CRE Midwest

New age of retail is transforming distribution networks

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E-commerce is redefining how some distribution centers do business.

E-commerce is redefining how some distribution centers do business.

With 92 percent of retailers selling online, 68 percent maintaining brick-and-mortar stores, and 64 percent utilizing catalogs, retailers are embracing a multi-channel approach to meet buyer expectations and battle for market share, according to Jones Lang LaSalle’s report, “Retail 3.0: the evolution of multi-channel retail distribution.” In addition, nearly 80 percent of retailers state that online sales have increased in the past five years with some reporting increases of 25 percent or more. This has forced retailers to change the traditional distribution network for their e-commerce models.

The influx of e-commerce and m-commerce (mobile) has revolutionized the retail sector. Smart retailers are tapping multiple channels to sell their merchandise – from traditional stores, by catalog, through the Internet and increasingly via smart phones and tablets. Technological advancement means that the store is now everywhere, in consumers’ pockets, at their homes and at the mall.

“With multi-channel selling comes a major focus on retail distribution, and how to get from ship to shore to store or your door as quickly and as efficiently as possible.” said Kris Bjorson, head of Jones Lang LaSalle’s Retail/e-commerce Distribution Group. “Traditional retailers must support the delivery of merchandise and manage both in-store and online inventories and shipments at a frenetic pace against the backdrop of intense competition from pure e-commerce rivals.

“Blending new shopping channels has forced retailers to simultaneously add complexity and flexibility into their supply chains while striving for greater efficiencies,” Bjorson added. “They have to reconsider their store footprints and total inventory levels. They are adding to their e-commerce infrastructure while trying to optimize their store footprints.”

John Morris, senior managing director, Cushman & Wakefield industrial, said e-commerce will require higher levels of service from distributors.

“The idea that I could go into a store, find a jacket that I like, look it up on my iPhone, order it and get it to me the next day sounded really unique a couple years ago. I think it’s becoming more and more of the norm,” he said.

Morris predicted that retail stores will become smaller and hold less inventory, while distribution centers will hold more inventory to fulfill next-day or even same-day service.

“I could see a future where Amazon has a distribution center in every major metro area and they ship to you next day, all the time and sometimes that same day. I can even see a future where Amazon has its own fleet of trucks,” he said.

New distribution networks

Retail chains are finding it more cost-effective to increase online logistics operations rather than open more traditional stores, which requires an entirely different kind of distribution model. Therefore, retailers are evolving their regional distribution networks with the addition of e-commerce distribution centers.

Traditional warehouses that support stores require less investment and machinery and fewer staff. The new e-commerce distribution centers, which involves direct order fulfillment, can cost three times as much and involve three times as many employees.

“Considering proximity to key customers, tax incentives, sales tax and the availability of local labor are vital to retailers when searching for the right location for their e-commerce distribution centers,” Bjorson said.

Morris added that e-commerce will increase the cost of shipping and handling.

“E-commerce has had a significant impact on distribution, and obviously that impact is going to continue to grow,” he said. “E-commerce orders are generally smaller, so instead of shipping a layer or a palette of iPods, you might be shipping electronics one at a time.”

Adam Naparsteck, associate with Paine/Wetzel TCN Worldwide, said companies like Amazon are opting to have more warehouses in more locations in order to ensure same-day service.

“The distribution business is constantly evolving much faster than some of the other industries out there,” he said. “About five or six years ago I think there was a trend toward network consolidation. Recently we’ve actually been seeing a trend to the opposite, especially as distribution companies try to better serve their customers in a more immediate way.”

Global effects

The global spread of technology into multi-channel retailing has also opened up new markets in both developed and developing countries. While online sales are growing in the United States and abroad, China and Hong Kong are leading the way.

“China’s consumers are fast embracing e- and m-commerce and are spending the most money online,” said Bjorson. “Yet as fast as the technology is expanding commerce, the logistics infrastructure for retailers is still emerging.”

The inability of domestic logistics service providers to fulfill high volumes of customer parcel shipping at low costs and within a reasonable delivery timeframe dramatically impacts the direct-to-customer channel. Retailers have had to establish their own distribution networks or rely on outsourced express shippers. There is an opportunistic gap in the market for third-party logistics companies and investment in industrial real estate infrastructure.

For the past two decades, U.S. companies have been shifting production to markets with lower labor costs. However, as energy costs rise and labor becomes more expensive in Asian markets, companies are increasing near-shoring and on-shoring. Firms that want to use all-water options but cannot tolerate the lengthy shipping times from Asia are shifting some operations to near-shoring destinations such as Mexico or Central and South America and even back to the United States. With production closer to home and demand, retailers can respond more quickly to trends and changes in buying patterns.

Increased automation

Morris said another distribution trend is that over time as the cost of labor increased, distribution has become more automated. Distributors are beginning to rely more on capital and less on labor, he said.

“Younger people today are more interested in a learning job, or being part of a knowledge economy, and less interested in an industrial job. So that ability to automate distribution will become even more critical in the mid-term,” Morris said.

And with more people deciding to live in urban areas, Morris said distribution centers will increasingly be closer to cities to reduce transportation costs.

“I think on average you’re seeing companies interested in having more facilities closer to population centers so that they can eliminate empty miles and reduce their transportation costs in exchange for having more space,” he said.

Naparsteck said the economy has forced some companies to take a closer look at the location of their warehouses.

“This downturn is really giving companies an opportunity to reorganize their own supply chains, and they’ve had to take a hard look at their real estate footprint,” he said.

Naparsteck said Chicago-area companies are starting to look at less congested locations for their warehouses with easier access to interstates.

“I think we’re going to start seeing a lot more activity away from the more congested areas as people start thinking about where they really need to be,” he said. “I think you’re going to start seeing more well-located warehouses with an eye toward getting products in a more efficient and smarter way to the consumer.”