EP 214: The Future of Retail Returns: Automation Meets Human Intelligence

Special Guest: Tim Fehr, COO of Happy Returns

The complexities of modern returns management include processing hundreds of thousands of SKUs and demand both technological precision and human insight. As retail continues to evolve, the ability to efficiently manage returns while preventing fraud has become a critical factor in maintaining profitability and customer loyalty. As a pioneering force in returns management, Happy Returns has revolutionized the industry through its innovative approach to combining human verification with robotics automation. Join Shelley and Tim as they discuss how the Happy Returns system achieves a remarkable 35 percent improvement in processing speed while maintaining rigorous fraud prevention standards and how their automated processing centers ensure rapid inventory recovery for retailers. Their returns process is also netting a lifetime 93 Net Promoter Score. Their acquisition by UPS has further enhanced their capability to provide enterprise-level returns management solutions and the ability to scale innovation efforts. 

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Transcript

Transcript by Descript: 

We have a market leading approach to item verification where we physically inspect goods and validate them through scanning the skew barcodes, which we think is one of the most useful things you can do to prevent fraud. Retail Unwrapped is a weekly podcast hosted by Shelley Kohan from The Robin Report.

Each episode dives into the latest trends and developments in the retail industry. Join them as they discuss interesting topics and interview industry leaders, keeping you in the loop with everything retail.  Hi everybody and thanks for joining our weekly podcast. I'm Shelley Kohan. I'm very excited to welcome Tim Fehr.

He's the COO of Happy Returns and we're going to take a look at this holiday season, the amount of returns that are coming back. But more importantly, how come we better process, execute returns overall beyond holiday season? And also, what strategies are in place to really reduce return abuse and fraudulent returns?

So I'm so thrilled to have you on Retail Unwrapped. So welcome. Very excited to be here, Shelley. Thank you for having me. Excited to talk about returns today.  Excellent. Let's go back a little bit with happy returns. I know, Dave, it's so big.  well, from his beginning journey when he started the company, but can you kind of give us a little quick history of Happy Returns then and now? 

Yeah, so, you know, Happy Returns was founded,  almost, Jesus, almost 10 years ago now.  we were the first, organization to do, in person open box returns.  very proud that we. Space.  since then there's been,  I think a recognition that this is a really useful thing for consumers and for businesses.

And you've seen a large proliferation of options.  so Amazon, followed us in introducing this service, but sort of, they have a bit more scale than we do at this point. So kind of train the market. And then particularly post pandemic, when we saw a real, both a sharp increase in e com, volumes, as well as material capacity constraints.  T

Tere is a number of new entrants into the market,  for, returns.  and I think now you see that market consolidating around,  the two major parcel carriers.  Excellent. And I know something big happened last year because I actually wrote about it and that is when Happy Returns was acquired by UPS.

So, that has been a great journey for you. So, with that, You know, tell us a little bit about you go from this small company that specializes in, you know, returns to now you have all the resources or I shouldn't say all the, but a lot of resources now. So what are you doing with those resources and how are you making return process both easier for consumers, but also, you know, it's the fraudulent returns that really drive up the cost of business. 

Yeah, great question. I think as always, we're trying to use the resources that are disposable to increase value for customers.  and UPS being one of the iconic American companies, really helps that both, not just with the power of the brown shield and the promise that gives to customers about, But about all the resources we have access to that we didn't before.

So, a couple of thoughts from a sales perspective.  big, big help, right? UPS has relationships with basically every merchant who ships in the country  and trying to go to market as part of a comprehensive suite of services.  is much more powerful, I think for us, but also for merchants, which is cool. 

UPS has a lot of sort of operational capabilities. It's been one of the world's largest operations business. And so we found a lot of synergies on the upside.  we did a big push on industrial automation, which we chatted about earlier this week.  UPS was instrumental in, pushing that forward.  We also have various synergies when it comes to procurement and HR management, which is very useful and then, you know, continuing to really press. 

All the resources and skills we have into preventing fraud for merchants.  We have a market leading approach to item verification,  where we physically inspect goods and validate them through scanning the skew barcodes, which we think is one of the most useful things you can do to prevent fraud. 

