Growing e-commerce is making prom kings and queens out of markets typically seen as wallflowers compared to port regions.
The key is finding sites with roughly two-day access to large population centers but without the high warehousing rents found in import gateways, such as San Pedro and the New York-New Jersey region. States fitting the description — Arizona, Indiana, Kentucky, Nevada, Ohio, Pennsylvania, Tennessee and Utah — are expected to attract even more fulfillment centers as traditional retailers scramble to catch up with e-commerce trailblazers such as Staples and Amazon.com.
With bricks-and-mortar retail growing anemically, retailers are building their online units. Forest Research expects U.S. e-commerce to expand 10 percent annually to $279 billion by 2015, accounting for 11 percent of total retail sales.
To handle that business, retailers are setting up distribution centers that are smaller than traditional facilities but far more automated, said Cathy Roberson, senior analyst for Transport Intelligence. Many find it’s better to keep their traditional and e-retailing divisions separate, particularly because the latter runs on different engines and delivery expectations.
“Retailers are looking inland,” said James Atkinson, vice president of the logistics practice group for ProVenture, a commercial real estate consultant and broker in Brentwood, Tenn. “If you can hit your target market in one to two days, it doesn’t matter if you’re not on the coast or in a major population center.”
Phoenix, he noted, has attracted the online operations of Amazon.com, Gap and Macy’s, because the area provides access to Southern California without the Inland Empire’s high rents. Sites in Ohio, Indiana, Pennsylvania, Kentucky and Tennessee also can access most of the U.S. population within three days.
E-retailers offering next-day delivery of electronics with a 10 p.m. cutoff often locate near parcel hubs in Memphis, Tenn., and Louisville, Ky., said Larry Shemesh, president and CEO of OPSdesign Consulting. E-retailers that import heavily also may set up warehousing within a free trade zone, even if it’s hundreds of miles from a port.
Opening a DC in more inland locations doesn’t just save e-retailers from costly rent or property taxes. Labor in the Midwest or Southwest, such as Nevada and Arizona, also tends to be cheaper. Large e-commerce companies employ five to 10 times more employees as a traditional DC, and the salaries tend to be higher because the automated facilities require more know-how, according to Jones Lang LaSalle research. That makes finding plentiful, well-suited employees more of a priority than with traditional distribution, as evidenced by home goods retailer CSN’s decision to open an 80,000-square-foot facility in Odgen, Utah, instead of in Boise or Las Vegas.
“A lot of the people who have come to work for us have prior distribution and material handling experiences, so they are ready from the get-go,” said Greg Konicki, CSN’s director of distribution.
CSN recently leased more than 200,000 square feet in Kentucky and Ohio, allowing the company to reach “98 percent of the U.S. population within one or two days,” a Jones Lang LaSalle white paper quoted him as saying.
“For some companies, (avoiding) sales tax is the most important factor,” said Bob Silverman, Jones Lang LaSalle’s senior vice president of supply chain and logistics solutions. With traditional retailers pressuring cash-strapped state governments to recapture lost sales tax revenue, however, such havens are becoming more scarce. Companies without a physical presence in the state can still get a break for the next two years in states such as Indiana and Arizona, but many analysts expect federal legislation to crack down on such havens within the next several years.