Australians spent more than $27.5 billion online last year, as internet shopping grew faster than expected.

Key points: Australia Post estimates 7.6 million Australian households shopped online in 2018

Australia Post estimates 7.6 million Australian households shopped online in 2018 Power Retail says 70 per cent of shoppers consider returns policies before buying online

Power Retail says 70 per cent of shoppers consider returns policies before buying online Buy now, pay later can allow items to be sent back before cash leaves customer accounts

Australia Post's yearly e-commerce report found a 24 per cent increase in spending, with online now accounting for 10 per cent of total retail, marking a rare area of growth for the struggling sector.

However, it is not only parcels going out to customers that is an important consideration for retailers — there are also items coming back the other way.

Online spending fuelled by fashion, sales events

An estimated 7.6 million Australian households shopped online in 2018, according to Australia Post.

"It did take a big jump last year and what we're seeing this year is a continuation of that growth," said Australia Post's general manager of e-commerce Ben Franzi.

"That means we're probably going to reach out to 12 or 14 per cent of total retail spending being done online in the next couple of years."

The growing popularity of sales events including the American-imported Black Friday and Cyber Monday saw November become the biggest month for online sales, followed by December.

"On our busiest day we'd quite comfortably be doing over 2 million parcels a day — even up to 3 million a day when you start to get into the Christmas period," Mr Franzi said.

Fashion remained the most popular category, accounting for 35 per cent of purchases when accounting for both specialty retailers and variety stores.

Shoppers are now expecting their items to arrive even faster, with next-day deliveries growing by nearly 32 per cent, largely driven by fashion purchases.

Customers are also paying attention to shipping costs in both directions.

"About one-in-three items is actually returned in fashion and retailers who are making it simple, with free shipping, free returns, they get higher sales because it removes a big barrier for consumers, so we're investing a lot in what they call reverse logistics," said Mr Franzi.

Returns make or break for some shoppers

Sydney online shopper Will Luu buys homewares and sometimes groceries via the internet, but clothes are his major purchase.

"The things I love about it are being able to have access to a variety of clothes, it's the accessibility of not being stuck to just on-brand, finding cost efficiencies and, most importantly, time efficiencies," he said.

Returns policies are key for Will and Kevin Luu when shopping for clothes online. ( ABC News: Stephanie Chalmers )

One of the first things Mr Luu looks for before trying a new retailer is a flexible returns policy, where the store foots the bill for the shipping costs, as he often orders multiple sizes and styles to get the right fit.

"It usually takes around five to 10 minutes, all I have to do its try the clothes on, see I like them, maybe go to my husband for a consultation to make sure it's right, and then if it's not, chuck it in my bag and on my way to work I'll drop it off at the post office."

Mr Luu is not alone — according to a report from Power Retail, while the average online returns rate in Australia is 9 per cent, 70 per cent of shoppers consider the returns policy before making a purchase.

The business case for free returns

While it is something retailers cannot afford to ignore, it is not necessarily something they can afford either.

"There's actually no such thing as free returns," said Power Retail managing director Grant Arnott, who founded the Click Frenzy online shopping event.

"It might be free for the consumer but the retailer's paying for that both ways.

"There's a very real shipping cost that's incurred in both directions on the part of the retailer in order to enable the same level of 'try before you buy' behaviour online as they do instore."

It is a cost Australian fashion retailer The Iconic is willing to bear. Since opening its virtual doors in 2011, it has offered free returns within 30 days for customers who change their mind.

A large pile of returned clothes at The Iconic's warehouse in Sydney. ( ABC News: Stephanie Chalmers )

"That cost is an investment, from our perspective, on customer experience, so it's definitely factored into our model," said The Iconic's chief operation officer Anna Lee.

The Iconic is yet to turn a profit. Its costs rose more than 30 per cent last year, while its revenue grew by 38 per cent.

Ms Lee thinks customer expectations will increase as the Australian online retail market grows.

"I think we're kind of on a head start to make sure we're ahead and meeting those customer expectations," she added.

Australia Post's Ben Franzi acknowledges the cost to retailers but said those that prioritise the customer experience will be rewarded.

"What [retailers] see on the upside is, that customer is much more loyal back to them," he argued.

"That customer will go back and buy another item from them and, once you get your size, you tend to go back and buy again."

Sydney shopper Will Luu is one such loyal customer, preferring to buy from retailers he has tried before and only considering a new option if it offers flexible and free returns, after some bad experiences in the past.

'Sanity has to prevail'

While The Iconic's online business model is built around fast shipping and free returns, some industry analysts believe flexible returns can be a profit-killer for smaller businesses.

"It may harm online retailers who do not have the economies of scale to minimise the costs associated with deliveries and returns, along with the cost of processing these returns," said IBISWorld senior industry analyst Kim Do.

"While offering these services may help increase revenue and customer satisfaction, it may also negatively affect the profit margins of online retailers."

Power Retail's Grant Arnott agrees and thinks something has to give.

"It's going to be a really tough time for the retail industry in years ahead unless something's done to change this crazy land grab for giving so much to the customer, that is really unsustainable when it comes to profitability — I think sanity has to prevail."

Buy now, return later, never pay

Even with free returns, the refund process can prove a hurdle for shoppers, with the wait for money to land back in their account deterring some from returning.

However, "buy now, pay later" (BNPL) is making that a problem of the past.

Australia Post found BNPL accounted for nearly 7 per cent of online payments last year and around half of those were for fashion purchases.

Platforms such as Afterpay require no upfront payments and split the cost into instalments, collecting a fee from the retailer, not the shopper.

That means customers can return items before the first payment comes out of their account, with no money ever leaving their hands and the retailer footing the bill.

"If that's not a problem retailers are considering, I really think they should be because that is a dangerous way of shopping that millennials are embracing in larger numbers all the time," said Mr Arnott.

The Iconic's Anna Lee said there has not been a significant difference in the behaviour of customers who have bought using Afterpay, compared to those who paid upfront.