Is the Returns Model Breaking?

Australian retailers are managing an unprecedented volume of product returns, and unlike other cost pressures that fluctuate with economic cycles, the returns challenge appears structural, accelerating, and eating through margins faster than many operators can adapt.

The numbers tell a complex story. Online shopping now accounts for over 20% of total retail sales, according to Australia Post’s 2025 E-commerce Industry Report. With Australians spending $69 billion on online shopping, and industry-average return rates, this creates an estimated $20 billion reverse logistics challenge for the Australian retail industry.

But averages mask significant variation. Fashion return rates can reach as high as 30%, while electronics returns hover at 10-15%. These aren’t just statistics – they represent billions in potential lost revenue and mounting operational complexity that many businesses are struggling to navigate profitably.

The Economics Under Pressure

The cost structure of returns processing is becoming untenable for many operators. Processing a single return can cost anywhere from 20% to 65% of the item’s original value, according to industry data. For a $50 fashion item with a 15% margin, that’s $7.50 in profit offset by $10-$30 in processing costs.

The expenses compound at multiple stages. Shipping the item back to the warehouse. Inspecting its condition. Determining if it can be restocked or requires refurbishment. Managing items that can’t be resold as new and face markdown requirements. Many retailers are now spending 8.1% of total sales on reverse logistics, creating significant margin pressure.

And the timeline matters. Fashion items may be out of season by the time they’re processed. Electronics lose value rapidly. Opened products often can’t be sold as new. The result: deep discounting, liquidation, or disposal—all of which further erode already-thin margins.

The Customer Expectation Challenge

Consumer behaviour is moving in the opposite direction to business economics. A 2025 survey by the Australian Retailers Association found that 68% of consumers are more likely to repurchase from a retailer with a hassle-free returns policy. Free returns, extended windows, and no-questions-asked policies have shifted from competitive advantages to baseline expectations.

“Bracketing” behaviour, where customers buy multiple sizes or colours with the intent to return most, has become increasingly normalised, particularly among younger demographics. Half of Gen Z shoppers admit to this practice with clothing and shoes, compared to just a quarter of Baby Boomers.

Leading Australian retailers like Myer and David Jones have implemented centralised return hubs to streamline processing, but the volume continues to challenge even sophisticated operations. Retailers who tighten return policies risk customer defection. Those who maintain generous policies absorb costs that may not be sustainable. The middle ground keeps narrowing.

The Supply Chain Ripple

The impact extends well beyond retail operations. Warehouses require dedicated space and specialised staff for returns processing, particularly during peak periods. Australia’s vast geographic distances and dispersed population create unique challenges, with high costs for shipping to and from remote and regional areas.

Cross-border returns present particularly complex challenges. When Australian customers return items to overseas-based retailers, products may need to travel around the world for verification before re-entering inventory. Some innovative operators report achieving up to 60% savings on return-related expenses by processing returns locally rather than shipping internationally.

Manufacturers and suppliers face unpredictable demand signals when returned inventory floods back into the system, complicating production planning and inventory management. The cumulative effect creates volatility that ripples through multiple tiers of the supply chain.

Finding Smarter Solutions

Some operators are finding ways to transform the returns challenge into a competitive advantage. The operators seeing success are those investing in technology and process innovation:

• AI and predictive analytics: Advanced systems can predict return patterns, optimise routing across Australia’s terrain, and streamline processing at distribution centres. Real-time tracking keeps customers informed while automation reduces manual handling costs.
• Integrated reverse logistics: Leading retailers are implementing centralised return hubs that serve as single locations for receiving and processing all online returns, enabling more efficient management.
• Buy-online-return-in-store (BORIS): Retailers like JB Hi-Fi and Harvey Norman allow customers to return online purchases at physical stores, providing convenience while reducing shipping costs and overall supply chain impact.
• Secondary market channels: Rather than heavily discounting returned items through primary channels, some retailers are routing products directly to recommerce platforms, liquidation channels, or charity partnerships, preserving brand value while recovering some cost.
• 3PL reverse logistics partnerships: Companies like Toll and Australia Post are offering tailored reverse logistics solutions, allowing retailers to optimise supply chains and minimise both cost and environmental impact.

Businesses investing in improved reverse logistics processes have reported seeing a 12% increase in customer satisfaction and a 4% decrease in costs, according to industry research, demonstrating that strategic investment can yield measurable returns.

The Sustainability Dimension

Environmental considerations are adding another layer of complexity. The transport of returned goods contributes significantly to carbon emissions. Australian consumers and regulators are placing greater emphasis on sustainability, with the federal government’s commitment to net-zero emissions by 2050 and initiatives like the National Waste Policy Action Plan pushing businesses to rethink how they handle returned goods.

Efficient reverse logistics can play a role in reducing waste by facilitating repair, refurbishment, and recycling rather than disposal. Some operators report shortening shipping distances can achieve a 40% reduction in emissions while simultaneously cutting costs—aligning environmental and economic objectives.

The Strategic Imperative

For many brands, the “reverse supply chain” is now as important as the outbound journey. Returns are often a retailer’s largest single inbound supply source—sometimes bigger than any supplier. In this context, speed and accuracy in processing aren’t just operational metrics; they’re revenue drivers.

An advanced returns management platform needs to take a full-journey approach, optimizing not only the customer-facing front end but also the store and warehouse processing stages. This accelerates resale, shortens the time products spend out of circulation, and enables smarter disposition decisions, whether restocking, refurbishing, or routing to clearance.

What Businesses Should Watch

Returns are now a strategic lever. With rising expectations and thin margins, focus on the levers that lower costs, free working capital, and protect customer loyalty.

• Return rate trends by category: Fashion and electronics show different patterns and require different strategies. Understanding category-specific dynamics is critical for resource allocation.
• Processing time metrics: Days from return initiation to restocking directly impact working capital and inventory availability. Speed matters.
• Technology investments: AI-driven analytics, automated sorting systems, and integrated platforms are becoming table stakes rather than differentiators.
• Regulatory developments: Consumer protection laws and environmental regulations may continue evolving, potentially impacting return policy flexibility.

The Takeaway

Australia’s returns challenge isn’t a temporary spike, it’s a structural shift in how retail operates. At an estimated $20 billion scale, it represents one of the most significant operational challenges facing Australian retail.

The current model, where retailers absorb most costs while customers expect free and unlimited returns, may not be sustainable indefinitely. Yet tightening policies risks customer defection in a highly competitive market.

The operators who will thrive are those treating returns as a strategic priority rather than a necessary evil, investing in technology, optimising processes, and finding creative solutions that balance customer satisfaction with economic viability.

For supply chain operators, warehouse providers, and retail businesses, building sophisticated reverse logistics capabilities isn’t optional anymore. It’s becoming as critical as outbound fulfillment to maintaining margins and competitive position in an increasingly returns-heavy retail environment.

 

Sue Tomic

SCLAA Chair  |  Board Advisor – Institute of Transport & Logistics Studies, University of Sydney Business School