Handling holiday returns helps fuel Lanham firm

Lanham, MD -- Paul Alexander moves boxes of equipment into the quality control area for testing and inspection at Optoro's warehouse Tuesday, Dec 9, 2014. (Karl Merton Ferron / Baltimore Sun)

By Lorraine Mirabella,The Baltimore Sun

Tech company's Lanham warehouse handles returns for some of the biggest retail chains.

Here's one company's answer to managing returned goods during the holiday buying season.

In Optoro's sprawling warehouse in Lanham, dozens of workers scan, sort and pack toys, shoes, laptops, books, headphones, power tools — almost anything that consumers bought online and at stores then sent or brought back. The returned goods may be resold online, sent to wholesalers, recycled or donated.

Business is brisk this time of year for the Washington-based technology company, which processes and resells returned merchandise for some of the nation's biggest retailers. Americans returned $267.3 billion worth of goods last year, an industry report found, and the share of sold goods that are returned to stores ticks up over 10 percent during the holidays. Last holiday season, the National Retail Federation said it expected one of every three gift recipients to return at least one item.

Optoro has built its business on helping retailers get the most out of those returns, and its success has attracted investments from one of the biggest Silicon Valley venture capital firms and the owner of the Washington Wizards and Washington Capitals.

While accepting returns is considered an unavoidable cost of business, "the goal is to help cut out extra middlemen and get the highest value," said Optoro CEO Tobin Moore. "I don't think anyone has taken on this industry with our approach."

Most consumers never see what happens after they return clothes that don't fit, electronics that don't work or gifts they can't use. Items that can't go back on shelves are sent to distribution centers. Often, inventory piles up in an unknown condition before it can be resold to liquidators or other resellers.

"Retailers are focused on making sales and having the right inventory," so it makes sense that "reverse logistics" companies are finding a niche, said John Talbott, director of research at the Center for Education and Research in Retailing at Indiana University.

And the growth of online channels will likely only stoke demand, he said.

"The returns in online are higher than in … stores," Talbott said. And, while some online sellers are trying to improve online product information to minimize returns, he said, "companies like Zappos … have made a living letting customers try products and return them at no cost, allowing them to drive the business."

Retailers are always looking for ways to improve the way they manage returns, especially because the area can be ripe for fraud, according to a report by National Retail Federation and The Retail Equation. In 2013, returns made up 8.6 percent of total sales, or $267.3 billion, with $9.1 billion of that estimated to be fraudulent.

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During November and December last year, returned holiday merchandise amounted to $58.5 billion, or 10.1 percent of sales, with 5.8 percent of the returned goods considered fraudulent. The report attributed the elevated fraud rate during the holidays to the increased return rate and the hiring of less-experience, part-time labor.

Such fraud can encompass stolen or fraudulently bought merchandise, the use of counterfeit receipts and returns by organized retail criminals.

Around the holidays, retailers also see more of what they call "return abuse," such as buying more special-occasion outfits than needed and returning some or buying a big-screen TV for the Superbowl then returning it, said Robert Moraca, vice president of loss prevention for the National Retail Federation. Retailers have begun to zero in on ways to stop the increasing use of counterfeit receipts, he said.

"It is certainly of concern to the industry," Moraca said. Returns "are a component of the business that retailers accept as the price of doing legitimate business. When you get fraud, that's when the difficult part comes in."

Today, some of the nation's biggest retailers use Optoro's cloud-based system for handling returns, either at Optoro's center or at the retailers' own distribution centers throughout the U.S. It won't name its clients, citing confidentiality agreements. Optoro also declined to disclose its revenues but said growth has been meteoric, with sales increasing tenfold since 2008.

Last week, the company announced $50 million in new funding from a group of investors led by Silicon Valley's Kleiner Perkins Caufield & Byers and Generation Investment Management, an investment firm co-founded by Al Gore.

Ted Leonsis, co-founder of Revolution Growth, which invested in Optoro last year as well as in the current round, said in an announcement that the company is transforming the way mainstream retailers handle the costly challenge of managing returned inventory.

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"Optoro is creating a brand-new category, 'Re Commerce,' and transforming what was once an incredibly antiquated solution to one of the retail industry's biggest and most costly challenges — what to do with the roughly 15 percent of goods that are returned or become excess inventory — into a significant revenue-generating opportunity," Leonsis, CEO of Monumental Sports & Entertainment, which owns the Wizards NBA team and Capitals NHL team, said in an email.

Moore, who says he had found many retailers using what he considers antiquated systems, said the Optoro system can increase the value of returned merchandise up to 10 times.

The operation today bears little resemblance to the garage business that he and a couple of friends from elementary school started as college students more than a decade ago, selling items people dropped off on eBay for a fee.

Moore started eSpot in his parents' garage in Georgetown in 2004 while still a student at Brown University. He then expanded into a storefront, also in Georgetown, financing the 15-person startup on credit cards and selling items valued at $100 or more. Moore and co-founder Adam Vitarello, now Optoro's president, began developing the cloud-based technology they use today, one that automates much of the process of assigning condition, price and an eventual market for returned and excess goods.

"We got a lot of publicity because we were 23-year-olds doing something different, and retailers started reading about it," Moore said.

The firm's first customers were small Georgetown boutiques, some of which needed to find a market for returned luxury items.

By the time eSpot had evolved into Optoro in 2008 and moved to the Lanham center, the company had signed its first big chains as customers. It now employs more than 200 people, including 125 workers hired in the last year, and uses its Lanham center as the pilot facility to introduce retailers to its system and tweak it as needed. Once a system is finalized, the process moves to the retailer's distribution center, where the retailer's workforce uses the Optoro software.

One afternoon last week, workers in one warehouse monitored dozens of laptops that were plugged in to software for testing. In another area, workers scanned products before sending them down a conveyor belt. Items that are new and unopened can be posted immediately online, and sometimes sell in minute, on Optoro's ecommerce site, Blinq, as well as websites such as Sears, Amazon and eBay.

Items ready for immediate resale are posted continuously on its Blinq site, with some bargains selling in moments. It features computers, other electronics, home goods, clothing and toys, among other items.

But most items go through a few more steps. Once merchandise is scanned into Optoro's system, it's assigned conditions such as "open like new," "new," "lightly used" or "heavily used," and designated for sale, parts harvesting or repair. Items that might be obsolete before they can make it back on the shelves — such as some electronics — would be sold for parts, while lower-price items might be sold in bulk.

"It's bringing a modern-day approach," Moore said. "It is [part of] the industry that has lagged behind."