Retail is changing.
The inexorable rise of e-commerce and m-commerce continues to exert pressure on sales at bricks-and-mortar locations. At the same time, the Great Recession and the subsequent weak recovery has put a premium on companies maintaining tight supply chains and optimizing inventory distribution.
As a result, the savviest merchants are becoming omnichannel—selling goods online, through smartphones, in stores and, in some cases, still via catalogs. This means retailers’ real estate strategies for distribution centers and stores are changing. No longer is distribution just about supplying a network of shops stocked to the gills with goods. Instead, it’s also about internet order fulfillment. It’s about a showroom model and carrying less merchandise. It’s the evolution of the sector.
To explore these developments, NREI and Jones Lang LaSalle conducted a survey of retail companies, distributors, third-party logistics providers and others to find how their approach to distribution from “ship to shore to store” has changed in recent years. The study found that how retailers set up distribution centers, ship goods and design stores is evolving. But we’re still at the beginning of the process.
A multichannel approach
The vast majority of retailer respondents in the survey (92 percent) sell goods online. In addition, 68 percent have bricks-and-mortar stores while 64 percent also sell goods through catalogs. In all, the high percentages in all three categories shows that many retailers have embraced an omnichannel approach, according to Aaron Ahlburn, vice president, Americas director of research, industrial and retail with Jones Lang LaSalle.
In addition, of retailers that responded, nearly 80 percent said that their online sales had increased in the past five years. In fact, 36 percent of retailers said that online sales had grown by 25 percent or more. Only 9 percent said online sales had fallen while 11 percent said that sales had stayed the same.
“It just lends credence to fact that retailers looking at multiple ways of getting products in front of consumers,” Ahlburn says.
According to the Department of Commerce, e-commerce sales for 2011 were estimated at $194.3 billion, an increase of 16.1 percent from 2010. In all, e-commerce accounted for 4.6 percent of total retail sales, up from 4.3 percent the previous year.
With the increase in online sales alongside traditional distribution channels, retailers are examining how they move goods around and trying to find ways to adjust to increasing expenses.
Among respondents, 78 percent said they used less-than-truckload shipments. In addition, 49 percent used full truckloads. Another 66 percent used air and 48 percent ship goods by sea.
When determining the mode of transportation, 74 percent of respondents said cost was the primary consideration [Figure 2]. Other major considerations included the size and weight of products (61 percent) and the location of the product (54 percent).
In the last two years, respondents identified rising energy prices as the factor that has most affected their business [Figure 3]. Other major factors were rising material costs and availability of talent.
More than three-in-five respondents said they were responding to rising expenses by passing those costs along to customers [Figure 4]. However, Ahlburn said that might be more aspiration than reality given the low pace of inflation in the economy and depressed consumer demand. Retailers don’t have the pricing power to increase costs without cutting into their sales.
“It will be interesting to see how over the course of the year how it plays out,” Ahlburn says. “We will have to see if that bears out.”
When it comes to labor, 53 percent of the retailers that responded said that their in-store labor needs remained the same as five years ago. An equal number—23.5 percent on each side—said that their in-store labor needs had increased and decreased.
On the distribution center side, 32 percent said their labor needs had increased and 36 percent said they had fallen. Overall, 18 percent said their labor needs had increased by more than 25 percent in the last five years.
Real estate decisions
In terms of real estate needs, 80 percent of retailer respondents said their average store size had stayed the same in the last five years. Only 15 percent had decreased store size. The result does not entirely jibe with what Jones Lang LaSalle has seen in the market.
“Increasing the sophistication of logistics makes it easier to pick up smarter storage and complex inventory management systems,” Ahlburn says. “On the retail side, it means having store footprints laid out in some modular layout that allows for quick changes.”
Things have been different on the warehouse/distribution center front where 39 percent of those that answered said their needs had increased while only 15 percent said their needs had decreased. The rise in distribution space is likely a reflection of the growth of e-commerce.
