Retailing today is undergoing profound and rapid change, as sellers reconfigure and reconcile their brick-and-mortar stores with their online presence. Surviving and thriving through this transition will require integration among communications technology, customer preferences regarding service and delivery, retail and industrial buildings, transportation modes, and logistics and inventory systems.
Professionals in all of the affected industries are working hard to understand how they will need to adapt to this change. Doing so will entail learning about new product types, technologies and systems that might never before have been part of their traditional business.
Online and brick-and-mortar retailers alike have built robust online presences through websites, social media and mobile apps. The ability to research and purchase items using our computers and mobile devices has changed the way we shop.
As Google’s “ZMOT Handbook: Ways to Win Shoppers at the Zero Moment of Truth” observed, the old style of consumer behavior may have looked like a funnel, starting with “awareness” and progressing down to “interest,” “desire” and “action.” But today’s shopper’s multichannel journey looks more like a flight map, as those shoppers flit among TV and the Internet, newspaper ads and catalogs, and brick-and-mortar stores and online retailers as they research and purchase products.
And what a flight it has been. How dramatically have online retail sales grown? Citing statistics from PricewaterhouseCoopers (PwC) and the Internet research firm comScore, a white paper titled “The Future of E-Commerce in the U.S.” from Deutsche Post DHL reported that e-commerce has grown at five times the rate of traditional retailing. Internet Retailer.com expects U.S. online sales to increase 13 percent in 2013, to $262 billion.
According to the U.S. Census Bureau, e-commerce sales accounted for nearly 6 percent of total retail sales in the second quarter of 2013, up from 2 percent in the first quarter of 2004. While this figure may seem minimal, Deloitte projects that by 2030, e-commerce will comprise 30 percent of all retail sales, meaning that in roughly 15 years, e-commerce sales will grow by a factor of five.
This robust growth can be attributed in large part to the advent of tablets and smartphones. According to comScore, mobile commerce (m-commerce) spending reached $4.7 billion in the second quarter of 2013, with a growth rate of 24 percent over the year before. With the expected seasonal surge in the fourth quarter, comScore estimates that m-commerce could surpass $25 billion for the full year. According to research firm Peerless Research Group (PRG), nearly half of the retailers responding to a recent survey expect m-commerce to become the most vital sales channel in the next 24 months.
Blurred Lines in Retail
Last year, brick-and-mortar retailers railed against the practice of “showrooming” — in which shoppers would go to a store to see, feel, touch and experience products, only to turn around and order them online elsewhere, usually at a discount or without paying sales tax. Now, as Steve Jones, managing director of the retail team for Jones Lang LaSalle (JLL) pointed out, “many traditional stores are beginning to embrace and invest in showrooming technology to rival — and even surpass — the advantages of online retailers. For example:
- Home Depot has outfitted each of its approximately 2,000 U.S. stores with First Phones. These Wi-Fi-enabled phones function as inventory trackers, walkie-talkies and cash registers.
- Walmart and Ahold are beginning to install scan-it-yourself technologies in their U.S. stores. Ahold has reported that scan-it shoppers spend an average of about 10 percent more than other customers.
- T-Mobile has installed eye-catching vertical highlight panels featuring monitors with touch screens for customers to get more information on products and try them out.
Many retail store merchants are using their physical space to provide product and inventory information and demonstrations and other events that online retailers can’t offer. Best Buy, for instance, has launched an in-store interactive kiosk program with gaming headset company Turtle Beach. Many other retailers, including Publix, Whole Foods, Macy’s, Home Depot, Pottery Barn, Apple, Lowe’s, Verizon and Bass Pro Shops, offer in-store classes, seminars and other activ-ities directly connected to their products.
Kris Bjorson, international director and head of e-commerce and logistics at JLL, said that gradually more retailers are making the financial commitments to strategize and implement omnichannel solutions; if seven out of 10 retailers were still in the “studying” phase several months ago, now it may be closer to six out of 10, with four in the implementation phase for 2015 to 2017.
David Sisco, retail marketing director for UPS, remarked that “omni-channel is top of mind for virtually every retailer.” The retailers’ goal is to create a seamless experience for shoppers across all channels. This requires best-in-class inventory management systems, so that retailers can ship from distribution centers as well as from their stores. They can “leverage the stores” as a distribution vehicle, he noted, which helps preserve the retailers’ margins. In this realm, he said, Nordstrom, Macy’s and Ann Taylor are far ahead of the curve.
The specialized requirements of today’s huge e-commerce fulfillment centers — including a large, flexible labor force and plenty of parking for workers — make it difficult to squeeze them into existing industrial structures.
