Amazon’s Reign: The Rise of the Secondary Market and the Hidden Cost of Convenience
The ease of returning online purchases, particularly on Amazon, has fueled a booming secondary market, creating a complex and often unseen ecosystem of liquidation, refurbishment, and resale. While this seemingly endless stream of returned goods benefits consumers with instant gratification and low prices, the environmental and economic cost is significant, raising questions about the true cost of convenience.
Amazon’s ubiquitous reach and its "customer-first" return policy have become a catalyst for a massive return wave. Over $761 billion worth of merchandise was returned in 2021, with more than 10% of those returns deemed fraudulent. The sheer volume of returns, fueled by factors like wardrobe buying and generous holiday return policies, leads to a substantial amount of waste. Nearly £6 billion of landfill waste and 16 million metric tons of carbon dioxide emissions are generated annually from e-commerce returns, a figure equivalent to the waste produced by 3.3 million Americans in a year.
Amazon’s strategy to maintain control over its deliveries has created a network of Delivery Service Partners (DSPs) – independent contractors who operate fleets of vans, often under intense pressure to meet Amazon’s one-day shipping promise. Drivers face relentless workloads, with some reporting they are forced to skip meals and bathroom breaks, leading to unsafe driving conditions and even accidents. Despite numerous reports of overworked drivers, Amazon maintains that it is not responsible for the actions of its contractors and prioritizes driver safety through technology like the mentor app and in-van cameras.
While Amazon has taken steps to reduce waste, like refurbishing and reselling returned items, a significant portion of returns end up being destroyed, incinerated, or sent to landfills. The disposal of unwanted goods has sparked controversy and criticism, with Amazon facing backlash for incinerating millions of items. However, the rise of liquidation companies like Liquidity Services has offered a more sustainable alternative. Liquidity Services operates warehouses that receive bulk returns from various retailers like Amazon, Target, and Walmart. These returns are sorted, refurbished, and then auctioned off to resellers, individual consumers, or even used for parts.
The liquidation marketplace, once a shadowy and unregulated sector, has now become a $644 billion industry, highlighting the growing demand for affordable second-hand goods. This trend is driven by consumers seeking value, thriftiness, and environmental consciousness. The boom in liquidation has prompted major retailers to embrace the concept of “circular economy,” selling refurbished items directly through their own platforms and partnering with liquidation companies to manage their returns efficiently.
The convenience of e-commerce has undoubtedly revolutionized the way we shop, but the hidden cost of returns is slowly coming to light. The increasing return rates and the associated environmental and social implications raise questions about the long-term sustainability of the current model. As the industry continues to evolve, striking a balance between convenience, affordability, and sustainability will be key to building a more responsible and circular future for e-commerce.
Amazon’s $761 Billion Return Problem: A Boom in the Secondary Market
The rise of e-commerce has brought convenience and accessibility to consumers worldwide. But with this ease of online shopping comes a massive, often hidden, problem: returns. In 2021, a staggering $761 billion worth of merchandise was returned, and over 10% of those returns were fraudulent. It turns out, there’s no such thing as a free return. Someone has to pay for all those unwanted goods, and it’s falling on the shoulders of retailers like Amazon, which has become a major player in the reverse logistics world.
Key Takeaways:
- Amazon’s relentless push for one-day shipping has led to a massive rise in returns, fueled by "wardrobe buying" (ordering multiple sizes of the same item and returning the ones that don’t fit), lenient return policies, and increasingly no-questions-asked returns processes.
- The convenience of e-commerce drives up returns, costing retailers as much as 66% of an item’s original price to handle.
- Amazon has been under fire for destroying millions of items to avoid having to resell them at a lower price.
- While Amazon aims for a goal of zero product disposal, it still sends items to energy recovery (incineration) as a last resort.
- The liquidation market has exploded as retailers are trying to find ways to get rid of their returns. This has created a booming secondary market, where companies like Liquidity Services are processing and reselling unwanted goods in bulk.
- This has also led to a rise in refurbished goods as a more sustainable way to deal with returns, and is becoming a significant player in the retail world.
- There is a growing segment of consumers who are embracing secondhand shopping and liquidation marketplaces as a way to save money and reduce their environmental impact.
The Price of Convenience: Return Rates Soar
Amazon’s business model is built on a foundation of convenience. With easy online ordering, fast shipping, and generous return policies, customers are incentivized to buy more than ever before. But this convenience comes at a cost.
Return rates for online purchases are estimated to be three times higher than brick-and-mortar stores, according to Tobin Moore, CEO of UpToro, a returns solution provider. This means that 25% of all online goods sold are returned, compared to 7.5% for physical stores.
This is a problem that’s been growing for years and has accelerated during the pandemic. In 2019, an estimated 67% of consumers preferred to return online purchases in-store, but by 2020, 60% opted for shipping their returns back.
The convenience of e-commerce has normalized shopping habits that lead to more returns, such as:
- Wardrobe buying: Consumers often order the same item in multiple sizes to find the perfect fit and then return the other sizes. This practice results in a significant amount of returns.
- Lenient return policies: Amazon and other retailers have become more flexible with their return policies, allowing for easier returns and fewer restrictions.
- “No-Questions-Asked” Returns: This ease of returns has led to an increase in fraudulent returns, where customers take advantage of the system and return products they’ve used or damaged.
