Optimal return and refund polices for perishable food items with online grocery shopping

The purpose of this paper is to help online grocery retailers determine the optimal return and refund policies for perishable grocery items. Three refund policies and two return requirements are modelled: no-refund, full-refund and partial-refund, with or without product return. We first derive the optimal refund policy under two scenarios, where either product return is or is not required for refund. We further analyse how market conditions impact the optimal policies. Lastly, we investigate when product return should be required for refund. Our results show that a more generous refund policy should be offered if the product has a higher profit margin, if an unsatisfactory product has a large negative impact on consumer utility, and if consumers have high return costs when product return is required for refund. Our results also show that it is optimal not to require the unwanted product to be returned when consumer’s return cost and product return rate are above certain threshold values. This paper fills the gap in the literature on return and refund policies in an online grocery setting. The findings of this paper provide explicit guidance to online grocery businesses on how to optimally determine the return and refund policies.