It's interesting because what you just described, which is that, you know, scanning at the return at the point of return, is very interesting. Cause originally when the business model was built, that was more of a service thing where you don't have to pack it up, tape it up, find a label and do all this.

As David used to say arts and craft project at home, but you would just take the item to the store, scan it. And so there's that visual of the item. And, so now. With trying to combat higher degrees of return fraud and they get more sophisticated and sophisticated,  now that is actually the human intervention is a big piece of how you're able to reduce fraud, right?

It's an interesting story. It's just a wonderful company to work for. I love my job.  you know, we, we really earnestly are focused on increasing value for merchants. And I think a lot of that story as well, how can you architect around the system you have to add things that add more value? And so the original value prop was largely around consumer convenience and reduction in shipping costs. 

and as we've developed our product to be more robust,  we've realized that because we're sort of touching these items physically, that's actually the best place that you can have to, disintermediate, a fraudster. And so we added, we actually added item verification, not thinking about fraud, but mostly just thinking about controls.

Like how can we make sure someone actually returns all three items they say they're returning? It was like an internal, operational shrink question, and then we realized, well, that the same tools that we're using to combat operational loss are also fraud prevention tools, because fraud is basically saying something exists that doesn't exist, which is what happens when you lose something. 

And there was all this proliferation and there is of fraud, awareness and tools. And then we kind of realized, hey, we actually built  the best possible fraud prevention tool. We should make sure the market knows about that.  Yeah, and it's interesting. There's also, I also think that the way that the returns are processed is actually a positive customer service experience and I can relate my own experience.

I bought two pairs of shoes  from a company and I was returning one pair. And so, when I went to actually do the returns, it was a happy, returns when I went to do the actual return. I just literally, I grabbed the wrong box by mistake. So I wasn't intentionally trying to defraud anyone, but when I got to the UPS, drop off location and the person was scanning, they're like, this isn't the right shoe.

And I looked in the box. I said, Oh my God, that's the one I want to keep. So that was really a customer service plus for me, in addition to fraud prevention. Right. Yeah, and I think the, you know, the real  common theme there is  simplicity, I suppose. Executable simplicity. And, you know, we're, we, we, we try to be, you know, we're growing a pretty complex business pretty quick.

So we really try to be quite diligent about like, Hey, you have to have simple solutions that work really well.  and item verification was originally about how can we ensure the item is correct while making it easy for the returning star, the person at the return bar operating the service to do it.  and, you know, this is, The magic of great ideas, everything, like you don't have to have trade offs if you innovate well enough.

And for us, it's, we actually have a far greater level of precision and we made it quicker than it was before because scanning is, is faster than visually selecting. And then,  a well controlled system has knock on benefits, like we help people understand if they brought the wrong stuff.  and it even, you know, even helps when we talk about like the accuracy of our manifests when we ship from our warehouses back to the retailers.

So, you know, you just, you want everything to work all the time and you want it to work easily and,  quickly.  Absolutely. And I, I read recently that, you had a white paper that came out that talked a lot about automation and robotics. So on one hand, we're talking about human intervention, but on the other hand, there's a great need for, Being able to really scale up the returns processing.

So you want to talk a little bit about automation and robotics. Yeah, no. And I like your your kind of tie your hook there because  you know, when we think about robotics in our warehouse, it's let's remove it. simple tasks,  simple onerous tasks and have our workforce focus on things that only a human can do. 

So, you know, in any warehouse there are exceptions handling. So, like, an item is removed from its bag and you can't, you have to figure out what it is. Right.  I would so much rather have my very talented warehouse specialist do that than just to be walking between 2 points as fast as possible all day long. 

It's just, it's just, it's not as it's not as fun. So,  so clearly there's kind of a people benefit there. I think sort of upscaling  and then beyond that  operations need to be resilient to work well, especially through things like a peak season, which we're just ramping up to now, along with, you know, Hyper growth, which is the average has the whole time.

