Retail Logistics: Shopping for the Right Site
Retailers buy into the impact global outsourcing has on their transportation practices, and now think twice about whom to partner with, and where to locate stores and distribution facilities.
What do supply chain management and commercial real estate development have in common? Quite a lot, according to a recent report from international real estate firm Cushman & Wakefield.
The rationale follows accordingly: In order to meet consumer and business demand for low-cost goods in apparel, electronics, motor vehicles, appliances, and machinery, U.S. manufacturers have moved production abroad to take advantage of inexpensive labor.
These goods are imported through a handful of major ports, fueling the commercial development of large warehouses close to main transportation routes, writes Maria Sicola, senior managing director of research at Cushman & Wakefield and author of the paper, The New Age of Trade.
“As more warehousing and distribution centers are built near ports and major inland hubs, certain communities and our rail system are springing to life,” she explains.
Experts don’t expect this trend to wane anytime soon. Domestic manufacturing will continue to decline while imports of goods entering the United States continue to rise, resulting in a 10-percent increase year-over-year in the proliferation of goods entering U.S. ports, the report predicts.
Five major trends are fueling this convergence of interest in logistics and commercial real estate development, according to Cushman & Wakefield:
1. Use of larger ships: Increasing reliance on goods purchased overseas means larger ships are needed to import goods. These large vessels have added capacity, but can also cause congestion because only a limited number of ports can handle their size and cargo volume. The growth of large ships coming into ports on the West Coast has pressured some consignees to offload cargo to nearby inland DCs for redistribution.
2. Rail makes a comeback: An increasing number of shippers are using rail instead of truck as a quick and cost-effective method for shipping a variety of goods into the mid-United States—particularly large shipments that can be sourced directly from ports to holding destinations, such as big box distribution centers.
This increased use of rail has led to growth in warehouse markets surrounding some of the nation’s biggest interior hubs, such as Chicago, Memphis, and Dallas-Fort Worth. These regions have the ability to serve large markets and are located at the intersection of multiple rail lines and interstates.
3. Super-sized distribution centers: The surge in large, million-square-foot distribution centers is a direct result of the massive flow of low-cost products imported to the United States, says Sicola. While many of these facilities are built-to-suit for large tenants, plus-sized speculative warehouse construction has escalated considerably during the past 12 months.
4. Emergence of large urban distribution centers: Mega-sized distribution facilities are no longer a rare “site” and often pop up on the periphery of major urban markets where land is cheap. Retailers can use these big box warehouses as a central hub for regional distribution.
The DCs also allow shippers to utilize multiple distribution strategies, from cross-docking to transloading to short-term storage, and make more efficient use of rail and intermodal transportation.
5. Shifting the load: Breaking down and re-loading shipments for more efficient transportation is becoming an important intermediate step that can improve distribution speed.
“While transloading goes against traditional supply chain strategies by adding a mode and increasing facility costs, it can result in cost savings in other links of the supply chain,” explains Sicola.
For many companies, prioritizing modes based on their unique product needs is the primary logistics criteria for selecting a distribution or warehousing site. If a retailer moves product inbound and outbound from its DC via LTL, for example, access to a major highway network constitutes a primary need.
“It is important for companies to consider transportation links as they apply to the nature of their shipments. For outbound shipments from the distribution center, for instance, road is generally the only realistic option because products are being distributed to a wide number of different locations, which is not feasible to achieve on a rail network,” says Simon Lloyd, director of the industrial and logistics team at DTZ, a global real estate firm headquartered in London.
While road access remains the most important transport consideration for warehouse operators, increasing customer service demands and road congestion are forcing prospective tenants to build flexibility into their supply chains with multimodal options.
Proximity to rail and port facilities is a common interest among disruption-wary shippers, and will likely become crucial for stateside consignees looking to leverage better control over inbound shipments to access capacity and further streamline time to market and costs.
If a warehouse network, for example, operates as a hub-and-spoke model, opportunities may exist to transport goods from one warehouse to another via rail. Rail can provide major benefits to companies moving inbound product, particularly from long distances overseas, says Lloyd.
Due to the economies of rail facilities and the lengthy buildings businesses need to accommodate a suitable siding for rail, however, “the general preference among shippers is to locate close to a site that has a rail terminal. These can be operated by a separate party with the benefit of flexibility of scale and use,” he says.
The proximity of sites to ports has merit as well, Lloyd adds.
“Access to ports is becoming vital because the majority of products now are manufactured offshore in low-cost economies such as Eastern Europe and the Far East, and because more than 90 percent of global freight is transported by ship,” he says. “While some companies gain customs and tax benefits from being ‘on port,’ occupiers will generally require a distribution center inland from the port.”
Locations along the A14 corridor in southeastern England, which serves as a major road artery to and from the Port of Felixstowe, are a perfect example, Lloyd says.
Companies, however, are less concerned with locations close to airfreight shipment points, particularly in England, says Lloyd.
“While some freight is transported via air, it tends to be perishable goods. The volume of freight transported into the UK via air, for instance, is very limited,” he explains. Some specialist companies, such as parcel operators, however, do require close proximity to airports when selecting warehouse locations.
