The winter holiday season is in full swing, and it’s no secret that “the most wonderful time of the year” is the most high-stakes time for retailers. This period is an opportunity to bring in record-breaking sales as consumers shop for gifts for loved ones, seasonal merchandise and food for holiday get-togethers. Sales during November and December typically account for about 19% of total retail sales, which can be much higher depending on the sector. This year, the National Retail Federation anticipates consumers will spend 2.5 to 3.5% more than they did in 2023. While all this sales growth is an exciting prospect, retailers must prepare for the returns rush that inevitably follows a strong holiday season.

After Christmas and into January, retailers face a staggering volume of returns as consumers return or exchange items they no longer want. A CRBE report predicts that 16% or $160 billion of all holiday sales will be returned this year.

As holiday returns pour in, retailers face increased operational burdens and high costs. Each returned item must be shipped, inspected, restocked and possibly marked down or liquidated, which cuts deeply into profit margins.

Many retailers focus on preventing returns from occurring to minimize their financial impact. These efforts include offering more detailed product information online, improving order fulfillment accuracy, and implementing paid returns policies. However, these preventative measures alone are insufficient to keep inventory from returning. Retailers also need to rethink how they manage returns behind the scenes.

Why traditional returns management falls short

Most retailers still rely on outdated returns management processes, which are ill-equipped to meet omni-channel customer expectations of returning items where and how they want.

The first issue with traditional systems is forecasting. Predicting future return patterns is crucial for effective inventory planning, yet most forecasting methods are inaccurate. Allocation and replenishment decisions fail to account for the influx of returned items, causing stockouts for some stores and overstock situations for others.

The second issue is the lack of visibility for returns positioning. Ideally, each item would be routed with the highest probability of reselling at the highest price before the season ends. However, typical inventory systems can’t help retailers determine optimal return paths. Instead, retailers end up using simple, static rules, such as:

• Send all online orders back to the closest fulfillment center.
• Ship all returned items to one central warehouse.
• Keep items in the store where they’re returned, even if that location does not carry them.

This simplistic approach results in warehouse bottlenecks and high transportation and handling costs. It also delays the reintroduction of products to the sales floor—if they make it back at all—which creates unnecessary stockouts, lost sales and dissatisfied customers.

When returned products return to the sales floor, they are rarely reallocated to an optimal location for resale. One-size-fits-all rules lack the sophistication to consider factors like seasonality, regional variations in demand, and individual store performance. Thus, products end up sitting around unsold, eventually getting heavily marked down or liquidated at the end of the season.

These issues with traditional returns management ultimately hurt a retailer’s bottom line. The good news is that AI and data analytics are powering modern strategies to optimize the entire returns process.

The AI-powered returns revolution

By leveraging AI, retailers can easily handle the complexities and sheer volumes of omnichannel returns—even during their busiest holiday season. AI-driven returns solutions make the process efficient, proactive and profitable through accurate returns forecasting and intelligent rerouting.

AI forecasting enables accurate return volume predictions, empowering proactive planning and resource allocation. Retailers can make informed allocations and replenishments that account for future returns, optimize staffing levels for processing returned goods, and strategically plan for the reintroduction of these items onto the sales floor. This proactive planning minimizes inventory flow disruptions and maximizes sales opportunities.

When an in-store or online return request comes in, AI systems analyze massive amounts of data to instantly determine the optimal distribution center or store location for each item. It accounts for factors such as current inventory levels, expected profit margin for the item, the probability of selling the extra unit, time left in the sales season, transportation time and costs, potential store constraints and much more. Returned goods are then strategically reallocated for the highest chance of a quick and full-price resale, minimizing the need for markdowns or liquidations and maximizing the return on investment for each item.

Turning returns decisions into dollars

Far more sophisticated than traditional returns management, AI-powered solutions automate and completely transform decision-making processes around returns. Retailers that have implemented AI-powered returns solutions see financial benefits that include:

1. Increased sales: By minimizing delays in reintroducing items to the sales floor, retailers can generate a 25-50% sales uplift and maximize revenue.
2. Minimized markdowns and liquidations: By giving returned items the highest potential for full-price resales, retailers can minimize markdowns, reduce end-of-season liquidations and significantly improve profit margins.
3. Greater customer loyalty: With an AI-driven returns strategy, retailers can offer flexible return options that consumers have come to expect in the omnichannel world—while protecting their bottom line. Moreover, retailers can ensure in-demand items are readily available to keep customers coming back again and again.
4. Enhanced employee satisfaction: Happy workers are just as important as happy customers. AI streamlines all the complexities of returns, lessening the burden on overwhelmed staff during the holiday rush. They can spend more time making sales and delivering exceptional customer service and less time struggling to process a mountain of returns.

Powering profitable holiday seasons across the industry

Retailers across industries are discovering that AI offers more than just operational efficiency; it’s a powerful tool for enhancing profit margins and the customer experience. By embracing AI this holiday season, retailers can give themselves the gift that keeps on giving: a strategic approach to inventory that helps the business thrive all year long. Keep your returns on the right path by speaking with an invent.ai retail expert today.