The Hidden Costs of China's E-Commerce Boom: Cancellations and Returns

Coupons? Pay Later? Chinese e-commerce platforms have been encouraging customers to make purchases impulsively by offering features that make shopping faster and easier. However, this convenience has come with a downside: many brands are struggling to understand and manage the ever-increasing return rates on platforms like Tmall.

A notable example is Ralph Lauren. The brand reportedly experienced a staggering 95% return rate, despite initially celebrating a RMB 1.6 billion GMV sales surge.

During a recent trip to China, I met with several e-commerce partners and toured warehouse facilities in the Shanghai Free Trade Zone and Zhejiang Province. These visits provided valuable insights into the realities of e-commerce returns and cancellations in China, from both front-end and back-end perspectives.

Understanding the Difference Between Returns and Cancellations

It's important to distinguish between actual returns and order cancellations. Returns occur when a consumer receives a product and then sends it back within the allowed return period (typically seven days). Cancellations, on the other hand, happen when a consumer places an order but then cancels it before receiving the product.

Order cancellations are often motivated by a desire to increase basket size and unlock coupons rather than genuine buyer's remorse. However, given the emotional nature of livestream shopping, buyer's remorse can also play a role in cancellations made through this channel.

While cancellations might seem preferable to returns, both present significant challenges for businesses.

Another feature that many Chinese e-commerce platforms have rolled out is the "Pay Later" (先用后付) option, where consumers don’t need to pay until they confirm receipt of the products. This feature is designed to shorten purchase times and encourage impulse buying. While it’s seamless for consumers to opt in, opting out can be frustratingly complex. For brands, the aftermath is often a spike in product returns, leading to additional shipping and service costs, which strain their bottom line.

The Complexity and Cost of Returns and Cancellations

The logistics systems for handling returns and cancellations are intricate and expensive. Maintaining customer satisfaction and avoiding negative reviews often requires significant manual work and associated costs.

When an order is placed, it is quickly picked and packed for shipment. Even if the order is cancelled, the product may still need to be unpacked and returned to the shelf. It might even be in transit or have already reached the customer, requiring further coordination and effort to manage the return process.

The Unsustainability of High Return and Cancellation Rates

With return and cancellation rates reaching as high as 80% in some categories, this situation is unsustainable for both brand profitability and the environment. While consumers hold significant power in this dynamic, increased awareness and potential consequences for excessive cancellations and returns could encourage more responsible purchasing behaviour.

Brands could consider incentivising responsible purchasing behaviour through loyalty programs that reward customers with low return rates. They could also explore stricter cancellation policies, such as charging fees for late cancellations or implementing a limit on the number of cancellations allowed per customer.

As the e-commerce landscape continues to evolve, it will be fascinating to see how brands and consumers adapt to the challenges of returns and cancellations in China.