Under Development - What E-Retailers Need in New Distribution Center Locations

Winter 2012

As e-commerce retailers expand their businesses, and traditional brick-and-mortar stores offer a larger part of their products online, both are carefully selecting locations for new e-commerce distribution centers (DCs) that will reduce operating costs while enhancing customer service.

Curtis Spencer, president, IMS Worldwide, Inc., who spoke at the NAIOP Development ‘12 conference in Washington, D.C., identified nine criteria that retailers take into account when selecting a new DC location.

1. Reliable workforce/available surge workforce:
A reliable workforce is number one when it comes to locating an e-commerce DC, according to Spencer. “It is amazing how many people work in the fulfillment center of an e-commerce DC. This is because they are packing one order at a time. It is not unusual for a one-million-square-foot pure e-commerce facility to have a typical staff requirement of between 800 and 1,200 workers per shift during normal hours. During peak hours, a third shift of personnel would be added to accommodate the surge in order processing,” he noted.
In addition to a year-round reliable workforce, the e-commerce DC also needs a large “surge” labor force to work at specific times of the year, such as Christmas and Mother’s Day. Spencer consulted on Target’s new facility in Tucson, Ariz., and noted a workforce of 300 to 800 was needed by the retailer, depending on the time of year. What made Tucson attractive to Target, in addition to a truck hub and easy access to intermodal coming from the West, was the large student-surge labor force available from the University of Arizona.

2. Nearby UPS/FedEx truck hubs: A traditional retail DC may ship 100 truckloads of merchandise to 200 stores over the course of a week, compared to an e-commerce DC which may ship 5,000 items a day to homes and businesses. “It is a different dynamic; therefore, an e-commerce DC needs to be close to UPS and FedEx truck hubs. Locating a distribution facility within 30 minutes to one hour of a major truck hub is sufficient,” said Spencer.

3. Circumvention of Internet sales tax: E-commerce DCs are likely to locate in states that do not tax e-commerce sales. “The state sales tax nexus is a big issue today. For five years, we have been hearing that there will be a national sales tax or that there will be an agreement among states to eliminate the sales tax holiday for e-commerce. Here it is almost 2013 and nothing has been done on this issue,” Spencer commented. As states are increasingly pressed to raise more money to balance budgets, this could change quickly.

4. Right-to-work states: Retailers want their e-commerce DCs in a right-to-work state, according to Spencer, because they cannot afford to pay a high hourly wage for employees to pick and pack. He suggested that neither e-commerce DCs nor major truck hubs will locate in union states.

5. Proximity to major markets: Proximity to major markets is critical, especially as major retailers like Walmart have begun promoting same-day delivery.

6. Inexpensive land: The e-commerce distribution facility needs considerably more land than the traditional DC to accommodate parking for the surge labor force, noted Spencer. Where the typical facility may require parking for 140 cars and 175 trucks, the e-commerce DC needs parking for 1,000 cars and 400 trucks.

7. Real property and/or other tax incentives:
Tax incentives are crucial to virtually all site selection decisions today, but they are particularly necessary for e-commerce DCs seeking to keep all costs low, said Spencer.

8. Robust Foreign Trade Zone (FTZ) programs:
States that offer strong FTZ programs are attracting e-commerce DCs because the program allows federal taxes and fees to be reduced. However, FTZ programs vary by state. For example, Arizona provides a 75 percent reduction in real property whereas Texas provides approximately a three to four percent reduction on imported inventory.

9. “Zone skipping” availability to major markets:
Locations that permit “zone skipping,” resulting in large dollar savings on shipping for the e-commerce retailer, are popular.

“Zone skipping” is used for ground shipments only and reduces shipping costs for large volume ground shippers. Typically, a truck carrier is used to move packages in bulk from a distribution facility to a select shipping point, from there the parcel carrier delivers the packages to local customers as a local delivery. By “skipping” over the intermediate zones between the distribution centers and the local delivery locations, the shipments are counted as a local delivery. This means the shipper pays just local delivery charges plus aggregated costs to move the goods to the local delivery center.

Spencer cited a “zone skipping” example of a retailer with e-commerce DCs in California and Georgia. The Georgia DC serves customers in the upper Midwest, and all packages from Georgia can be shipped via UPS. However, because UPS charges by the zone, if that same retailer trucks the packages to the Chicago UPS hub, costs are reduced. “If a single package crosses three zones going from Georgia to Chicago, that shipping charge may be $28 per unit. If packages are combined and delivered by truck to Chicago, the retailer may pay only $5 per unit to get them to the UPS truck hub. From that point, the retailer is paying UPS for one zone,” said Spencer.

To read the full research report, go to www.naiop.org/borderlessmarketplace.