Whether a retailer should enter an e‐commerce platform taking into account consumer returns

• Author: Yuqiu Xu,Jiajia Cao,Bing Xu,Kaiying Cao,Jia Wang
• Published date: 01 November 2020
• Date: 01 November 2020
• DOI: http://doi.org/10.1111/itor.12768

Intl. Trans. in Op. Res. 27 (2020) 2878–2898

DOI: 10.1111/itor.12768

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Whether a retailer should enter an e-commerce platform

taking into account consumer returns

Kaiying Caoa, Yuqiu Xua, Jiajia Caoa, Bing Xua,∗and Jia Wangb,∗

aSchool of Management, Nanchang University,999 Xuefu Avenue, Nanchang, 330031, Jiangxi, P.R. China

bSchool of Tourism & Tourism Research Institute, NanchangUniversity, 999 Xuefu Avenue, Nanchang, 330031, Jiangxi,

P. R. China

E-mail: kycao@ncu.edu.cn [K. Cao]; 15779845652@163.com [Y.Xu]; cjj921@126.com [J. Cao];

xubing99@ncu.edu.cn [B. Xu]; wangjia2014@ncu.edu.cn [Wang]

Received 5 May2019; received in revised form 13 December 2019; accepted 16 December 2019

Abstract

Considering consumers are increasingly shopping online nowadays and the online sales market is dominated

by e-commerce giants, traditional retailersneed to choose whether to enter e-commerce platforms. Moreover,

traditional retailers need to determine whether to offer offline return services considering online return

services are very popular.To address these challenges,we explore a retailer’soptimal offline return strategy and

channel choice of whether or not to enter a platformin the contexts of symmetric information and asymmetric

information, respectively. We present conditions for the retailer to share information. Interestingly, we find

that the retailer in some conditions has no motivation to improve customer satisfaction rate of offline store.

Most important, we find that the retailer’s channel choice depends on the magnitude of the annual service fee

that is affected by offlinereturn strategy and asymmetric information, and the offline return strategy depends

on the magnitude of the average residual value of returned products.

Keywords:asymmetric information; e-commerce platform; return strategy; channel choice

1. Introduction

With the rapid development of e-commerce, consumer consumption habits have begun to gradually

shift from offline shopping to online shopping. According to a report from the U.S. Commerce

Department, American online sales in 2017 were estimated at $453.46 billion, an increase of 16%

from 2016, which represented13% of total retail sales in 2017 (U.S. Census Bureau, 2018). Moreover,

the online sales market is mainly captured by some e-commerce giants (e.g. Amazon.com, Inc.;

Alibaba Group; JD.com, Inc.). In this context, traditional retailers are increasingly opening up

online sales channels for survival. However, traditional retailers operating their own online sales

∗Corresponding author.

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2020 The Authors.

International Transactionsin Operational Research C

2020 International Federation ofOperational Research Societies

Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

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K. Cao et al. / Intl. Trans. in Op. Res. 27 (2020) 2878–2898 2879

channels need to undertake lots of expense forbuilding, maintaining, and operating online websites,

and these websites are very low-profile relative to e-commerce platforms. For these reasons, more

and more small and medium retailers are entering e-commerce platforms as third-party sellers. For

instance, Amazon.com sales by marketplace merchants accounted for 51% of unit sales globally

in 2016 (Amazon, 2018); there were over 120,000 third-party sellers on JD.com as of December

31, 2016 (JD.com, 2018), and Taobao.com of Alibaba Group is a pure third-party marketplace. In

particular, the high-end brand Canada Goose settled in Tmall.com on September 12, 2018 after

MCM (German luxury brand) and Qeelin (high-end jewelry brand) entered Tmall.com in August

2018 (Hu, 2018). That is to say, it is a normal phenomenon that rational retailers choose to enter

e-commerce platforms.

Although e-commerce platforms are well known and convenient for traditional retailers to enter,

traditional retailers may not enter e-commerce platforms for the sake of online and offline com-

petition, high transaction fee, high online return rate, etc. First, there is competition between the

online sales channel and the offline sales channel (Goolsbee, 2001); thus, traditional retailers need

to consider whether it is beneficial for them to operate an online sales channel. Second, e-commerce

platforms such as Amazon.com charge third-party sellers referral fees per unit sold and monthly

subscription fees, which are huge expenses for small and medium retailers. Finally, products sold

via online sales channels have a much higher return rate than those sold via offline stores (Vlachos

and Dekker, 2003), and relevant statistics of online product return rate show thatthe online product

return rate is at least 30%, whereas the offline product return rate is only 8.89% (Rudolph, 2016).

Moreover, returned productshave less value than new products (Rogers and Tibben-Lembke, 2001),

and almost all e-commerce platforms and third-party sellers offer return services; thus, traditional

retailers who plan to enter e-commerce platforms may need to bear huge return losses. Thus, there

are still some traditional retailers choosing not to enter e-commerce platforms. Given that the on-

line return rate is relatively high and the corresponding return loss is relatively large, firms need to

carefully consider whether to enter e-commerce platforms.

Most online stores offer returnservices, whereas many offlinestores do not; for instance, REFASH

does not have a return policy for offline purchases whereas it offers a return service at its online

store (REFASH, 2019), and MR.DIY’s return and exchange policy is only applicable for online

purchases but not for purchases from MR. DIY retail stores (MR.DIY, 2019). Analogously, Pebble

Beach Concours d’Elegance offers no return policy for all its products (Pebble Beach Concours

d’Elegance, 2019), and Walmart does not offer refund for unfit food or fashion products (Chen and

Grewal, 2013). These offline retailers do not want to undertake product return loss. However, if re-

tailers do not offer offline return service, consumer’s willingness to pay for offline products reduces,

which indirectly reduces the competitivenessof offline stores. Otherwise, retailers need to bear losses

from low-value returned products. It is another issue for traditional retailers to determine whether

or not to offer offline return services. An offline return strategy (i.e. full-refund and no-refund

strategies) affects consumer utilities of purchasing offline products, which must affect the retailer’s

channel choice of whether or not to enter e-commerce platforms. In turn, retailers’ channel choice

of whether or not to enter platforms also affects the retailer’s offline return strategies. For instance,

if a retailer chooses to enter a platform, there is competition between the offline sales channel and

the online sales channel, which affects the retailer’s offline return strategy. That is to say, the online

return strategy interacts with the e-commerce platforms entering strategy. Traditional retailers need

to consider joint strategies of offline return and platforms entering in the context of e-commerce.

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2020 The Authors.

International Transactionsin Operational Research C

2020 International Federation of OperationalResearch Societies