“From a real estate standpoint, I think it fits quite perfectly,” Ahlburn says. “There’s a need on the retailer side to increase an investment in technology and how they are selling to really heighten the consumer experience.”
Retail chains are finding it more cost-effective and less risky to build up their online operations rather than to continue to open bricks-and-mortar stores. But that means an entirely different kind of distribution model.
“What it evolved from is the traditional regional distribution network,” says Kris Bjorson, managing director of Jones Lang LaSalle’s retail distribution group. “If we are in Chicago, one distribution center may serve the Midwest region. A majority of retailers built out regional distribution networks to have product residing close to stores. What people are working on now is the e-commerce distribution networks.
In a traditional warehouse, retailers are moving pallets or crates. That setup requires less investment and machinery and fewer workers. When conducting direct order fulfillment to customers, however, the equation changes. According to Bjorson, it can cost three times as much and require three times as many employees. If a traditional regional distribution center cost $10 million and employed 100 workers, an e-commerce facility might cost $30 million and employ 300 workers.
Increasingly, established bricks-and-mortar retailers are opening such facilities. Kohl’s, for example, expects its online sales to grow to $1 billion this year. As a result, it has opened three facilities devoted to e-commerce. The third facility lies in Edgewood, Md. There it purchased a 602,000-sq.-ft. building and 29 adjacent acres. By the end of the year, the facility will include one million sq. ft. of space and employ 1,200 workers.
“You are seeing a leader in each sector,” Bjorson adds. “In each sector there is one retailer evolving e-commerce faster than others. For example, Bed Bath & Beyond embraced it long ago keeps on adding to that e-commerce infrastructure. And their store footprints are continuing to get smaller.”
The 600-pound gorilla shaping how brick-and-mortar retailers are operating online is Amazon.com. The company finished 2011 with 25 distribution sites. Many traditional bricks-and-mortar chains only have one or two e-commerce fulfillment centers.
Meanwhile, in March, Amazon announced that it will acquire order fulfillment company Kiva Systems $775 million in cash. Kiva’s hardware and software package speeds the picking, packing and shipping of e-commerce products. It uses autonomous robots and a control system to provide a fulfillment system for retailers. “It just goes to show you how much further they are than people that are just getting ready to do their first e-commerce facilities,” Bjorson says.
For the past two decades, Western companies have been shifting production to markets with lower labor costs. Overall, more than 90 percent of respondents said their products originate in the domestic United States [Figure 1]. But about half also said goods originated in China. And as energy costs rise and labor becomes more expensive in Asian markets, companies are increasing near shoring and on-shoring.
At the Retail Industry Leaders Association conference in Dallas, John Menzer, CEO of Michaels Stores, laid out his “top eight retail trends.” Among those, he identified retailers increasing production of private labels (which provide a higher margin of between 5 percent and 25 percent compared with branded goods).
Other trends he pointed to included global sourcing, store optimization, increased digital marketing and social networking and rethinking merchandising strategies.
Surprisingly, respondents have not embraced new technologies to predict and manage spikes in demand. A full 76 percent said they were relying on historical demand. Only 23.5 percent said they were using specialized modeling software and 22.7 percent said they were using a more rapid inventory fulfillment system.
In addition, only 39.5 percent of respondents said they were using more technology and less manual labor for picking, packing and shipping while 49.6 percent said their utilization of distribution technology was unchanged.
But Bjorson says that in his experience, larger retailers are being more proactive that the survey responses seem to indicate.
“Our clients seem to have a greater sense of urgency,” Bjorson says. “I think a lot of this is changing.”
In April 2012, the research unit of NREI and sister publications Multichannel Merchant and Material Handling & Logistics, as well as Jones Lang LaSalle conducted an online survey of retailers and third party logistics providers. Half of respondents are retail companies (50 percent), while 13 percent are distributors and 8 percent are third party logistics providers. Ninety-seven percent are involved in the logistics decision-making process. The survey yielded 119 valid responses.