Quicker Delivery, Happier Customers, Increased Revenue
Supply chain networks were once invisible to customers, but today that couldn't be further from the truth. When customers aren't happy with delivery times, they will take their business to the competition. This can be prevented with a strong and strategic distribution real estate strategy.
Customers who want same-day delivery options shift their loyalty quickly to those brands that provide it. Unfortunately, for many retailers, same-day delivery isn't a realistic promise. At the recent RILA Supply Chain Conference, UPS’s Bob Ganesh questioned whether same-day delivery was actually a scalable model for most retailers, suggesting that existing models make next-day delivery more realistic.
One factor playing a key role in shaping distribution possibilities is real estate. Distribution center size, location and overall network features are all critical to addressing the need for speed and its role in overall revenue creation.
As retailers consider their options, the face of distribution centers is changing. What does the next wave of supply chain real estate look like?
Making the Old New Again
While it may be counterintuitive, surplus stores may actually give some retailers an edge in the delivery speed wars. Reimagining alternative uses for existing space can produce real gains. For example, to build revenue, retailers are eliminating e-commerce shipping costs and giving consumers control over delivery time by using physical stores as fulfillment centers. Infrastructure has been developed to expedite delivery, including installing lockers for secure pickup, creating zones for curbside pickup, and dedicating salespeople to facilitate delivery.
Inventory levels in retail stores are thinning as e-commerce capture more sales. Instead of downsizing, which may prove challenging and costly with existing lease agreements, dead space may be more productive supporting distribution and ship-from-store delivery strategies. In fact, we at Jones Lang LaSalle (JLL) believe that about 30 percent of a retail store’s footprint will be converted to manage e-commerce purchases in the near future. Renovations such as adding dock doors or a new egress in the back might be necessary to maximize distribution possibilities, but the return on investment can be well worth it.
Dark stores — i.e., underperforming stores that have been converted to small local distribution locations — offer another way to rethink space on a larger scale. The strategic location of dark stores allows the retailer to position goods near customers to fulfill online purchases with delivery in a shorter time frame (even same day) than their closest distribution hubs. In this case, an entire facility that would otherwise serve as a conventional retail store is instead closed to the public and used strictly as a fulfillment center.
Replicating More on a Smaller Scale
Vast warehouse spaces normally come to mind when thinking about class A retail distribution centers. Initially, the trend was to build million-square-foot warehouses in states that didn’t charge online sales tax. Now, these big-box warehouses are being built near the largest population centers and transportation hubs, focusing on driving revenue by delivering more rapidly, thus increasing customer loyalty.
Soon, we’ll see smaller scale 500,000-square-foot to 750,000-square-foot distribution centers pop up more frequently in second-tier markets like Seattle and Phoenix to help shorten delivery times. Atlanta, which has the second most active construction market in the nation, is already becoming a hotbed for such speculative warehouse construction.
Likewise, Indianapolis, another growing secondary market, recently saw a major retailer build a fulfillment center at a site with rail connections to Canada’s Port of Prince Rupert, an alternative to the congested West Coast seaports. Aside from the benefit of moving distribution centers closer to end customers, secondary markets boast an attractive cost advantage to the more expensive real estate markets near major ports.
Speed You Can Afford
As supply chains are continually re-examined to push the envelope of efficiency and speed, it’s critical to consider the profitability of speed. In some cases, significant real estate investments may not be worthwhile. What expectations do consumers actually have for the brand? Recent research indicates that free shipping more often trumps the timing of a delivery, with 83 percent of consumers willing to wait an additional two days for a delivery if shipping is free.
Customer preferences are constantly changing and must be examined to address new dynamics. Factoring these elements into real estate decisions is essential to determining the most profitable choice, whether it’s reconfiguring store space or building smaller distribution centers in more markets. Whether it’s same day or next day, delivery speed is becoming an increasingly important competitive differentiator that's core to the customer experience.
Kris Bjorson is international director, head of retail/e-commerce distribution, at JLL. With a focus on maximizing business results for corporations, Kris also founded Supply Chain and Logistics Solutions, which integrates supply chain strategy through real estate implementation.