Nordstrom, which posted $1.3 billion in online sales last year, expects that by 2020 about half of its total sales will be generated online, according to spokesman Colin Johnson. Nordstrom has embraced e-commerce in several ways, including through its website and mobile apps as well as its acquisition of Wantful.com and HauteLook, plus the inclusion of menswear from formerly e-commerce-only retailer Bonobos in certain stores and online. Nordstrom’s e-commerce fulfillment is conducted from a facility in Cedar Rapids, Iowa. Within the last several years, the retailer has reduced its delivery time by two days on average, although Johnson would not disclose precisely how they’ve achieved that.
“To the customer, it’s just one Nordstrom,” he said. “A great online experience benefits the stores and vice versa.”
Lines are blurring in other ways. Garrick Brown, director of research for Cassidy Turley in northern California and author of the white paper, “The E-Commerce Imperative: Impact on Industrial and Retail Real Estate,” believes that “e-commerce is ultimately about convenience and shopping is about experience.” If that is the case, it should not be surprising that numerous e-tailers are making the leap into brick-and-mortar shops. These are not just temporary pop-up shops. Nor are they simply showrooms to enable shoppers to see, touch, feel and experience representative products. Bjorson stressed that e-tailers are aiming to add another touchpoint with their customers, another place to engage with them and to increase brand awareness and loyalty.
Bonobos is a case in point. Begun as an online-only seller of men’s pants in 2007, it has since expanded to shirts, sweaters and suits. In 2011, it launched Bonobos Guideshops, e-commerce showrooms that deliver personalized, one-to-one service. Shoppers can see the inventory and try on clothes, then order them online while in the store, for delivery later.
In an interview with the trade publication Business of Fashion, Bonobos CEO Andy Dunn explained that the company’s aim is to be great at both clothing and customer service. A survey of 1,000 of its most active customers, asking “Why do you shop Bonobos?” provided the “a-ha moment” for Dunn: the answers boiled down to “fit, fun and service.”
Eventually, Bonobos decided it needed a new kind of store to enable it to deliver great service. The Guideshops range in size from 700 to 1,200 square feet.
“To those who say you don’t sell in your stores,” Dunn said, “I have to correct them. We do actually sell a lot in our stores, we just don’t fulfill in our stores…. It has been astonishing how little our customer cares [about not walking out with a package]. In an e-commerce era, people are conditioned to receiving product through the mail.”
Blurred lines do not stop there. In a brewing clash of the titans, Google and eBay are taking on Amazon’s same-day delivery (see below for sidebar on same-day delivery issues) through their Google Shopping Express and eBay Now services, respectively. These enable shoppers to place orders with nearby retailers via an app or online; a courier then picks up the order from a store and delivers it.
Fulfillment as Competitive Advantage
With so much emphasis on customer service and speedier delivery, it’s clear that best-in-class warehouse/distribution/fulfillment centers are becoming a key competitive advantage for companies dedicated to shipping and delivering products faster and more efficiently. The good news for industrial real estate is that e-commerce is generating demand for new space. Kris Bjorson pointed out that e-commerce now drives 30 to 40 percent of the industrial real estate business.
E-commerce fulfillment centers often use multilevel racking systems and automated forklifts to store and move goods efficiently and quickly.
And these users are not likely to land in redeveloped older facilities. Given achievable rents, and the high cost of developing an older facility, Brown mused, “does it pencil? Maybe not.”
As Jon DeCesare, president of WCL Consulting, pointed out, just a few of the drawbacks of trying to transform an existing building into an efficient multichannel fulfillment center include not enough parking, labor issues and a location too close to residential areas.
Consensus has yet to develop among retailers regarding the best configuration — location, number and size — of distribution centers, so fulfillment solutions are quite literally all over the map. A CBRE Econometric Advisors research report, “Emerging Investment Niches in the Logistics Market,” predicts that “a combination of very large-scale regional or national/international distribution centers and local/urban parcel hubs or delivery centers, is likely to rise in popularity.”
Bjorson estimated that retailers probably are split 50-50 between having a dedicated e-commerce fulfillment center versus combining fulfillment for brick-and-mortar and e-commerce. “It’s an inventory question,” he said, one that technology will help answer. “It’s an evolution,” he said. “Retailers want a liquid inventory.”
Are traditional retailers concerned about mega-expansion among e-tailers like Amazon? Some retailers are using their own brick-and-mortar stores as distribution hubs. Glenn Murphy, CEO of Gap, Inc., appears unfazed. “Some people talk about Amazon with their 100 distribution centers, God bless them. We have 2,600 distribution centers,” Murphy recently told USA Today. The company began shipping online orders from its Banana Republic, Gap and Old Navy stores in 2012.