Multimodal compatibility is a certain bellwether for further convergence between real estate development and supply chain management strategy. Many global businesses are adamant about possessing myriad transport options in or near their primary distribution facilities to account for supply chain disruptions, access greater capacity, and reduce costs.
U.S. companies have shown growing interest in developing better inland transportation infrastructure and locating warehouses in less-congested areas with multiple transport options to serve as pivot points for redistribution.
Given the fact that the bulk of U.S. ocean freight arrives through Los Angeles and Long Beach, “inland transport modes are becoming more important, and this includes airfreight,” explains Lloyd.
European businesses have had to adjust their supply chain strategies to account for increasing global trade as well. Post-Panamax vessels are increasingly popular, but only a limited number of European ports can now accommodate these ships.
Consequently, break-bulk facilities and short-sea shipping routes are becoming more important. The ports of Rotterdam, Antwerp, Hamburg, and Felixstowe represent gateways to Europe in terms of ocean freight, but the European Union is trying to spread the load by developing additional ports in the Baltic and in southern Europe.
Ultimately, a country or region’s transportation infrastructure and resources not only impacts whether a business might locate a distribution center there, but also dictates the type of distribution strategy and the type of facility it will use to serve its supply chain needs.
In the United States, fixed transportation obstacles—aging infrastructure, insufficient labor, and high fuel costs among others—and ever-fickle consumer buying trends require retailers, in particular, to sharpen their focus on where they locate DCs in relation to new and existing stores, as well as where they source product.
A View From the Retail Side
Identifying where to open new retail outlets is a major priority because they directly serve end-customer demand.
“The most expensive action a retailer can take is to open a facility that doesn’t work. A store that under-performs is lost ROI, lost opportunity, and lost time,” says Rich Hollander, president, CustomerID division, Buxton, a Ft. Worth, Texas-based customer analytics and retail site selection technology company serving retailers such as Casual Male, James Avery Craftsman, The Container Store, and New Balance Shoes, as well as a number of economic development groups and communities.
A poorly located and under-performing DC that serves multiple stores is no bargain either, says Hollander. Some supply chains are sophisticated enough to allow for direct-to-store distribution models where demand signals pull just-in-time inventory in a real-time environment.
The majority of retailers, however, rely on warehousing and distribution facilities that engage, stage, and store product as it moves through the domestic supply chain.
Distribution networks, then, must be constructed with consumer markets, transportation infrastructure, and major source points in mind.
Companies such as Buxton are helping retailers do just that. Buxton helps organizations pinpoint the exact value of every customer for every product at any distance from existing or prospective retail sites.
Buxton’s CustomerID product is a database-driven tool that allows users to proactively examine and compare markets and predict sales potential, then run prospective sites through its proprietary search engine to identify matches.
This functionality enables businesses to drill down on where their demand is located, and make educated decisions about opening new retail locations. Buxton also offers a TenantID tool that uses a similar comparative analysis for communities seeking to bring businesses into their area to pad municipal revenue with retail sales taxes.
“We find out where a company’s retail locations are and aggregate the sales data for those locations,” Hollander explains. “Our database has information on all U.S. households as well as individual purchasing habits. It also has information about other stores, competitors, and gross leasable space, among other data.”
Buxton takes this information and creates models that discern best-performing and worst-performing sites. “This tactical tool makes strategic decision-making successful,” Hollander says.
As a result of tools such as these, retail store site selection is no longer speculative in the sense that businesses now know where their customers are or will be. As retailers are learning, however, the key is determining what types of DC facilities to use, and where to locate them to best serve new and mature markets.
The next progression in Buxton’s solutions suite is to take these analytics and drive them further into the supply chain. The company is working to expand its database to include other factors such as transportation infrastructure and more specific information on DC locations.
Conceivably, if a company knows where its customers are and where store locations should be, and it has empirical data on transportation accessibility, it also has the information to decide where DCs should go and where or how to source product.
“The next step is to tell Retailer A that Market B has the potential for 13 stores, then use this information to determine where DCs should be located and what size they should be,” says Hollander.
Cities are similarly using this information to find out what type of retailers can best serve their areas. By comparing and contrasting cities and their tenants, area groups can discern whether or not a specific retailer may be a good match.
Buxton provides a relational database that can enable businesses and cities to make these strategic decisions—illustrating, for example, where they need to strengthen logistics infrastructure to attract specific types of retailers.
Finding a Long-Term Vision
The company can also determine how big a store’s DC presence is in a specific area to give others a comparative view of existing and potential growth. Buxton’s long-term vision is to expand this facet of analytics so retailers and communities can more accurately locate pockets of strong consumption as well as decide how to tweak their distribution strategies and warehouses to more efficiently match supply to demand.
If companies such as Cushman & Wakefield, DTZ, and Buxton have any say in the matter, retailers will be equally inclined to engage commercial real estate developers for insight into selecting new sites for retail stores and distribution centers.
This may sound counterintuitive in a world where 3PLs have created a niche helping businesses set up their distribution networks and facilitate DC site selection. But the reality today is that real estate companies are feeling pressure to extend their value proposition beyond simply land purchase and development.
Supply chain prudence is becoming ubiquitous—from offshore suppliers to stateside retailers, and now to commercial real estate developers.