Supply Chain Commentary: How Amazon’s Acquisition of Whole Foods Will Disrupt Industrial Real Estate

Demand for warehouse space soared to a new high in 2016, leading to lower vacancies and higher rents. The upsurge shows no signs of abating.

This isn’t surprising. It’s simply a marker of the ongoing transformation of the industrial real estate market that’s occurred over the past 10 years.

During this period, the unrelenting expansion of e-commerce has put downward pressure on retail footprints and spread industrial ones. One-million-square-foot distribution facilities, once a rarity, are now commonplace. One-time retail sites are being adaptively repurposed into distribution points to meet growing needs.

Now, Amazon and Whole Foods are merging.

Exactly how the merger will manifest is anyone’s guess. But we do know that Whole Foods’ 460+ centrally located stores will augment Amazon’s physical infrastructure and allow it to use the stores as distribution centers.

In return, Amazon’s targeted transaction data, technological expertise, and logistical prowess catapult Whole Foods into the online realm and suggest a new level of convenience for its mostly affluent, localized customers.

What impact could the merger have on industrial real estate?

  • There’s speculation about whether the Whole Foods distribution network will be retained, evolved, and allowed to co-exist with Amazon’s own. Or whether it will be replaced. If the former, Whole Foods’ third-party suppliers will undergo development—possibly upsizing, possibly downsizing, along with reengineering. Whatever happens, meeting the promise of fast delivery for perishable goods may mean that Amazon will invest in more cold-chain fulfillment real estate.
  • Amazon may move some hard goods from in-store Whole Foods shelves to warehouses, following the industry-wide movement underway to shift inventories upstream from retail and back into the distribution center. This scenario would create a need for additional fulfillment space.
  • But would that space follow the model of today’s ever-larger and often taller distribution centers? Or would it play out in smaller “last-mile” locations dotted around the country, to put products closer to customers?Amazon already utilizes both options, but the exact mix going forward is still to be determined.
  • In urban centers, will Amazon turn to vertical farms to serve a customer base expecting Whole Foods-quality local produce? Disused factories and warehouses are already being developed as space-efficient means of producing fresh food within dense populations. Although the farms can be costly, Amazon has proven it invests for the long run and has the deep pockets to afford it.

These are only examples of any number of possibilities. But they illustrate the need to be knowledgeable and prepared for the coming impact on the industrial landscape, as Amazon and Whole Foods move forward—and likely to a location near you.

The “Amazonification of customer expectations,” a phrase coined by Savills Studley in 2015, warrants a clear strategy and perhaps a rethinking of distribution networks. Now is a good time for companies engaged in e-commerce to evaluate their industrial real estate footprint and determine the right number, location, and configuration of its distribution operations.

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