Which emerging sector is on track to be a $15 billion business by 2025?

Research indicates the growing reverse logistics industry is poised to enjoy the spoils of the rapidly expanding online retailing space, with flow-on effects to the commercial real estate sector. AMP Capital believes this is an important theme for institutional investors to follow as we head towards 2025.

Specialist reverse logistics operators collect, check and return goods bought online. They have a global remit and provide much more than a service that simply collects unwanted online purchases. In fact, it’s a complex sector that involves sophisticated operational and project management capabilities, in addition to expertise in logistics, to ensure the right goods are collected and returned to the appropriate e-tailer.

Additionally, there’s much potential for businesses in this sector to continue maturing and growing, which is likely to provide interesting investment opportunities over time.

A $15 billion opportunity

AMP Capital’s research backs this up. We estimate the size of the returns market could grow to more than $15 billion a year by 2025. This is supported by a report published by The New York Times, which indicates return rates for online retailers are 30 per cent, on average – especially for popular Christmas gifts such as clothes, books and toys¹.

Australian Bureau of Statistics figures indicate more than $20 billion is spent online each year, and this figure is growing. This translates to $6 billion of goods returned each year, creating a complex logistical challenge for retailers that reverse logistics businesses are only just starting to solve.

Moreover, customers value exceptional customer service support in this area, further backing up the investment thesis for the reverse logistics sector. AMP Capital’s research into the online retail experience found 63 per cent of consumers name returning goods as the most negative aspect of the online retail experience. As a result, online businesses are rapidly expanding their logistics and also sales capabilities to ensure they meet consumer expectations around this.

How do customers feel about the returns experience?

In 2018, AMP Capital surveyed 500 consumers about their views and preferences in online retailing. Unsurprisingly, over 65% of respondents identified the returns process as the most painful aspect of their online shopping experience. The time lost going to post offices and other mail outlets to send back their goods was the biggest pain point for consumers.

Some online retailers are already ahead of the curve in their customer experience for returns, with some companies picking up goods and providing return postage bags as a standard part of their service. However, these retailers are in the minority, which explains why there are new, returns-focused service operators entering the market to provide a more frictionless, convenient customer returns experience.

This customer pain point also presents an opportunity for bricks and mortar retailers. Survey respondents showed a preference for return locations that were less than one kilometre from their home or workplace. Ideally, this experience is enhanced through no-cost returns and on-the-spot refunds

While it’s easy to assume the growth of online shopping could negatively impact bricks and mortar retailers, it’s actually providing interesting opportunities. For instance, new business models are emerging to help online retailers and logistics firms to pick up returned items.

New opportunities

In the US, a new venture called Happy Returns is establishing return booths in major shopping centres to pick up purchases consumers wish to return. This has a positive flow-on effect to shopping centres, resulting in higher foot traffic thanks to shoppers attending their centres to return goods.

Research by commercial real estate business CBRE also indicates there will be positive impacts for the real estate sector thanks to the growth of the reverse logistics industry². Operators require supply chain networks to be enhanced, which means more warehouses and distribution centres will need to be built to support the reverse flow of inventory. AMP Capital’s research shows the growing returns market could create demand for more than two million square meters of logistics space between now and 2025, which is positive for commercial real estate operators.

Rising commercial rents, especially for logistics facilities, will also help support the growth story for new industries such as reverse logistics this year and beyond. It’s a theme AMP Capital will continue to explore as online businesses take an even larger slice of the retail pie.
 

¹ The New York Times, Many unhappy returns? Online holiday shopping’s big hangover, December 2017.
² CBRE, Return to sender: Holiday season heightens challenge of online returns for retail supply chains, December 2018.