Service Providers See Opportunity in 'Omnichanneling' Online and Physical Store Sales
With online competitors such as Amazon.com grabbing an ever-larger share of total shopping sales, traditional retailers have been forced to re-evaluate how they merchandise their products -- and also how they get them into the hands of consumers.
Retailers deeply invested in networks of bricks-and-mortar distribution centers are re-evaluating and in some cases making major changes to their hub-and-spoke supply chains in the face of sophisticated and highly automated next-day or even same-day fulfillment and delivery sought by nimble online-only merchants.
Such adjustments may be crucial as retailers move to adopt omnichanneling, the system of marketing and selling products to shoppers on multiple platforms, including web sites, mobile devices, television and radio, direct mail and even social media, in addition to physical storefronts.
The rapidly changing retail-supply landscape is creating opportunities for real estate service providers. Case in point is a new joint venture launched by Jeff Binswanger, president of the Philadelphia-based Binswanger, and David Birnbrey, co-CEO of The Shopping Center Group.
"People are shopping three different ways, with each one both complimentary and in conflict with the other," Birnbrey said. "The retailer doesn’t care where consumers bought the product; they just care that they bought their product. One of the legacies of the recession is the fact that stores found themselves with untenable inventory levels."
Some chains are expanding their ability to fulfill online orders at individual store locations. Earlier this year, Macy's said it would add online fulfillment at nearly 200 stores, for a total of 500 of its nearly 850 Macy's and Bloomingdale's stores, by the end of 2013.
"Stores have had to repurpose themselves as distribution centers. There are three elements to a retail store - the sale, the delivery and the returns - and each one has to take into account where the customer lives," Birnbrey said.
The new venture, called The Retail Logistics Group, advises store chains on the most effective site selection strategies for distribution and fulfillment centers, which now in many cases serve as both suppliers to physical storefronts as well as virtual points-of-sale for e-commerce orders.
"There are retail experts and there are distribution experts, but nobody has been able to put those two specialties together," Binswanger President Jeff Binswanger tells CoStar. "It's now more important than ever that these facilities be located near consumers. That's not the typical industrial site selection strategy. We’re trying to bring a different platform, technology and knowledge that’s not in the market."
One retailer that the venture is working with is up-and-coming apparel company Tory Birch, which recently expanded to 80 freestanding stores across the U.S. and is trying to determine where to locate future outlets. The retailer currently leases warehouse space
in Northern New Jersey and needs to evaluate its future distribution needs and locations.
Retailers have traditionally responded to growing demand by opening more and more stores based on where retail consultants say they can sell the most product based on existing demographics.
"Most companies in the past have tried to figure out their supply chain after they put their store model in place and open stores," said Jim Medbery, senior vice president and head of logistics and special operations for Binswanger. "We’re helping them to marry those evaluation processes up front so it’s not an afterthought, and then it can be done much more efficiently."
While the era of online commerce has changed the shape of supply chains, retailers typically continue the inefficient practice of operating separate warehouses and fulfillment facilities, Medbery noted.
"A distribution center set up to service online orders is totally different versus a DC set up to handle [physical] store supply. Product is sorted and packaged differently and the materials handling systems are totally different," Medbery said.
That makes it difficult for retailers to run both operations under the same warehouse roof. While most store orders are shipped out on pallets and truckloads, most e-orders have to be assembled and packed separately, he said.
The Retail Logistics Group aims to help clients integrate the two functions so they have less real estate square footage to manage, resulting in cost efficiencies and overhead reductions to the retailer's bottom line.
The competition from online sellers is formidable and most retail store operators are playing catch up. Through a massive construction program over the last two years, Amazon now operates 29 distribution and fulfillment centers and is planning to open another 20 in the next year. With an average footprint of 1.2 million square feet, each of the centers contains about $50 million in inventory management and material handling equipment, Medbery said.
As online sellers have become the fastest-growing segment of warehouse occupiers, the world's largest developers and owners of distribution space have taken notice. Mike Yamada, president of Prologis Japan, recently noted at a Prologis investor meeting that of the space leased this year in Japan by Prologis, 60% was to e-commerce companies.
Prologis anticipates high demand in the U.S. as well. The San Francisco-based industrial real estate giant has secured approvals from the city of Tracy east of the Bay Area to help develop Cordes Ranch into what may become California's largest business park, with entitlements for up to 30 million square feet of warehouse and other commercial space.
Part of that expected demand is driven by traditional retailers that just a couple years ago said they wouldn’t need any additional e-commerce distribution space. Nordstrom, for example, previously said its single facility in Iowa had abundant capacity -- but now the chain is in the market looking for new e-commerce space, said Ki Bin Kim, REIT analyst for SunTrust, in a note to investors.
"Selling merchandise from $3 to $4 rent per square foot of space -- and stacked higher -- has much better economics versus [the cost of] more than $60 a square foot at a high-end mall," Kim said.