as new users come onto the Internet and existing users increase their frequency of online shopping. In 1999, 39 million U.S. consumers averaged 13 purchases on the Internet, spending a total of $20.3 billion. Of that, 57.4% was from purchases of small or medium sized products, QuickReturns’ target market.
4.1 Market Segmentation
The customer segments QuickReturns targets–catalog merchants, e-tailers, and click-and-mortar stores–are expected to produce 170 million returns this year and 370 million by 2003. These projections are considered conservative, as the rate of e-returns is projected to reach parity with return rates of brick & mortar stores, which currently are twice as high.
Assuming a $42 average product price and an average of 2.5 products per order, 480 million products were ordered online in 1999, representing a 400% increase from a year earlier. The rapid pace of online sales growth is expected to continue as 2003 e-commerce revenues top $144 billion from 3.5 billion online purchases.
QuickReturns will also aggressively target consumer catalog merchants, a sector whose 1999 sales was nearly three times as great as those of B2C e-commerce. From the returns standpoint, catalog merchants represent an attractive market since many have return rates higher than those of e-tailers. For instance, BMG Direct, a direct marketer of pre-recorded music, processes 40,000 returns daily, requiring a staff of 140 people to inspect products and credit customers’ accounts. Largely due to the adoption of Internet sales, the mail-order catalog industry is projected to grow only moderately in coming years, but will continue to represent a sizeable distribution channel.
Virtual retailers face a growing competitive threat from brick-and-mortar retailers, which are increasingly pursuing online (click-and-mortar) strategies. Such retailers can use their physical infrastructure as a returns channel for goods purchased online, giving them leverage over pure-play e-tailers. But with the growth of their catalog and website businesses, many traditional brick-and-mortar retailers will face a similar returns problem as their virtual counterparts: not all of their Internet and catalog customers will have access to physical locations to return merchandise. Companies such as J. Crew and Nordstrom have relatively few store locations, leaving the majority of their Web and catalog customers without a place to return goods. Such click-and-mortar retailers therefore would benefit from partnerships with QuickReturns.
The chart and table below summarize the total market potential for e-returns market in the U.S.
|Year 1||Year 2||Year 3||Year 4||Year 5|
4.2 Target Market Segment Strategy
Recent surveys reveal that 89% of consumers say return policies influence their decision to shop online, and 67% consider potential return hassles to be a barrier to online shopping. As a result, pure-play e-tailers and catalog merchants are at a significant disadvantage to brick-and-mortar and click-and-mortar retailers that allow customers to return purchases made online to their physical store locations. Moreover, 30% of e-tailers have identified returns handling as their biggest logistical challenge going forward, demonstrating a substantial need for an outsourced solution provider.
Return rates in QuickReturns’ target markets described above are projected to increase until they reach parity with brick-and-mortar return rates, due to the following three factors:
- Many shoppers refuse to use the Internet to shop–-especially when purchasing gifts-–because of the difficulty and expense involved with returning merchandise. Such shoppers will be more likely to shop online if a convenient and cost-effective way to return becomes available.
- Online shoppers currently avoid goods, such as clothing, which are more likely to be returned. If an easier returns method becomes available, shoppers will be more likely to purchase such products, thereby driving up the average e-return rate.
- Women tend to return more merchandise than men. Currently, women represent only 39% of the U.S. online shopper population, but this is quickly changing. In 2000, for the first time, more women will use the Internet than men.
QuickReturns has excluded large products (e.g., furniture, bicycles, tires) from the market estimate because they will not be accepted at QuickReturns locations; they take up an unacceptable amount of floor space, are difficult to handle, and are generally aesthetically displeasing in a store environment. Instead, QuickReturns will target retailers selling common products with higher-than-average return rates. These retailers are particularly disadvantaged now because consumers are reluctant to buy products with high return rates since returns are so difficult to carry out. The categories that are best suited to QuickReturns are clothing, shoes, and toys because their value is highly subjective, they are vulnerable to changing tastes, and they are often purchased as gifts for others (who may value them differently). Moreover, such products are easy for QuickReturns clerks to inspect because problems with the merchandise are more easily identifiable and the clerks are more likely to be familiar with the products. Within the group of retailers selling these product types, QuickReturns will pursue those most focused on customer service and satisfaction.
A second segment of desirable retailers includes those selling specialty gifts, consumer electronics, books, music, videos, computer hardware and software, sporting goods, and health and beauty supplies. Although their return rates are not quite as high, these categories comprise 37.6% of e-commerce revenues, and thus generate a large number of returns.
Initially, QuickReturns will approach mid-size retailers that can act as beta test partners. These partners will work closely with QuickReturns for a limited time to optimize operational processes, technology integration, and reporting requirements. In return, QuickReturns will provide its services free of charge for one year from integration.