DeCesare remarked that risk mitigation is a big issue for multi-national retailers. “There are big questions everywhere you look in the supply chain,” he said. “They have to be more careful about picking ports of entry and where to put warehouses.
“Now warehouses are as important as retail stores; it will make or break them,” he went on. For example, what if the labor supply can’t fulfill the volume of business, particularly around the holidays? What if a local community doesn’t want 24/7 operations?
Not only has e-commerce fulfillment made the site selection process more complex than ever; it also has made it imperative for developers and commercial real estate service providers to become far more knowledgeable about a wide range of critical factors. These include labor supply; state by state right-to-work laws; taxes; municipal incentives; transportation costs; how UPS and FedEx charge and ship; and logistics — including inventory management, automated systems and robotics for picking-and-packing.
“It’s more than just working on a warehouse/distribution facility sale,” said Scott Belfer, senior vice president and leader of CBRE’s e-commerce group, which was established in March 2012. “You’re helping plan [the e-tailers’] overall distribution network nationally. It’s definitely a lot more intensive.”
The group’s clients have included Newegg.com, Diapers.com (now owned by Amazon, but operating independently) and Fab.com. One of the challenges of working with e-tailers, Belfer pointed out, is that they often cannot predict their own growth. In the course of one assignment, he explained, one client went from a 25,000-square-foot requirement to 250,000 square feet.
“How do you miss that?” Belfer remarked. His advice to others facing a similar dilemma: “You need to look at a facility’s expansion capabilities.”
He believes that when the Marketplace Fairness Act passes and all 50 states begin collecting sales tax on Internet purchases, e-tailers will move into markets they had avoided because of tax issues, such as Chicago. This already has begun to occur; Amazon is building distribution facilities close to population centers in many states, regardless of whether that means customers in those states will have to start paying sales tax.
What about smaller retailers that don’t yet need a 1 million-square-foot fulfillment center? Many third-party logistics (3PL) companies are happy to serve. An example is Barrett Distribution, which has 2.1 million square feet of warehouse space in 10 markets located in Boston, New Jersey, Baltimore, Memphis and southern California. It has clients in footwear, apparel, consumer electronics and auto parts, and currently provides fulfillment and distribution services for products ranging from garden hose sprayers to pianos.
“Companies don’t want to use 10 different 3PL firms to create a national supply chain solution,” Barrett’s director of customer solutions Mike LaTella remarked. They want one provider with a multiple location footprint to serve their customers coast to coast quickly and efficiently, without the headaches inherent in using several 3PLs. The real bottom-line push, he said, is to get products to customers faster. “It’s no longer okay for packages to sit in a warehouse for 48 hours before they’re sent out,” he said. “If an order comes in during the first half of the day, it goes out the door the same day.” He noted that 90 percent of Barrett’s deliveries get to its client’s customers within two days via small parcel carriers.
Looking Into the Future
Amazon founder Jeff Bezos has famously said that consumers want low prices, fast delivery and vast selection, and this will be as true 10 years from now as it is today. But e-commerce seems to be evolving beyond that. Would it have been predictable even a few years ago that people would buy high-end clothing and home furnishings online? But that is happening, in what Fab.com touts as the third wave of e-commerce, or “emotional commerce.”
Robotics are becoming increasingly common features in e-commerce fulfillment centers.
This upscale e-tailer calls the first wave “commodity commerce,” which has been dominated by Amazon and based on product selection, price and speed. The second wave, dubbed “digital commerce,” is characterized by a battle between Apple, Amazon, Netflix, Google and others involved in the digitization of media. But the third wave, it maintains, centers on non-commodity, high-end purchases: furniture, home accessories, textiles, fashion, art and jewelry — all of which Fab.com sells.
E-commerce evolution certainly will involve a social media component, too. New sites such as Storenvy and Polyvore not only enable those who sign on as members to learn about the latest style and design trends by browsing through curated “collections” of products, but also give them an opportunity to create their own collections of desired items, follow those designers and members they’re interested in and post news about their purchases for those who follow them. They enable sellers to establish online storefronts (much like Etsy.com) and to connect with a vast array of shoppers. Storenvy has opened a 1,700-square-foot pop-up shop at the Crocker Galleria in San Francisco featuring curated collections from its featured sellers that rotate once a month.
Even Pinterest is catching on. This site, which began as a way for people to share groupings of photos and links of anything they deemed noteworthy, is becoming a marketplace too. Now, if you have “pinned” an item, and the seller of that item lowers its price, you’ll be notified and given an opportunity to purchase it.
