Offline Returns for Online Retailers via Partnership

Online shoppers often prefer to return items to stores (i.e., “offline return”) rather than mail them back. We study a new business practice, return partnership, wherein online retailers partner with store retailers to offer offline returns. We seek to identify when return partnerships benefit both the store and online retailers. Customers choose between the online and store channels for their purchase and decide whether, and through which channel, to return an online purchase if needed. We find that store and online retailers who offer differentiated products have incentives to partner, as in the case of the return partnership between Everlane and Cost Plus World Market (formed via Happy Returns—a service provider that connects online retailers with store retailers). In this case, the online retailer’s benefit from the cost savings achieved by consolidating shipments of returned items from stores outweighs the loss associated with a high return rate. We show that, contrary to initial intuition, return partnerships may also feature retailers who offer similar products, as in the case of Amazon-Kohl’s. In this case, online customers’ migration to offline returns ensures a store retailer’s incentive to partner. However, it limits the incentive of an online retailer when the added convenience of an offline return induces more returns of online purchases. Thus, we caution that with limited differentiation in product offerings, store visits should not be too convenient for a partnership to form.