Happy Returns

Returned merchandise that would have been scrapped or sold at big discounts are given a second life after being refurbished with cheap Mexican labor.

Big-box stores selling consumer electronic goods sell many large-screen TV sets before the Super Bowl game only to have them returned for full refund after the Super Bowl party is over. Such disguised free rental happens often enough to be known in the industry as the "Super Bowl problem."

Encouraged by the "no-questions asked" merchandise return policy of big-box stores, American consumers often return all kinds of merchandise with the flimsiest excuses¹. Such fickleness accounts for more than $10 billion of U.S. product returns annually just in TV sets and stereos and other audio equipment, according to the Consumer Electronics Manufacturers Association. Dale Rogers, who teaches inventory management at the University of Nevada, says 6% (over $100 billion a year) of nonfood items sold in U.S. stores eventually are returned to their original vendors (WSJ 12/26/01).

More often than not, the returned items are not defective. But they cannot be resold without a discount or extra costs to the retailers or the manufacturers. Just disposing of them as trash costs the retailers money. Retailers often just ship them back to manufacturers as defective items.

At the prevailing labor cost in America, it will cost more to refurbish them than to make new ones. But writing them off could reduce the manufacturer's profit by as much as 25% (WSJ 9/26/94). Big-box retailers are reluctant to unilaterally tighten up their return policy for fear of driving customers to their fierce competitors². Manufacturers are powerless to dictate the return policy of their big-account retailers. Nor can manufacturers simply pass on the higher cost to consumers in a competitive market environment.

Before NAFTA opened up a nearby cheap source of labor in 1994 and lowered the customs barriers, these returned merchandise were either sold at second-hand stores at very low prices or sent to the garbage dump. But with wages of Mexican labor at as little as $6 a day, these returned merchandise can be refurbished at a reasonable cost and resold as new in the Latin American markets at prices sometimes even higher than those in American stores. Refurbishers thus provide a more profitable outlet for the returned merchandise and stablize the bottom line of manufacturers.

The low labor cost and lower customs barriers have fostered in Mexico a vibrant refurbishment industry that not only gives a second life to returned merchandise but also other end-of-life machine parts. For example, Cummins Engine Co. has a plant to remanufacture their truck engines. GE Transportation Systems also repair their locomotive engines for resale in Mexico and in America.

Thus, the length of end-of-life cycle of products often depends on the labor costs of refurbishing them relative to the resale price of the refurbished items. Since refurbishing is not as easily mechanizable as manufacturing, refurbished items might be more expensive than new items. But thanks to the low labor costs in Mexico, even inexpensive (by American standard) returned items from America such as phones and power tools are given a new lease of life.