Amazon’s Reverse Logistics Operation: DSPs and the Last Mile
Amazon has tackled the "last mile" delivery problem, which is the most expensive part of a package’s journey from warehouse to doorstep. Through its Amazon Logistics program, the company has built a robust network that includes:
- Semi-trucks
- Amazon airplanes
- Flex drivers: Independent contractors who use their own vehicles for delivery.
- Delivery Service Partners (DSPs): Small businesses that contract with Amazon to operate a fleet of vans and deliver packages.
This network allows Amazon to manage a large portion of its deliveries without having to hire directly. The DSP program has been pivotal in Amazon’s rapid expansion and has allowed the company to effectively avoid paying outside carriers for shipping.
Concerns about DSP Drivers and Working Conditions
Amazon has created a network of 2000 DSPs across the United States, employing more than 115,000 drivers. While the DSP model offers flexibility and entrepreneurial opportunities, it has faced criticism due to the intense workload, pressure on drivers to meet deadlines, and concerns about driver safety and well-being.
Many DSP drivers have described their work conditions as grueling, with long hours, stressful routes, and insufficient time for breaks. Some drivers have even resorted to urination in bottles due to the lack of bathroom breaks, a practice that Amazon initially denied but later acknowledged as an industry-wide issue.
Amazon’s Safety Measures: Technology and the Mentor App
Amazon has implemented several safety measures in an attempt to address the concerns of its DSP drivers. These measures include:
- Mandatory safety meetings: All warehouse employees are required to attend safety meetings before each shift. However, this doesn’t extend to DSP drivers.
- The Mentor App: This system monitors drivers’ behavior, scoring them on metrics such as speed, braking, and use of mobile devices. DSPs are ranked based on their drivers’ collective scores, with bonuses awarded to high-scoring DSPs.
- Cameras in vans: Many vans are equipped with multiple cameras to monitor driver behavior and capture incidents. This technology is touted for potential safety benefits, but some drivers feel it’s more about surveillance than safety.
Despite these measures, drivers remain concerned about the pressure to meet deadlines, which can lead to reckless driving and compromises on safety. The workload, combined with the "arms-length relationship" between Amazon and DSPs, has made it difficult for drivers to effectively advocate for their needs.
The Environmental Impact of Returns: Landfills and the Circular Economy
While the convenience of e-commerce is undeniable, the environmental impact of the growing return rate is a significant concern. Every returned item contributes to landfill waste and carbon emissions.
Amazon’s Efforts to Reduce Waste
Amazon has been criticized for its destruction of millions of items, a practice that it has attempted to reduce. The company has taken steps to:
- Refurbish and resell some returned items.
- Send pallets of returns to be auctioned off in the booming liquidation market.
- Donate eligible items to charities through its FBA Donations Program.
However, it’s important to note that incineration is still an option as a last resort when returns can’t be reused or resold.
The Rise of the Liquidation Market
As e-commerce returns continue to grow, there is a burgeoning secondhand market for unwanted goods. Here, companies like Liquidity Services are playing a key role in processing large volumes of returns and reselling them to individual consumers, other retailers, and businesses.
This trend is driven by several factors:
- The need to reduce waste: Liquidation provides an alternative to landfill disposal and incineration.
- Consumer demand for secondhand goods: A growing number of consumers are embracing sustainable shopping practices and seeking bargains on the secondhand market.
- Supply chain shortages: The pandemic has created a shortage of new goods, increasing the demand for refurbished products, making them a profitable venture.
Liquidation: A New Frontier for Sustainability
The industry is changing from a back-alley operation to a more legitimate business, with companies like Liquidity Services leading the charge. By providing a platform for reselling returns, they are helping to push forward the circular economy by giving goods a second life and keeping them out of landfills.
Challenges and Opportunities
The liquidation market faces its own challenges, including:
- Slim profit margins: The uncertain quality of secondhand goods often means lower selling prices, which can lead to lower profit margins.
- Unpredictable inventory: The volume and quality of returned goods can be unpredictable, making it difficult for liquidators to manage inventory and pricing.
But the liquidation industry also offers opportunities:
- Sustainable business: Liquidation helps to reduce waste and carbon emissions, promoting a more sustainable economy.
- Job creation: The industry is creating jobs in processing, refurbishment, and reselling returned goods.
- Lower prices for consumers: Liquidated goods often sell at significantly lower prices, making them more accessible to a wider range of consumers.
The Future of Returns: Transparency and Collaboration
The rise of e-commerce returns presents both challenges and opportunities for retailers, consumers, and the environment. As the industry continues to evolve, transparency and collaboration are critical to finding sustainable solutions.
- Increased transparency: Retailers can be more transparent about their return policies, making it easier for customers to understand the costs associated with returns.
- Collaboration with Liquidators: Retailers can partner with liquidation companies to streamline the process of handling returns and find better solutions for reselling or recycling unwanted goods.
- Consumer education: Consumers can be educated about the environmental and financial costs of returns, encouraging them to make more conscious purchasing decisions.
- Shifting consumer behavior: Encouraging consumers to embrace the "buy less, buy better" mindset can help reduce the volume of returns.
The future of e-commerce depends on finding ways to manage the growing return rate in a sustainable and responsible manner. By rethinking their return policies, embracing circular economy principles, and working with innovative partners, retailers can turn what is now a significant cost into a valuable opportunity.
