23 May, Mumbai 2025
The digital landscape of fashion retail in India mirrors global trends, which is a dichotomy where high return rates for investor-backed e-commerce ventures and marketplaces are not always perceived as a significant impediment to growth and future prospects. While traditionally viewed as a negative indicator, a closer look, especially from the point of view of investor priorities, gives a clear picture. The pursuit of rapid growth and market validation often leads these entities to view substantial return volumes as a byproduct – and sometimes even a signal – of aggressive scaling strategies.
Revenue growth as the North Star
For investors in the Indian e-commerce space, particularly in the high-growth fashion and apparel sector, the primary focus often lies in demonstrating significant revenue growth and capturing market share. A growing top line, even if accompanied by substantial returns, creates the perception of strong consumer demand and a rapidly expanding business. This growth narrative is crucial for attracting subsequent funding rounds and achieving higher valuations.
As an early-stage investor in a prominent Indian fashion e-tailer once stated, one is looking for hockey-stick growth. Returns are a logistical challenge to be solved later; right now, it's about showing the market believes in the product and the platform. This sentiment underscores the prioritization of scale over immediate profits in the initial stages of many investor-backed ventures in India.
Returns as a source of valuable data
While the operational costs associated with high return rates are undeniable, they also generate a rich source of data for e-commerce players. Analyzing return patterns can offer invaluable insights into consumer preferences, sizing issues prevalent in the Indian market, product quality concerns specific to local manufacturing, and even the effectiveness of product descriptions and visuals. Myntra, one of India's largest fashion e-commerce platforms, has heavily invested in data analytics to understand return reasons, which has informed improvements in their product sourcing and listing strategies. By leveraging this data, companies can refine their offerings, improve customer satisfaction, and ultimately work towards reducing return rates in the long run. As a senior data scientist at a leading Indian online marketplace for apparel noted, returns gives a direct line to the customer's experience with the product. They treat each return as feedback, helping them iterate faster and smarter.
The cost of customer acquisition and retention
The Indian e-commerce market is fiercely competitive, with numerous players vying for a share of the rapidly growing online fashion segment. In this environment, offering customer-friendly return policies, including easy returns and sometimes even free returns, can be a crucial tool for customer acquisition and building trust.
For example, Ajio, Reliance Retail's e-commerce platform, is known for its relatively hassle-free return process, which likely contributes to its growing customer base. While this might lead to higher initial return rates, the increased customer loyalty and repeat purchases can offset these costs in the long term. A marketing head at a mid-sized Indian fashion brand selling online commented, In India, a smooth return experience can be a significant differentiator. Customers remember good service, and that includes how easy it is to return something if it doesn't fit or meet their expectations.
Acquisition endgame
For some investor-backed fashion e-commerce startups and marketplaces in India, the ultimate goal might not be long-term independent profitability rather it’s to achieve a scale and user base that makes them an attractive acquisition target for larger players, both domestic and international. In such scenarios, high revenue figures and strong user engagement metrics, even with higher return rates, can be compelling factors for potential acquirers.
The narrative of rapid growth and a substantial market presence can outweigh concerns about short-term profitability in acquisition negotiations. While specific examples of acquisitions driven solely by high revenue despite high returns are less publicly documented in India, the general principle of scale attracting acquisition interest holds true across the e-commerce landscape. The acquisition of smaller e-commerce players by larger conglomerates like the Tata Group or Aditya Birla Fashion and Retail (ABFRL) often factors in the acquired entity's reach and revenue potential.
Return rates in India
While precise, publicly available data on return rates specifically for investor-backed fashion e-commerce companies in India is limited, industry reports offer some insights. A recent report showed, the average return rate for apparel purchased online in India can range from 25 to 40 per cent, significantly higher than in brick-and-mortar stores. Some categories, like premium or fast fashion, might even experience higher rates.
Table: Estimated average return rate in India
|
Product category |
Average return rate in India (estimated) |
|
Apparel (Overall) |
25% - 40% |
|
Premium Apparel |
30% - 45% |
|
Fast Fashion |
35% - 50% |
|
Accessories |
15% - 25% |
|
Footwear |
20% - 30% |
Another report highlighted that return orders accounted for over 10 per cent of total e-commerce orders in a recent fiscal year in India, with clothing being the most returned category. This indicates the significant volume of returns that e-commerce players, including those with investor backing, have to manage.
A calculated trade-off?
Therefore, while high return rates present operational and financial challenges for investor-backed fashion e-commerce and marketplace startups in India, they are not always viewed as an insurmountable problem, especially in the early stages of growth. The focus on rapid revenue expansion, the valuable data gleaned from returns, the strategic use of liberal return policies for customer acquisition, and the potential for a lucrative acquisition often lead investors and founders to prioritize growth metrics.
However, it is crucial to acknowledge that this perspective is likely to evolve. As these ventures mature and the emphasis shifts towards sustainable profitability, effectively managing and reducing return rates will become increasingly important for long-term success in the dynamic Indian e-commerce landscape. The ability to strike a balance between aggressive growth and operational efficiency will ultimately determine the enduring success of these businesses.
