After years of turning their backs on distribution centers as grey hulks full of low-paying jobs, more states and cities are knocking on cross-docks with incentives.
Their timing couldn’t be better. Shippers are increasingly reworking their distribution centers to take into account the growth of Internet retailing, near-sourcing and rising transportation costs, transportation and industrial real estate analysts say.
Retailers “play the states against each other to see what kind of package (of incentives) they will get,” said Charles W. Clowdis Jr., managing director of transportation consulting at IHS Global Insight.
The incentives won’t attract a distribution center unless the shipper sees benefits in the site, but the government assistance can make the difference between two equally attractive locations, Clowdis said. More states are offering to facilitate capital investment loans and train workers, rather than providing tax breaks for jobs created, the go-to incentive.
That’s because many of the jobs created at the distribution center don’t pay enough to classify for high-paying incentives. And cash-strapped states are reluctant to forgo any potential property tax revenue, especially as voters are critical of awarding incentives in general.
As distribution centers become more heavily automated, the amount of jobs needed at the facilities decrease, but the salaries tend to rise, making the jobs more attractive to economic development agencies. The added capital costs for machinery also allow agencies to tap some of the same incentives available to manufacturers.
Aside from the ongoing debate about whether incentives are worth the cost, states must decide whether attracting e-commerce companies is worth sacrificing revenue from retail sales. New Jersey’s unwillingness to give Amazon.com a 20-month tax holiday might have helped pushed the online retailer to sign a deal with neighboring Delaware for a 1.2 million-square-foot distribution center.
Earlier this month, Amazon announced plans to build a $90 million in Middletown, Del., after the state offered a roughly $8.5 million incentive package. Amazon said it is still interested in opening two distribution centers in New Jersey if a tax holiday is granted.
Amazon added 17 large distribution centers in the U.S. last year, and the company plans to add more this year near population centers as it attempts to shorten two-day delivery. James Atkinson, vice president of the logistics practice group for ProVenture, said the majority of his projects were port-related between 2006 and 2010, but now most are for regional and national distribution, particularly for e-commerce.
“Traditionally, e-commerce and bricks-and-mortar distribution were coupled together, but now (retailers) are increasingly breaking them up,” he said.
Yennessee, Texas, Ohio, Indiana and Nevada have aggressively tapped this boom, Atkinson noted. Aside from Ohio, they are all right-to-work states, and the Buckeye State is on track to join them. Their emergence as distribution center players signals a shift in the industry from attracting facilities to serve ports; South Carolina, Virginia and Georgia have had success in that area.
Companies, especially e-commerce retailers, are reworking their networks to provide faster delivery and cut transportation costs, said Tim Feemster, senior vice president and director of global logistics for Grubb & Ellis. Instead of operating a 1 million-square-foot distribution center near a major city, companies are opting to open two or three smaller facilities.
“The e-net clients are the ones who are really looking at it,” Feemster said. “Free ground shipping has been ingrained in consumers’ habits, and (shippers) are realizing how much that will cost as fuel goes up.”
Diesel prices across the United States hit their highest point in some three months last week, pushing up 8.7 cents a gallon on average nationally and clearing $4 a gallon on the East Coast and the West Coast. The price is some 11 percent higher than it was at this time last year and it promises to go higher, with a barrel of crude fetching more than $105 last week amid ongoing conflicts between Iran and the West.
The realigning of distribution networks to include more regional distribution centers also fits well into the shift of manufacturing from Asia to the U.S. and Mexico. Because transit time is reduced, companies can ship goods from the U.S. and Mexico directly to their regional distribution centers.
Count on economic development advocates to pitch those distribution centers as part of the U.S. strategy to regain its manufacturing might. A slowly recovering economy can do wonders for the appeal of those sprawling warehouses outside of town.