The dramatic growth of e-commerce is driving demand for a product that can’t be obtained online — big box e-fulfillment centers.
E-commerce and omnichannel distribution centers are highly specialized and need to be located near population hubs. As e-commerce volumes grow, they’ve become so rare that they have set off a speculative development boom, the first in industrial development since the recession.
In 2012, e-commerce sales totaled $225.5 billion, up 15.8 percent from $194.7 billion in 2011. They continue to account for a larger share of total retail sales, up from 4.7 percent of total sales in 2011 to 5.2 percent in 2012, according to the U.S. Commerce Department.
Excluding goods, such as cars, fuel and food service items, that are not generally sold online, the adjusted e-commerce share of total retail sales was 7.6 percent in 2012, up from 6.8 percent in 2011.
Commerce Department estimates are based on a quarterly survey of more than 11,000 U.S. merchants. Total retail sales, which include e-commerce sales, reached $4.4 trillion in 2012.
E-commerce spending in the United States is projected to reach $262 billion in 2013, a 14 percent increase from 2012, and $370 billion by 2017, accounting for 10 percent of all retail sales, according to Forrester Research.
The phenomenal growth of e-commerce is being driven by an overall increase in consumer comfort with Web shopping and the use of mobile devices such as smartphones and tablets for making purchases. Major retail chains are also investing heavily in omnichannel retail strategies, including fulfillment centers.
In U.S. industrial real estate markets, developers are scrambling to keep up with demand for omnichannel and dedicated e-commerce fulfillment centers. Demand for U.S. industrial distribution centers larger than 300,000 square feet is strong and getting stronger, as the economy improves and e-commerce growth projections remain red hot, according to Jones Lang LaSalle’s October 2013 Big Box Velocity Index.
Nationally, approximately 96.7 million square feet of distribution space is currently under construction, about half of which is speculative, with an average building size of 360,000 square feet. Twelve percent of the current total — and about 30 percent of demand for big boxes — is related to e-commerce.
“Tenants with requirements in excess of 750,000 square feet will not find much choice with existing inventory and will need to pursue either pre-build or built-to-suit opportunities,” noted the JLL index.
Overall, demand for distribution space in the retail industry, including e-commerce, accounts for fully a third of total U.S. demand.
“It’s no surprise that the retail sector comprises more than a third of our growth,” said Craig Meyer, president of industrial, Jones Lang LaSalle. “The demand from e-commerce is shaping the market more than ever before, and is influencing the requirements of both users and the institutional investors who make speculative construction possible.”
As big retail chains seek out scarce big boxes, smaller e-commerce companies are looking for buildings of less than 250,000 square feet in secondary markets. Virtually all of the demand in the e-commerce sector is for built-to-suit or owner-built facilities, which speaks to the highly specialized fulfillment and distribution requirements of e-commerce and omnichannel retailing.
“With e-commerce sales expected to more than double over the next four years, we anticipate increasing demand for highly specialized facilities, Meyer said. “We are seeing a number of major retailers in the market looking for mega-fulfillment centers of more than 2 million square feet near large population centers — especially in the major logistics markets in Pennsylvania or New Jersey, Atlanta, Chicago and, of course, the Inland Empire.”
New-built omnichannel fulfillment centers are differentiated from traditional distribution centers by specialized features including greater building depth, with wider column spacing to accommodate a new generation of warehouse management systems. The facilities have specialized material handling equipment and racking, and a cross-dock configuration.
They also have a higher density of truck and trailer parking, at least 300 trailer stalls and a 185-foot secured truck court, said Kris Bjorson, head of retail/e-commerce distribution, Jones Lang LaSalle.
“A good way to think of truck and trailer density for omnichannel facilities is a three-times multiple over traditional warehouses,” Bjorson said. “The same figure holds for power requirements.”