So we, the robotics just create a system where it's easier to win and harder to lose because you're making machines do things that people did before. And it's harder to get consistent outcomes with people than software and  hardware.  So there's just a real resiliency benefit.  on like a, it's harder to, to make that, quantifiable, but honestly, that is the, I think most useful thing is it's just not as hard to succeed and you want to create, you don't want fair fights, right?

And the fight against complexity and volume you want to be, you know, you want to be the U S army, in terms of the hegemony there.  and then, you know, more sort of more discreetly.  we're much more productive than we were before. This helps make our service competitive, to, to retailers. We also significantly improve speed and quality.

So when you're operating a multi hundred way sort, it's very challenging to do it fast with people. So the robots, kind of blow up that complexity and make it faster. And it's very easy to make errors in high velocity environments. If you look at any 3PL or warehouse. A lot of the tech is about making sure the right items go in the right box, you know, think about sort of light to pick ASRS systems and our robots are achieving that, that kind of level of quality, which,  you know, it's, it's not a happy return if you get the wrong thing. 

So we're very focused on shipping the right stuff to the right place.  Now that's great. And the other thing is when you talk about speed and efficiency, especially now, I know a lot of retailers are really Reducing down their inventory holdings, and you're able to actually process returns much quicker, I think in the white paper it said like 30 percent or 35 percent faster.

So, by nature, if you're doing this quicker, then the retailers are getting that merchandise back faster, which means they can then put it back in stock, right?  Correct. and I think it just makes the service,  we're trying to make this as much of a shipping product as we can. And so major differences from shipping products that exist in the UPS rate and service guide, for example, just make it harder to,  add value for the merchant partners.

It's like, Oh, what about the slowness?  so we're, we're really trying to get to the speed. Of like an economy ground product. So USPS ground advantage,  MI and just making it harder to,  removing barriers for use. everyone is super enthusiastic about the cost consumer experience.  we're very proud of our lifetime 93 NPS score.

That was so high, honestly, that when I was interviewing for the shop in 2018, I thought that couldn't be real. And it was something.  Like marketing lie and now I manage the NPS program and it's very real. And, it's just very stable. It's like stunningly stable that number.  even from when we were much smaller to much bigger with much different retailer base, it's always roughly that number. 

And so as we improve, as we maintain and hopefully improve the consumer experience, which is now unparalleled and bring the operations closer to parity with normal shipping products, we increase our value proposition for merchants. Which is great. And by the way, I totally believe the NPS score. And the reason I believe it is because I've experienced happy returns.

Like literally, so I can see how, you know, in that returns process, it's just really flawless and simple. Well, honestly, that's, that's one of the, I worked for a business to business industrial distributor, before I worked here.  so not, not a lot of like enthusiasm in the world about.  Getting new shims quickly. 

One really fun aspect of my job is, you know, I, I meet people in the world who have used the service and they almost always share your genuine level of alacrity and enthusiasm and yeah, it,  it, it, it keeps you motivated, I suppose.  And then I just want to go back to something you said, because I think it's important for our listeners to understand.

So in regular logistics, forward logistics, even though we don't say forward with logistics,  you know, you get a thousand, 10, 000 units, and those are easily distributed among, trucks in the DC and those trucks go out to stores. But when you think about reverse logistics, It's really a lot more complex.

Now you talked, I heard a number, you said something about 800 sorts, but can you just explain the volume aspect? So I think you're working with nearly a thousand different brands and you have how many SKUs and like, what does that look like?  Yeah, you know, it's a good question. I think it's an imposing like thought. 

It's like, oh wow, that's hard. And I think the story of our success has been  just really rigorously enforcing simplicity wherever we can, because it's an inherently complex problem. And so if you can't make it easier, it will kill you, you know, manage your operation or your operational manager.  and so this is why we've tried to make everything the same, I suppose.3

I would use the word commoditized, but that has like various implications for value, but like within our hub,  like, so, so you think about UPS.  UPS moves,  I don't know the figure, 15 to 20 million packages a day to the network, going to,  millions of destinations, right?

How do they, how does it make it work? Well, everything has the same shipping label. Everything's a box and it gets, like, it doesn't really matter what's in there. And as long as the size is within a certain range, it all just works. So they've eliminated the complexity through that, that, standardization.

