Returns of Consumer Electronics Set to Increase in 2009: Time for Manufacturers and Distributors to Assess and Minimize their Risks
The consumer electronics world saw a tightening of customer return policies by big box retailers such as Costco in 2007. However, the slowing of the U.S. economy in 2008 has caused many retailers to reverse course. A November 2008 survey by the National Retail Federation (NRF) found that 52% of retailers planned to have more lenient return policies during the 2008 holiday season, compared to 35% in 2007. The NRF survey also reported that retailers expected customer returns for 2008 to rise to over $219 billion -- a 23% increase over 2007. (fn1) Among retailers with more lenient return policies were Macy's, Sears and Circuit City. (fn2) Given this recent liberalization in return policies by retailers, distributors and manufacturers of electronic goods should get ready for higher returns in 2009.
Product Return Rates Are Linked to Retailer Marketing Strategies
Foreign entrants into the U.S. consumer electronics market are often blind-sided by the liberal return policies of U.S. retailers. These policies push U.S. return rates on retail sales to levels much higher than those found in comparable economies, such as the E.U. (fn3) According to a 2008 report by Accenture, the average return rate for consumer electronics devices "ranges between 11-20 percent in the US and 2 to 9 percent in Europe. (fn4)
Industry insiders know that return rates do not reflect defects in the products themselves. Product defects are responsible for only a small sub-set of returns, with failure rates typically in the "sub 5 percent range". (fn5) Indeed, the predominant reasons given by customers for returns are factors such as buyer's remorse, an inability of the consumer to operate a complex product, or lack of customer support. (fn6)
Rather, the major driver of customer return rates are the policies set by retailers (and their suppliers). Economic research and industry practice agree that liberal return policies lead to increased sales. Liberal warranty and return policies insure customers against the risk of defects, eliminating much of the anxiety associated with investing in a high-ticket product. The "no questions asked" policies favored by many large retailers also permit customers to effectively defer their decision-making until after gaining experience with the product, which again reduces the consumer risk associated with investing in an expensive electronic good. (fn7)
In either case, liberalizing return policies increases customer sales. (fn8) This is undoubtedly the reason that many U.S. retailers chose to liberalize their return policies during the dismal Christmas 2008 season. (fn9)
Time for Suppliers to Assess their Risks
If you are a manufacturer or a distributor, cooperating with a retailer's liberal return policy can increase your sales, as well. However, given the tight margins prevalent in the consumer electronics industry, an increased return rate can also wipe out your profits. In future postings, we will discuss strategies that suppliers can use to minimize their risks from product returns.
David D. Johnson is a business lawyer whose practice focuses on issues relating to digital media and consumer electronics companies. David can be contacted at (310) 785-5371 or DJohnson@jmbm.com.
Notes:
fn1 National Retail Federation, www.nrf.com, November 13, 2008.
fn2 Herb Weisbaum, "ConsumerMan: Retailers relax return policies", www.msnbc.com, December 26, 2008.
fn3 Gilvan D. Souza, et al., "Time Value of Commercial Product Returns", 52 Management Science (August 2006).
fn4 Accenture, "Big Trouble with "No Trouble Found" Returns" (2008).
fn5 Id.
fn6 Al Delattre, Stop Boomerang Products, Vision (July/August 2008) at 24-25.
fn7 Yeon-Koo Che, Customer Return Policies for Experience Goods, 44 Journal of Industrial Economics (March 1996) at pp. 17-18.
fn8 S. Wood, "Remote purchase environments: The influence of return policy leniency on two-stage decision processes", 38 Journal of Marketing Research 157-169 (2001). No doubt, this rule, like many others in economics, is subject to the law of diminishing returns.
fn9 Permitting a lengthy return period can have very perverse effects. For example, prior to February 2007, Costco permitted its customers to return consumer electronics for an unlimited period of time. It was widely reported that some customers were treating this policy as a "free upgrade" program, and would return products whenever a better model came in stock.
