Business Trends

E-commerce Evolution — Element 4: Distribution and Fulfillment Centers

File Type: Report, Free Content
Release Date: July 2016
Average Rating:       (0 Ratings)
compensation report cover

(Originally posted March 2014, updated July 2016)

Distribution centers (DCs) typically serve customers who order in quantity or single vendors who warehouse durable goods such as refrigerators and HVAC units for stores downstream. Of late, these DCs are being supplemented and sometimes supplanted by e-commerce fulfillment centers, whose model is well expressed by the phrase “endless aisle.”

Customers increasingly expect not just endless choice, but also instant gratification. It is not enough to carry an item; a vendor has to be able to deliver it quickly, too. E-commerce fulfillment centers will play a key role in meeting this demand. They are geared not to replenishing brick-and-mortar stores but instead to satisfying online orders, often for a single item, which typically are smaller than those for traditional distribution centers. In this work, speed is of the utmost importance. The current wisdom is that anyone wishing to do retail business online must be capable of same-day order fulfillment, which means that multiple sort points have to be built into facility design.

With the growth of e-commerce comes increased demand for large contiguous blocks of industrial space. Currently, there is a pronounced shortage of large blocks of Class A space. Major retailers who operate fulfillment centers requiring more than 500,000 square feet face difficulty in finding existing spaces to meet their needs, requiring new construction of structures that, in addition to being large, have extensive truck and trailer parking and dock facilities, high roofs (allowing for multiple mezzanines), large employee parking lots and expanded facility power systems with backup generators to allow optimum performance at peak times. Most retailers prefer facilities located close to population centers, which provide easy access to both labor force and consumers. But finding sites large enough to accommodate these types of facilities, circulation patterns, employee parking, highway access and proximity to populations can result in higher land costs.

At the same time, demand for medium-sized fulfillment facilities also is expected to increase, as third-party logistics (3PL) providers enable retailers to grow their e-commerce businesses by operating single- and multitenant fulfillment centers throughout the nation. Whether large, medium or small in size, those centers need to be served by top-quality road and railroad networks. Smaller ones can be located in appropriately smaller regional hubs: in Spokane, for example, to serve eastern Washington and northern Idaho, or in Rochester to serve central New York.

Both new construction and retrofitting of existing structures will be needed to accommodate demand. According to Cushman & Wakefield, cutting-edge fulfillment centers — with their higher ceilings, greater building depth, wider column spacing, energy-efficient systems and sustainable materials — can cost three times as much to build as traditional warehouses. With such significant investment at stake, planning for fulfillment centers requires developers and retailers to look even more closely at all matters of location, logistics and zoning codes. Vendors also will consider local and state taxes and the possibility of incentives that can be secured from local and state governments. Larger vendors are in a particularly good position to bargain, since they will be bringing needed jobs to communities in quantity. Home Depot’s e-commerce warehouses are expected to employ about 300 workers apiece, for example, while a recently established Macy’s distribution center in Martinsburg, W. Va., received $17.3 million in tax and other incentives.

Sources: