Did Mercado Libre Solve Reverse Logistics in Latin America?
One of the biggest obstacles to e-commerce development in Latin America is the profit-killing practice of product returns. In the U.S., some categories like fashion and clothing have return rates close to 50% of online purchases versus 9% in brick-and-mortar stores. E-commerce returns across all product categories in semi-mature markets like the U.K., Germany and the U.S. is close to 35%, while in Mexico, the figure is closer to 20%. Yet, according to Juan Martin de la Serna, VP of logistics operations for Mercado Libre, returns account for less than 10% of all online purchases in their marketplace. Given the high cost of reverse logistics, Mercado Libre’s track record is an important achievement.
The Cost of Reverse Logistics
When goods are returned or exchanged, retailers suffer from more than higher logistics costs. Sometimes, the returned product cannot be re-sold at the original price due to damage, wear and tear, or obsolescence — an issue impacting fashion and other seasonal merchandise. The Reverse Logistics Association in the U.S. defines their field as the full spectrum of customer service and fulfillment after the customer receives his original order including: customer phone and online support, collecting and reverse shipping the product, product refurbishment and/or repackaging, product recycling, product exchange and re-delivery to the client, as well as the secondary re-sale of a product.
In spite of the costs, or, just as likely, because retailers are not fully cognizant of the costs of reverse logistics, unlimited product returns are offered free of charge to customers. E-commerce is a cutthroat competitive industry and thanks to the precedents set by Amazon and other retailers, customers now expect unlimited returns. According to the 2017 UPS Pulse of the Online Shopper study, 79% of U.S. online shoppers rate free shipping on returns as important when selecting an online retailer and 44% made a new purchase online with the same retailer after processing a return. The value proposition of creating customer loyalty through hassle-free returns is strong. When returns are easy, shoppers feel more confident about buying a larger ticket product online.
What we have yet to see in the public domain is a quantitative comparison of unlimited customer returns on one hand and the impact they have on customer loyalty and repeat business versus a model by where the customer must pay for all or some of their product returns and the commensurate impact on customer-retailer fidelity. Given the speed at which reverse logistics have surfaced as a crucial issue, there may be only a handful of companies who have bothered to study the issue.
A Retailer Rebellion against Returns
In the U.S., Amazon has bet on the unlimited returns policy and is lauded for its reverse logistics. Other online retailers, like shoe seller Zappos, stress unlimited returns as a differentiator to break the consumer habit of purchasing in a physical store. But in Latin America, where fulfilment is more complicated and costly, Mercado Libre appears to be leading a retailer rebellion against the imported concept of unlimited returns. According to the Future of Fulfillment Vision Study sponsored by Zebra, a provider of fulfillment solutions, shipping fees and returns are about to change in Latin America. Approximately 40% of respondents plan to discontinue free shipping, 55% expect to end free return shipping and 61% forecast the elimination of separate returns facilities that are managed by third-party companies.
Mercado Libre limits its customers to one free return per month. For additional returns, Mercado Libre will provide you with a downloadable returns label but you have to pay for it. As the most prolific, broad-based online retailer operating in Latin America today, Mercado Libre is betting that their not-so-customer-friendly policy will not drive customers away to smaller scale e-tailers whose list prices tend to be higher than Mercado Libre’s. But is such a policy sustainable once Amazon and Alibaba ramp up their Latin American operations? Time will tell if these global leaders will side with their customers and keep subsidizing returns or whether they will bend to what appears to be a trend among LatAm e-tailers to charge their customers for product returns. Reverse logistics are thought to cost some LatAm e-tailers upwards of 20% of the costs of goods sold. That is a strong incentive to curb returns.
A Possible Workaround
A third way may be found among the solutions implemented by 3PLs and retailers. These include: leveraging physical retail stores as makeshift fulfillment centers that accommodate product returns, the consolidation of damaged goods on reverse logistics centers to be refurbished or sold in secondary markets, and the optimization of labor and transportation costs by combining shipments. A returned product that is quickly reviewed and assessed by the retailer can be repacked or refurbished and put back on the shelf or re-sold online. Today, most retailers rely on a 3rd party 3PLs to collect their returns and take them to an off-site warehouse where it is processed, adding precious time and inventory costs and raising the probability of further damage or theft.
Understanding why a customer returns a product is crucial. Some of the key questions asked today by e-tailers to help determine whether to restock or recycle returned merchandise — is a product damaged or was the wrong model or color chosen or delivered? — will help them avoid unnecessary touch points and transportation costs.
Online retailers in Mexico and Brazil have begun to prioritize and evaluate the reverse logistics capabilities and flexibility of their 3PL suppliers. Increasingly, 3PLs offer a full spectrum of reverse logistics services, including product repairs and refurbishing, repackaging, re-delivery and, when necessary, the re-sale via used product intermediaries. Logistics operators are that much more crucial to e-tailers without any physical infrastructure.
For now, the Latin American e-commerce sector is still grappling to identify viable best practices in reverse logistics. As online sales in Latin America double in size over the next 3-5 years, mastering reverse logistics will be a decisive success factor for e-tailers trying to pull customers out of their old store of choice, a vital competitive advantage for omni-channel brick and mortar retailers and a must-have core service for 3PL suppliers.
Contact us if you have a tough LatAm logistics issue that some extra intelligence could help solve. AMI’s logistics practice and competitive intelligence expertise can help you with a number of key challenges, including outperforming competitors, identifying best & worst practices used by peers, pursuing new prospect leads and devising a winning logistics strategy in Latin America’s fast growth e-commerce sector.