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Offline Returns for Online Retailers via Partnership

Online shoppers often prefer to return items to stores (or “offline return”) than to mail them back, but online retailers are unable to offer this option. We study a new business practice, called return partnership, wherein a service provider partners with online retailers and firms with physical stores (“location partners”) to offer offline returns. We consider unique features of the partnership, namely (i) location partner’s incentive based on customers’ purchases during their offline return visits, (ii) online retailer’s incentive based on the number of returns and exchanges, and (iii) service provider’s choice of the number of stores and overlap between products sold by the online retailer and the location partner. We find that firms have incentives to choose a low-overlap location partner with many stores if the chance of an exchange is high as in the case of Happy Returns -- a service provider that partners with footwear and apparel retailers and location partners mostly in the stationery and housewares sectors. In contrast, return partnerships feature partners with more overlap when either the return rate is high, or the online retailer and the service provider are the same firm as in the case of Amazon’s partnership with Kohl’s. We caution that a service provider seeking a high-overlap location partner ensures that the number of locations is not too large as the online retailer’s incentive is limited when the convenience offered by many locations increases return volume substantially. We illustrate our findings using data from Happy Returns and its location partner.