Clearance height in the new facilities is 36 to 40 feet to accommodate two mezzanine levels for picking and packing. Overall, square footage requirements, including vertical space, are to accommodate high-velocity picking and packing and not for cubic storage of products, as in traditional DCs.
The evolution of e-commerce from a two-to-three-day delivery window to a same-day fulfillment model is driving the new design requirements and the clustering of big box sites near population centers. Retailers operating under a two-to-three-day fulfillment window could locate DCs in secondary Midwest markets and still be within reach of most of the population. That’s no longer the case, which is why big boxes are as scarce as hen’s teeth, and retailers are turning to speculative properties and built-to-suits.
“That’s why demand is red hot for big boxes on the East and West coasts,” Bjorson said. “Retailers have to compete on service as much as price.”
Many big retailers, concerned about critical service factors and faced with huge investment costs, have opted to operate their own facilities rather than entrust them to third-party logistics providers.
“The more mature retailers are taking e-commerce in-house, but new e-commerce sellers rely on third parties,” Bjorson said.
Retailers are also wary of ceding control of what has become their primary growth engine. From 2011 to 2012, Wal-Mart had comparable-store sales growth of 3.3 percent while their Web sales were up 20.3 percent. Macy’s posted a meager one-tenth of a percentage point increase in comparable store sales for the period, and 41.0 percent growth in e-commerce sales.
The Home Depot had a one-tenth increase in comparable store sales versus 16.7 percent for e-commerce. Sears Holdings was −7.5 percent versus 16.5 percent growth, and Lowe’s was one-fifth of a percentage point compared to a resounding 51.5 percent jump in their Web sales.
3PLs are well positioned to cash in on e-commerce. With online sales and SKU inventories growing, companies that lack the resources to keep up are turning to 3PLs to provide the space, technology and labor, said Lonny Warner, head of technology logistics services group for Menlo Worldwide Logistics.
E-commerce is one of several high growth areas for Menlo, which currently has about 2 million square feet of space dedicated to e-fulfillment.
“E-commerce represents a great opportunity for us,” Warner said.
Menlo has accelerated its presence in the e-commerce space in the past few years. The company operates dedicated warehouses for pure e-commerce and omnichannel retailing.
E-commerce centers are designed for velocity and also flexibility, to support large swings in volumes during peak periods while still maintaining significant operational infrastructure. For Menlo, that meant implementing a lean methodology, along with process flows designed for managing high velocities.
In traditional fulfillment models, items are picked, packed, labeled, staged and sent to the dock, where they might sit. Single process flows are used in rapid e-fulfillment to see products through from picking and packing to shipping.
CEVA Logistics operates e-fulfillment centers around the world. All of them are omnichannel and multitenant facilities, which gives customers a clear cost advantage over dedicated facilities, said Sandro Knecht, global consumer and retail sector leader for CEVA.
CEVA is not currently a major player in e-commerce. The company has clients in the consumer electronics, home furnishings, sports equipment and nutritional supplements industries.
Rather than try to manage the entire e-commerce process, CEVA is focused exclusively on the fulfillment side, leaving payment, analytics and front-end functions to partners. The company introduced an e-fulfillment solution in January 2013, with a basic option for small e-commerce companies, a more complex package for large operations and a fully customizable solution.
“We decided we couldn’t cover everything,” Knecht said. “Analytics is a totally different ballgame than e-fulfillment, and a lot of companies struggle to combine them.”
The solutions use a scalable modular approach and have a flexible infrastructure that can be used in any geography. They can manage a range of inbound and outbound fulfillment functions including call centers, visibility, warehousing, transport and delivery, reverse logistics, value-added services and inventory management.
One of CEVA’s customers, Bodybuilding.com, an Internet wholesaler of health supplements, provides one-to-three-day delivery options for more than 10 million customers worldwide.
“CEVA ... has allowed Bodybuilding.com to move quickly into major emerging markets by providing a holistic solution for all of our supply chain needs,” said Michael McCabe, the company’s vice president of operations.
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