An ecommerce thesis: Returns
Alt opinion piece on the addressable market of the ecommerce returns space...
Every week I write a piece on sports betting, gaming or trending themes in tech. If you would like to receive it directly in your inbox, subscribe now.
In my first alt opinion piece, which covers personal areas of interest outside of sports betting & gaming, I'd like to explore the world of ecommerce. Since the start of the year, over $13B of venture funding has poured into the space, powering companies working on aspects such as payment processing (Stripe/Checkout.com), fintech as a service (Rapyd), headless platforms (Swell) and logistics (Shippo). In terms of public exits, Global-e, a platform that helps online sellers reach global consumers, filed its F-1 a couple weeks ago, which boasted a YoY revenue increase of 107%, an uptick in gross margins and swing to net profitability - all driven by the COVID-19 ecommerce boom. However, one area that I haven't seen any recent headlines about and that I'm particularly bullish on is ecommerce reverse logistics. Ecommerce returns are a vital part of a digital retailer's CX and occur at a significantly higher rate than the rate of returns for brick-and-mortar retailers. Let's dive in.
In what has been dubbed the next battleground for the next generation of commerce, the reverse logistics space is driven by two primary growth factors - retail ecommerce growth and retail ecommerce customer return behavior. Retail ecommerce’s rising tide has lifted the industry even before the COVID-19 pandemic as internet, smartphone and bank account penetration expands. Retail consumers spent $600B online with US merchants in 2019, up 14.6% from $523B the prior year and representing 11% of total retail sales1. 2020 introduced nation-wide lockdowns and retail closures that forced consumers and retailers to go digital, greatly accelerating online penetration. There was $795B of US retail ecommerce spending in 2020, representing an increase of 32% YoY2. On the other end of the spectrum, brick-and-mortar retail spending decreased 14% YoY to $4.2T3. At the height of the pandemic, 10 years of ecommerce growth happened in just 90 days4.
Ecommerce penetration (as a % of total retail sales)
Even with brick-and-mortar sales expected to rebound from pandemic lows over the next couple years, ecommerce sales are forecasted to eclipse $1.2T by 2024YE5.
While the aforementioned factors greatly contribute to the rapid expansion of the retail ecommerce TAM, they also present headwinds through increased competition. Therefore, it’s essential that retailers innovate their end-to-end shopping experience to differentiate themselves and to cater to the expectations of digital natives. Optimizing the returns process is low hanging fruit. Shoppers return 5-10% of what they purchase in-store, but ~30% of what they buy online6. Using this assumption, we can expect nearly $360B of total retail ecommerce returns in the US by 20247.
Ecommerce returns
A UPS study found that 73% of shoppers surveyed said the overall returns experience impacts their likelihood to purchase from a retailer again8. With the surge in ecommerce sales and return volume, it’s clear that implementing a delightful returns experience is imperative to improving customer retention and lifetime value.
In terms of operational trends, progressive ecommerce returns companies are emphasizing in-person returns facilitated by third-party partners such as Walgreens or Bed Bath & Beyond. In-person returns, which allow retailers’ customers to drop off their items without the requirement of a box or label to any partner location and to receive an instant refund, seem to be a differentiating factor that ecommerce returns companies are scrambling to optimize. It's a pretty nifty design, leveraging the excess capacity (physical space and human capital) of retail return partner stores to provide accessible return locations for retailers’ customers. Additionally, the model is providing retail return partners with highly-qualified, incremental foot traffic from shoppers who just received refunds.
So who is building the best product within ecommerce returns?
Narvar
Overview: Narvar provides a CX platform that helps retailers inspire long-term customer loyalty, at all steps of the post-purchase journey. They do this through informing and engaging customers as to when an item will arrive in addition to providing a comprehensive returns product.
Money raised to date: $64M
3P in-person return locations: 9,000+
Happy Returns
Overview: Happy Returns offers third-party software and logistics solutions to streamline the returns process for ecommerce retailers and consumers.
Money raised to date: $25M
3P in-person return locations: 2,600+
The macro numbers support the case for a very, very deep ecommerce market. Currently, most reverse logistics companies have naturally started with customers in the Apparel and Home Goods space. However, supporting returns for additional retail ecommerce sectors such as Consumer Electronics or Health & Beauty, which comprise 22% and 9% of total US retail ecommerce sales, respectively, are additional verticals ripe for monetization9. Global expansion is another obvious, gigantic opportunity. There was $4.0T of global retail ecommerce spending in 2020. Forecasts call for this figure to reach $7.0T by 202410. Clearly, there is room for multiple companies to succeed, i.e. more room for more slices from a larger pie. Keep an eye on the two that I highlighted!
If readers are interested in chatting more, I’ve written an in-depth investment analysis on Happy Returns that I’m happy to discuss. Don’t hesitate to reach out!
https://www.emarketer.com/content/us-ecommerce-growth-jumps-more-than-30-accelerating-online-shopping-shift-by-nearly-2-years
https://www.emarketer.com/content/us-ecommerce-growth-jumps-more-than-30-accelerating-online-shopping-shift-by-nearly-2-years
https://www.shopify.com/enterprise/the-future-of-ecommerce
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-fifty-the-quickening#
https://www.emarketer.com/content/us-ecommerce-growth-jumps-more-than-30-accelerating-online-shopping-shift-by-nearly-2-years
https://www.invespcro.com/blog/ecommerce-product-return-rate-statistics/
https://www.shopify.com/enterprise/the-future-of-ecommerce
https://www.supplychaindigital.com/sustainability/ecommerce-returns-nightmare-after-christmas#:~:text=A%20UPS%20study%20found%20that,overall%20perceptions%20of%20a%20retailer.
https://www.emarketer.com/
https://s3.amazonaws.com/media.mediapost.com/uploads/groupmecommerceforecast.pdf