The coronavirus pandemic changed the way a lot of people shop. For the past couple of years, a growing number of consumers have taken to ordering goods online rather than running the risks of shopping in person.
Of course, a boom in online sales is bad news for real estate investors -- particularly those with money in retail REITs, or real estate investment trusts. If consumers continue to favor digital orders, it'll be harder to make the case to keep stores open. And if retail chains start shuttering locations in short order, the shopping centers and malls that rely on them for rental revenue will left deep in the lurch.
But while online sales may not be great for real estate investors, ultimately, they serve the purpose of pumping revenue into the companies that need it. Or do they? While it's true that digital sales allow retailers to reach more customers, there's a flip side that could be costing retailers big time.
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Are digital sales fueling more returns?
Ordering goods online may be easy and convenient. But it's definitely not the same experience as shopping in an actual store.
When customers forgo the latter, they miss out on the opportunity to touch, observe, and, in some cases, try on the products they're buying. The result? It's often the case that consumers who shop online end up returning the items they buy because they fail to meet expectations for one reason or another.
In an effort to stay competitive, many retailers have gotten very flexible with their return policies, often offering the option at no cost to consumers. But retailers themselves are paying the price.
The National Retail Federation (NRF) and Appriss Retail report that retail returns soared to an average of 16.6% in 2021 versus 10.6% in 2020. That's over $761 billion on merchandise that retailers had to take back and restock.
But many of those returns stemmed from online orders. In fact, the average rate of returns for online purchases in 2021 was 20.8%, an increase from 18.1% in 2020. And that's something retailers will have to grapple with as more customers favor digital sales.
Of course, returns are something retailers have long come to expect. But it's easy to see why online purchases are more apt to result in returns. This especially holds true in the categories of clothing, accessories, and shoes -- items where it's hard to gauge fit over a computer.
Not only do returned goods cost retailers money, but they also open the door to fraud. The NRF estimates that for every $100 worth of accepted returns, retailers lose $10.30 to fraud.
A no-win situation
Retailers need to offer flexible returns for online orders to stay competitive. But they also must figure out ways to minimize their losses in light of them.
As digital sales continue to dominate, retailers will need to anticipate an uptick in returns. But if they can't find a way to make them less expensive, they might ultimately get battered and shutter stores as a means of saving on costs. Either way, the popularity of digital sales is something that could hurt real estate investors, either directly or indirectly.
