The decision by Boohoo Group PLC (AIM:BOO) to end its free returns policy, could see it lose market share but could improve profit margins, analysts said.
The fast fashion group will take a £1.99 charge off customers for each return delivery, which may contain multiple items.
This cost will be deducted from the amount that the customer is refunded for the returned items.
It comes just under a month after the company reported lower quarterly revenues and said lower gross profit margin but stuck to its outlook for the year ending 28 February 2023. Boohoo suggested return rates were normalising compared to the pandemic peaks.
Last month, rival Asos said it was being hit by an increase in customer returns in the UK and Europe, and lowered profit guidance with a wide range to reflect potential quantity of customer returns on warehouse and delivery costs, as well as the cost of labour to clear returned stock.
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Asos does not charge for returns, but there are charges for online purchases from Next and Uniqlo, while Zara introduced a £1.95 fee to return products at third-party drop-off points.
Analyst Clive Black at Shore Capital said if Boohoo’s introduction of charging for returns was made “in isolation” compared to competitors, then the risk would grow that it could lose market share.
“If the whole industry moves then the volume loss will be more balanced,” retail sector specialist Black told Proactive.
Similarly, he said the emergence of charging for returns could lead to fewer excess items being ordered.
While volume specifically at Boohoo and across the online clothing subsector may fall, Black said “margin may improve as the cost of returns, which is real, would be covered”.
“The outcome is netting off whatever lost sales from whatever lower operating costs.”
What happens next is hard to predict, Black said.
“A rational industry would charge…but online is very irrational at times as brands fight for share.
“The collapse in online retail profitability with pandemic normalisation and squeezed purses brings such matters into clearer focus.”
Shares Boohoo have fallen 80% over the past 12 months, which has led to some hedge fund investors spying value.