After the QuickReturns model has been proven by beta test partners, larger catalog merchants (e.g., Lands’ End, L.L. Bean) will be more likely to sign up for the QuickReturns service. At this time, QuickReturns will aggressively market its services to the market leaders of each product category.
Finally, QuickReturns will seek partnerships with shopping marketplaces such as Yahoo! Shops, Shopnow.com, Z-Shops, and Shopping.com. These sites provide Web hosting, commerce tools, and product search functionality for micro e-tailers, aggregating thousands of online shops into one entity. Partnerships between QuickReturns and aggregators will bring the benefits of QuickReturns partnership to more specialized retailers, who otherwise would be too small for QuickReturns to serve. Aggregators will enable thousands of individual merchants to gain access to QuickReturns with a single system integration, saving time and money. QuickReturns’ ability to tailor shipping destinations to individual product SKUs will assure that products will be returned to the right merchant. For billing purposes, all processing fees will be paid directly by the shopping aggregators, who will pass along the charges to the appropriate micro e-tailers.
4.2.1 Market Needs
Market needs of e-tailers and catalog merchants are very similar in regards to the reverse logistics associated with product returns. Surveys have shown that 89% of consumers say return policies influence their decision to shop online, and 67% consider potential return hassles to be a barrier to online shopping. By eliminating such a barrier retailers can satisfy their needs in:
- Providing better customer service,
- Increasing customer retention rates,
- Increasing new customer acquisition,
- Converting product returns into exchanges, and
- Focusing on their core competencies.
4.3 Service Business Analysis
Despite the boom in the Internet shopping, reverse logistic business associated with such purchases has been overlooked by industry participants. This creates a strong barrier for the next step in Internet and catalog shopping. Currently, this market is not well defined. The few companies that try to get established in this market have very different backgrounds (shipping carriers, parcel depots, express deliverers, to name a few) and have very different financial and marketing resources.
4.3.1 Competition and Buying Patterns
A number of competitors, both established and start-up, have announced intentions to capture share in the growing product returns market. However, none are pursuing the business model used by QuickReturns. While the market for returns processing has largely been overlooked, competition is expected to increase significantly as retailers concentrate on fulfillment, back-end operations and customer service as sources of competitive advantage. Competitive threats may arise from other start-ups operating in secrecy and from incumbents in related industries such as parcel delivery carriers, parcel depots, residential delivery services, and brick-and-mortar retailing. However, the same attributes that make many of these firms formidable competitors also make them attractive partners, enabling QuickReturns to “co-opt” potential competitors.
To date, no company has established itself as a dominant player in the reverse logistics market for e-tailers or catalog merchants. Each of the competing returns programs discussed below is either still in the planning phase or has just recently begun operations. At this point, first-mover status has not been claimed in a growing market that will be capable of handling multiple players. Competitors can be grouped into four categories: parcel depots, shipping carriers, reverse logistics handlers, and same-day deliverers (see table below).
|Parcel Depots||Mailboxes, Etc.|
|Shipping Carriers||UPS, FedEx, U.S. Postal Service|
|Reverse Logistics||Genco, The Return Exchange|
|Same-day Delivery||Kozmo.com, Sameday.com, WebVan.com|
4.3.2 Main Competitors
United Parcel Service (UPS)
UPS handles 55% of the e-commerce delivery market, delivering 12 million packages daily through an integrated network of air and ground delivery. Services include early-morning, same-day, and next-day air delivery. The Worldwide Logistics unit provides supply chain management, warehousing, and other services relating to order fulfillment. UPS also plans to test stand-alone retail outlets to further its reach in the residential market. However, to avoid backlash from parcel depots, the company is proceeding cautiously; only two locations have been announced thus far.
UPS offers two types of returns services. The Call Tag service allows consumers or retailers to request a UPS Ground driver to retrieve packages from customers’ homes at a cost of $4.50 per package. The Return Service allows retailers to include a return label which the customer can use to call and request a UPS home return pickup. The cost is the same as the Call Tag service, except the service is automatically billed to the retailer. While these services are convenient for some customers, they generally require the sender to be at the specified location for the pickup. The pickup time window can span eight business days, making the service inconvenient for working families and single households. The services also lack other benefits provided by QuickReturns, such as instant refunds, product inspections, free shipping (for consumers), flexible shipping destinations based on reason for return, and ability to exchange merchandise.
UPS also offers a service called eLogistics, targeting small and medium size businesses that wish to outsource portions of their operations. For retailers, UPS handles warehousing, order picking and packing, shipping, customer service, and returns handling. On the latter point, UPS Ground drivers pick up products at customers’ homes and deliver them to UPS warehouses, where they are inspected, processed, refurbished, and restocked. While this service may have some cost saving benefits to retailers, it is just as inconvenient to consumers as the Call Tag service. Moreover, it does not allow for the flexibility of the QuickReturns system: products must be shipped back to the central UPS warehouse, regardless of the reason for return.
