For Retailers, Returns Are a Massive Pain

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Speaker 1
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Speaker 2
The dust is settled after the holiday gifting frenzy, and there's a chance you've been left with some items that aren't the right fit. Where to next? The store or post office to process a return? Probably yes. Returns the bane of retailers existences. See, while the holiday season marks peak sales for many retailers, January and February bring the reality of returns, and that's a burden for those retailers. In 2022, roughly 16.5% of retailers overall sales went to the cost of processing returns, according to the National Retail Federation. And returns mark a careful line for retailers to walk, according to the Wall Street Journal. They want to make the return process smooth enough that customers are encouraged to buy items in the first place, but also cut down on the costs of processing too many of those returns.

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Enter well, you know what I'm about to say, AI. Yes, a handful of major retailers have been turning to artificial intelligence to help them cut down on unnecessary returns and therefore save money. The secret, it appears, is to get customers before they buy and try to steer them toward items they're more likely to keep, rather than trying to make the return process more smooth on the back end. So that's where the AI comes in. Dutch clothing retailer Omota is using it to target ads to folks to match them with items they're less likely to return. That company's partnered with Google and marketing agency Dept. Or dept. To develop a machine learning program system to help limit the number of returns of sales generated from search ads, according to the Wall Street Journal.

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Using customer data and past return rates, the system can immediately forecast the total profit or loss each order will likely generate moments after it's placed. It also tracks which customers actually return which items. Then all that data is fed into Google's ad buying algorithm to target ads, not to the folks who they think will buy their items, but who they think will buy and keep their items. Since Omota rolled out that model in May, it's seen a 5% drop in return rates and a 16% rise in profit among all sales driven by search ads, according to the Journal. Not too shabby.

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Speaker 2
Meanwhile, in the UK, menswear brand Perry Ellis is trying to reduce the cost of its returns on Amazon, which is one place customers can buy the brand first, the company identified which items had the highest return rates and then used AI tools to analyze the descriptions of those products. The goal? Figure out if language in those descriptions was misleading and ultimately causing folks to buy things in the wrong size or fit, the journal notes one Perieellis shirt, for example, whose description was changed from cotton Oxford fabrication, which sounds confusing, right? To made from 100% independently certified organic cotton. After clarifying its descriptions, Perialis combined them with behavioral data from Amazon's database in order to better target its ads. According to a Perry Ellis spokesperson, return rates declined 15% in a year, and the brand plans to expand its tools into other european markets.

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If things continue to go this well, AI can already pass the bar exam, write essays, and even find you a love match on dating apps. So its presence in the retail space is, shall we say, unsurprising. The question is whether retailers can continue to use it effectively to cut down on costs, or if AI in retail will eventually pass the point of no return. Get it.

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Speaker 1
From wondering this is business wars daily. I'm your host, David Brown. Written and produced by Jessica Yarmoski. Our executive producers are Tina Rubio and Marshall Luby.

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