And so we've attempted to do the same thing. We have done the same thing in returns. It's just harder. So when you drop off stuff at the return bar, we put that in a bag and that bag has a barcode on it. And that barcode is associated with the return. And because we control  We're a walled garden of software.

So you start a return online either with our software or a partner software, but it's still in our system. And then that same,  return has a barcode. It's taken to the  return bar. We put that in a bag. That bag still has that same information linkage on it. We put it in a box. We scan it in the box. We know what's in that box.

So if it doesn't arrive, we go look for it. It comes to our warehouse. We open that same box. We use the same bag and the same label. We put that on a robot and the robot knows where it's supposed to go. It puts it in a box and then we have various controls for making sure that those boxes make it onto, onto trucks.

So we've sort of tried to,  yeah, make it all widgets. I guess,  if you try to do it, can customers, well, merchants will often ask you to do a lot more.  And I think especially as an early stage startup or a hungrier business, if you have a revenue opportunity, okay, cool. Let's go, let's go make a new product and sell it. 

But you, if you do that, you can't scale.  So we made the, you know, at times like tough decision just to be like, Hey, look, we're not. We're not doing value added returns processing because we can't, we will only do things well that we can do well for everyone and at scale. So the way to do that is to make everything the same. 

And you know, there's a lot of opportunities that we could be doing,  adjacent to this returns, but you know, we decided to make ourselves basically a carrier.  and I think that vision is succeeding.  I think that's your secret sauce to success, in my opinion. You're just very focused. One of the ultimate validations was the UPS acquisition. 

You know, I think,  particularly on the op side of the house, it made us  just pretty proud that we built a thing that UPS was willing to call its thing.  cause that's, you know, that's a,  it's a real company, UPS. Yeah, definitely. So I want to ask you one more question before I let you go. I'm so appreciative of your time.

Of course. There's been a lot of talk about trade wars, tariffs, impact on, you know, what's happening with the business. Is that impacting retail returns at all? What are you seeing there? you know what?  I,  we're still growing.  business is good.  I would say  the future is uncertain on this point.  I think there are probably people smarter than I am about how to actions of the U. S. Congress. 

If I could do that, I would, that would be my job. I'd make far more money.  that said, I think there are some potential headwinds that we weren't thinking about in prior years.  You know, just we, no one was this idea of, of, de minimis and tariff changes. There was not a topic to four or six years ago.

So it's on the horizon. And,  Obviously, you got to work with the experts on how to react to the specific things, but I suppose  with potential adversity on the horizon,  all the more reason to get better at everything you're currently doing. If there's a potential that your cogs are going to increase due to some kind of political or regulatory action, then it's a great time to be thinking about ways to save money in your operation.

You know, if things get harder, you need to get better.  And I think, leading retailers are always trying to do that. And there may be more of an imperative than ever to get as,  lean and efficient in your fulfillment shipping returns, process,  to, to offset any potential, issues that come up. 

Well, thank you so much, Tim. Thank you so much for being here. I appreciate it. Any closing thoughts you want to add before we say goodbye?  yeah, you know, it's the, I think one of the shortest periods between Black Friday and Christmas in the last decade. So,  we're very, very excited to ramp up and meet the challenge.

It should be a very busy holiday season for everyone in Ecom.  Oh, definitely. It's going to be super busy. And I hear Ecom is going to be up 9 percent this year. So. Yeah. And if you look at the kind of like. I don't know, volume per day on those, I think 19 days. Yeah, it's going to be,  people will be very busy including us.

So we're looking forward to the challenge. Well, we have a 3 percent increase in sales or three and a half percent increase in sales. We have a 9 percent increase in online sales. And then you put that into the fact of you have five less days. All of a sudden your peak demand is going to be super peaked.

Yeah, and we're, we're very excited. We have those robots to help us. So that's right. Well, thanks so much. And I want to thank our listeners. If you have any comments, you want to make any suggestions, please reach out on the ROM report. com on the count, contact us and just let us know. And thanks again for listening. 

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