With these services, UPS provides an alternative to QuickReturns, but its target market is not consumers and merchants seeking physical locations to receive product returns. Nonetheless, UPS must be considered a serious competitor due to its large size and market clout with e-tailers and catalog merchants.
U.S. Postal Service (USPS)
Handling 32% of e-tailer shipments, the U.S. Postal Service is the second largest shipper of products ordered online. The USPS has an extremely strong geographic presence through its 38,000 post offices nationwide and mail delivery services. The Postal Service recently launched an advertising blitz for its new Returns@Ease program, which lets customers print pre-addressed shipping labels from their home printers, and affix them to boxes which can be dropped off at local post offices or left for mail carriers. Retailers enrolling in this program can establish advance-deposit accounts with their postmasters.
While the USPS plans to become more entrepreneurial with new initiatives like the Returns@Ease program, these services are still provided out of traditional post offices, which continue to suffer from long lines, uneven customer service, and poor reputations. As a result, the Postal Service has struggled to sign up retailers for its returns program. As returns are not a core business for the USPS, there is no indication that the Postal Service will attempt to move further backward along the returns supply chain to provide more value-added services.
Federal Express (FedEx)
FedEx Corporation currently offers retailers a program called Net Returns, which enables them to electronically order home pickups for their customers. FedEx drivers print return shipping labels from handheld devices, and shipping and service charges are billed to retailers. The service adds little value beyond the standard call tag pickup that has been available for years.
FedEx currently controls just 10% of the e-commerce delivery market. Most of its annual revenues of $17 billion come from overnight air deliveries. FedEx is making an attempt to expand its FedEx Ground Service (formerly Roadway Package System [RPS]), but it reaches fewer than 50% of American households. Moreover, FedEx has experienced great difficulty integrating its ground and air services, resulting in operating margins that are less than half those of UPS. FedEx’s operational problems and its failure to capitalize on e-commerce has led its share price to fall over 30% in the past year alone.
FedEx has few retail locations for customers to drop off returns, limiting its potential to be a direct threat to QuickReturns. However, it recently signed a deal with Kinko’s in which FedEx employees will operate pack and ship centers in selected Kinko’s stores. No plans have been announced to accept product returns at these locations.
Mailboxes, Etc. (MBE)
Mailboxes, Etc. is the world’s largest franchiser of postal/shipping services. Its franchised stores (more than 3,300 in the U.S. and another 700 internationally) offer packaging, parcel shipping, 24-hour mailbox access, copying, printing, faxing, paging, office supplies, and other related postal and business products and services. Its customers are small and home-based businesses and general consumers. MBE has system-wide sales of about $1.5 billion and handles over 100 million customer transactions annually, although the corporation itself only retains revenues of approximately $72 million and EBITDA of $20 million. MBE currently has e-commerce relationships with companies including eBay, iShip, and boxLot.com.
MBE is in the process of wiring its franchise locations to the Internet using Hughes Network Systems satellite connections. The company plans to link store cash registers to the corporate computer system and to e-commerce partners. Through this integration, MBE employees will electronically generate RMA numbers and shipping labels for customers. However, in its current form, MBE’s e-returns program is expected to offer limited value to e-tailers and consumers. Consumers will neither receive instant refunds nor be able to exchange products; retailers will not be allowed to provide inspection criteria for product inspections, limiting their ability to separate appropriate from inappropriate returns (see table below).
MBE may have certain early advantages in the e-returns space. First, the company’s large distribution network provides access to consumers without having to sign additional distribution partnerships. Second, MBE has an established brand name and mindshare of consumers, some of whom already use MBE to ship returned merchandise. Third, it has already begun work on its e-returns program.
Comparison of Business Models, QuickReturns and Mailboxes, Etc.
|Service||QuickReturns||Mail Boxes, Etc.|
|Access customer order information||Yes||Yes|
|Product exchange option||Yes||No|
|Shipping address based on reason for return||Yes||No|
|Product liquidation service||Yes||No|
Nonetheless, MBE has not been successful in executing on its returns program. The program is already six months behind schedule, and franchisee interviews indicate the program now may be delayed until Winter, 2000. One barrier to the program’s success has been coordinating 3,300 independently owned franchise locations. Franchisee awareness of the company’s e-commerce initiative varies widely, with some franchisees reporting they are completely unaware of the program. Moreover, franchise relations have soured in the past two months, as 200 franchisees have joined together to create an independent franchise association for franchisees to protest MBE corporate policies and capital outlay requirements. The group expects to have 800 franchisees signed by the end of 2000.
