As the warmth of the holiday season ebbs, Americans are taking a cold look at their Christmas gifts. Many don’t like what they see.

One in 4 Americans expects to return at least one holiday gift by this weekend, according to a report by UPS. That’s at least 60 million packages in a single returns season for the world’s largest package shipper alone, and a 10 percent increase over 2020 holiday returns. As the costs of shipping and handling those returns increases, retailers and consumers are facing an expensive and unsustainable shopping future.

For generations, savvy retailers adopted lenient return policies as a way to project reliability and retain customers. They knew perfectly well that unscrupulous customers could exploit no-questions-asked or receipt-optional refund policies. But the success of retailers like Nordstrom and Target, both of whom have famously permissive return policies and loyal customers, highlighted the countervailing benefits. In a recent survey of apparel companies, 86 percent of respondents agreed that returns are a “necessary evil.”

Online retailers recognized the necessity early, adopting lenient return policies and free return shipping to build trust and loyalty with consumers new to e-commerce. Perhaps the most aggressive proponent was Zappos, the online shoe retailer now owned by Amazon. Early on, the company encouraged customers to order shoes in multiple sizes and then return the ones that don’t fit – and paid for the shipping. As far back as 2010, Zappos was happily telling reporters that its best customers were the ones who returned the most products.

It’s an expensive way to gain market share. In 2020, U.S. consumers returned around $428.6 billion in merchandise, 10.6 percent of total retail sales. Now online retailers, buffeted by picky COVID-era consumers, face return rates between 15 percent and 30 percent.

Refunds are just the start of a retailer’s costs. According to a recent analysis from companies involved in the returns industry, it costs $33 for retailers to process a $50 return item in 2021, a 59 percent increase over the previous year.

Several familiar factors figure into those rising costs during the COVID-19 era, especially for e-commerce retailers. Rising transportation costs have made it more expensive to move returned goods to specialized processing centers and then to their final destinations. Rising labor costs have pressured retailers in need of employees to open, assess and route returned products.

But the biggest costs, by far, are related to write-downs and liquidation of returns (on average, between $6.50 and $35.25 per $50 product). Few returned products are rerouted back into a retailer’s inventory. The flood of returns is so heavy (and growing) that it’s simply impossible for retailers to assess whether each individual pair of jeans, porch furniture combo or Lego set is in resellable condition.

To manage the volume, retailers rely on a byzantine network of brokers, resellers, liquidators and – sometimes – themselves to wring value out of returns. For example, Home Depot Inc. hosts online liquidation auctions of returned products with lot descriptions like “Truckload (18 pallets) of Outdoor Power Equipment, Vanities & More.” Winners sort and – hopefully – resell the products. But there’s no guarantee that everything will work (it’s a return, after all), and thus the reseller also takes on the burden of disposal.

That can be a heavy burden. In 2020, retail returns produced nearly 6 billion pounds of waste. Some of that is packaging. But much of it is returned product that can’t be resold. In those cases, resellers and retailers, faced with an unmanageable flood of returns, are known to incinerate returned inventory or dump it in landfills. Retailers who fail to address the problem not only bear responsibility for the waste, but risk alienating customers.

The financial burdens are just as serious. Last month, the U.K. online fashion retailer boohoo Group PLC cut its sales forecast in part because of a ruinous 12.5 percent surge in returns over December 2020.

They’re not alone. In recent years, venerable retailers, including Nordstrom, have tightened up their once-liberal return policies in the face of rising costs. So-called “free” returns are being scaled back and consumers are being encouraged to deliver unwanted products to brick-and-mortar locations.

Solutions that avoid alienating consumers accustomed to free returns remain scarce. For example, many online apparel retailers have invested in virtual fitting rooms to assist online shoppers in purchasing right-fitting clothes. So far, the fitting rooms don’t seem to have had much of an impact on returns.

A better approach might be a retail industry campaign that outlines the environmental and financial costs associated with product returns. At a time when consumers and retailers are keen to burnish their sustainability credentials, an honest acknowledgment of what happens when consumers buy more than they need (or want) could benefit everyone.

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