Returns operations in omnichannel retailing with buy-online-and-return-to-store

Abstract

Many retailers provide customers with product return flexibility by allowing them to buy online and return to store (BORS). We consider a retailer who sells a product through both online and in-store channels to customers who face uncertainty over product fit. We endogenize customers’ purchase and return decisions. Online customers may return misfit products online or to the store, depending on the retailer’s return policy, whereas store customers inspect in store before purchase and will not need to return their products. We examine the impact of BORS on the retailer’s store operations in terms of customer base, inventory decisions, and expected profits. We find that customers respond to BORS only when the return penalty and return rate are both relatively low. BORS can help the retailer attract new customers and also induce channel shifting among existing customers. After offering BORS, the retailer can stock less in-store inventory. We find that not all categories of product suit an in-store return policy. In particular, when the proportion of resalable returns is high, offering BORS will hurt the retailer’s profitability. In addition, we find that introducing BORS does not necessarily increase cross-selling profits. We also analyze the impact of an exchange policy where customers can exchange misfit items for similar items in store. We find that an exchange policy can help the retailer retain more customers and attract more customers to the store, which will further benefit the retailer’s profitability.