Compounding the organizational issues facing MBE, parent company US Office Products has, over the past two years, undergone continual restructurings and has seen its stock plunge to a point where the company is being threatened with de-listing by NASDAQ. In March 2000, US Office Products announced its intention to sell off the entire Mailboxes, Etc. unit. Over the next several months, corporate restructuring issues may well distract management from focusing on new initiatives.
When MBE does launch its returns program, growth will be constrained by the number of e-tailers that can be integrated into the MBE network. Moreover, e-tailers using MBE’s service likely will be confined to MBE locations, since MBE will have little incentive to form outside distribution partnerships, which would direct traffic away from its locations.
The Return Exchange
The Return Exchange (TRE) is a Santa Ana-based start-up that plans to offer a suite of reverse logistics services to e-tailers. It is currently in beta testing with approximately ten e-tailers, but already has begun to advertise its services in industry trade journals. It offers three primary services:
- Returns management software
- Regional return centers to manage reverse logistics
- Online B2C auction to liquidate returned merchandise that cannot be resold as new.
TRE’s software program, called Verify, allows retailers to automate the providing of RMA numbers to customers seeking to return merchandise. Verify is linked to each e-tailer’s database, where it confirms order records and identifies the customer making the return. It then checks the customer against The Return Exchange’s own proprietary database which stores individual customer purchase and return histories across retailers signed up with TRE. Using intelligent algorithms, the software can deny return requests from individuals with histories of frequent returns. At the other extreme, customers with long order histories and low return rates may be considered premium customers and receive instant refunds, even before they return the merchandise to the e-tailers.
While TRE claims its customer return rating feature reduces fraud and facilitates customer relationship management, the company recently has come under fire for violating shoppers’ privacy. JunkBusters, a privacy-advocacy organization, has charged that TRE’s database could “lead to fear of individual redlining,” as customers are discriminated against because of their past behaviors. Indeed, the Industry Standard conjectured that retailers who use TRE may face a backlash from their customers. The article concludes that, “choosy retailers can only hope their own dealings with The Return Exchange won’t one day reflect poorly on them.”
While TRE’s process of receiving and processing returns may be of some benefit to e-tailers, it does very little for their customers. Customers must register their intention to return at the e-tailer’s website, and only “premium” customers are eligible to receive instant refunds. In addition, sending returned goods through TRE’s regional warehouses increases the time it takes to resell a product and results in unnecessary shipping costs. A recent Forrester Research report criticized this model, stating, “getting product back into inventory often means the difference between gaining and losing a sale. The Return Exchange currently adds a step to the process.” By contrast, QuickReturns customers will drop off products with no advance notice, and all customers will be eligible to receive instant refunds because QuickReturns agents will take possession of the returned merchandise before the refund is authorized. Moreover, QuickReturns will process returns before they are shipped, allowing merchandise to be sent to the proper destination with no intermediate step.
The third service TRE offers is liquidation or auction of returned products that cannot be resold as new. Such products are posted on an internal site, www.finalcallauction.com, and external sites, such as eBay. This type of service creates opportunities for e-tailers to salvage value from products that otherwise would be destroyed. QuickReturns will offer a similar service to its retailer partners soon after its initial launch, most likely in partnership with a returned merchandise auction service such as ClickReturns.
Pittsburgh-based Genco Distribution System is the largest of the traditional logistics providers, with services including contract distribution, order fulfillment, freight forwarding, warehousing, call centers, merchandise liquidation. Revenues from these services in 1999 were estimated to be $200 million. The company has traditionally focused on large, established brick-and-mortar retailers and manufacturers, including Wal-Mart, Kmart, Macy’s, Sears, Target, and HomeBase. Genco has announced intentions to pursue the online returns market. While it is a competitor, indications are that Genco management continues to focus on large, established retailers rather than start-up e-tailers and catalog merchants. Moreover, its lack of physical locations to serve consumers make it more of a potential partner than a competitor to QuickReturns.
Residential Delivery Services
Home delivery services, such as WebVan, Peapod, HomeGrocer, Streamline.com, Kozmo, and Sameday.com (formerly Shipper.com) deliver groceries and other products to residences. These companies are beginning to extend their services to include pickups of their own returned items. For example, WebVan customers can call to request a return pickup, and receive instant credit refunds at pickup. HomeGrocer offers free pickup of returned items with refunds processed in three days. Streamline.com picks up outgoing packages, holiday shipping, and catalog returns. Kozmo picks up returned videos from homes for a $1 fee. These home deliverers later could develop relationships with retailers to pick up returned merchandise. However, most of these delivery services are not nationwide, limiting their usefulness to retailers who have national distribution. Moreover, the delivery companies are currently focused on expanding their geographic networks rather than adding new services (e.g., systems integration with retailers) outside of their core competencies.