Meanwhile, back in the brick-and-mortar world, more retailers are likely to use geocoding — global positioning systems that pinpoint your location — to detect when you’ve entered a store and will send coupons to your smartphone if you’ve signed on for that service. If a retailer has data on your previous purchases — or maybe even tracks where you are in the store and where you linger — it will be able to tailor its incentives accordingly. This brave new world may make some shoppers queasy about privacy issues, but others will welcome the attention and the offers.
What does this all mean for commercial real estate professionals? At this point, there are more questions than answers: where should new brick-and-mortar stores be built? What are the right locations for warehouses and distribution centers? What are the optimum sizes for those facilities, and how will goods flow into and out of them in the coming years? One thing, however, is certain: Going forward, new relationships will be forged among retailers and industrial developers.
An Emerging E-Commerce Glossary
Retail and real estate professionals use many different terms and phrases — not always consistently — to refer to various aspects of the evolving world of e-commerce. The following is a “first look” at some of these terms and what they generally are understood to mean today.
E-commerce: electronic commerce; the buying and selling of products or services via electronic systems such as the Internet and other computer networks, typically via laptop and desktop computers but increasingly by mobile devices such as smartphones.
Marketplace Fairness Act: Proposed legislation pending in the U.S. Congress that would grant state governments the authority to require online retailers (“remote sellers”) to collect sales and use taxes — just as those governments already require local retailers to do — even if the online retailers have no physical presence in a state.
M-commerce: mobile commerce; buying and selling via smartphones, tablets and e-readers.
Multichannel retailing: The merging of retail operations in ways that enable retailers and customers to interact and conduct transactions via more than one “channel.” These channels include brick-and-mortar stores, online stores, mobile stores, mobile app stores, direct mail, catalog sales, telephone sales, television sales, etc. Transactions typically include browsing, buying, returns and service.
Omnichannel retailing: An extension of multichannel retailing that focuses on providing customers with a seamless experience through all available channels.
Online retailers: Retailers that sell their products through online channels. The lines separating brick-and-mortar and online retailers (also known as e-tailers) are blurring as both types of retailers extend their reach into multichannel and omnichannel retailing.
S-commerce: social commerce; buying and selling via social networks such as Facebook, Twitter, LinkedIn, etc.
Same-Day Delivery Looms Large
In its quest for retail world domination, Amazon has struck fear into the hearts of e-tailers and traditional retailers alike with its push to provide same-day delivery. Other retailers are strategizing how to follow suit, which has given rise to same-day couriers like Shutl.com, OnTrac.com and Deliv. Walmart has entered the same-day fray in several markets, and the fact that two-thirds of the U.S. population lives within five miles of a Walmart store, as Jon DeCesare has pointed out, could be advantageous to the retailer, in effect turning its 4,000 stores into distribution hubs.
Shopping mall operators also are jumping into the same-day delivery arena. General Growth Properties Inc. is offering same-day delivery service to its customers at four malls in San Francisco, San Jose, Los Angeles and Chicago, through a partnership with Deliv. Shoppers at these malls will be able to have their purchases delivered to their homes or offices; they also can shop online with participating retailers — including jewelry, fashion, footwear and luxury categories — and have those purchases delivered the same day.
Is same-day delivery the MacGuffin of the fulfillment business? Garrick Brown wonders whether at some point Amazon’s same-day services will prove to be a money-losing venture for the company. He believes that the notion of same-day delivery in certain markets is probably more about “next-day, everywhere” and that next-day delivery is “probably all they’ll need in the next couple of years.” In the meantime, he said, chains can meet Amazon head to head with state-of-the-art inventory systems.
A recently released report, “UPS Pulse of the Online Shopper: A Customer Experience Study,” by UPS and comScore indicated that consumers have other delivery priorities in mind besides speed. More important, it found, was flexibility in delivery times and places as well as package tracking capability. Flexibility included the ability to order an item online and pick it up at a store (51 percent do this, mainly to take advantage of free shipping) and the ability to return packages ordered online to a store.
This second annual study, which looked at the state of online retail in the second quarter of 2013, surveyed 3,000 respondents who are frequent online shoppers. The study found that shoppers take shipping costs into consideration almost as much as product price. Among myriad findings: shoppers want free shipping, an estimated delivery date and the ability to learn shipping costs early in the shopping process. They are more risk-averse and look at return policies more than they did a year before.
Kris Bjorson observed that while everyone is striving toward same-day delivery, customers and clients realize there are differences between what you need the same day and what you don’t, e.g., a carton of milk versus a piece of furniture. This challenge is not going away, he said, but predicted that “it will continue to evolve into something manageable and predictable.”
What impacts will these changing consumer preferences have on commercial real estate? Will Amazon and other mega-retailers need more — but smaller — distribution centers located closer to (or within) the major metropolitan areas in which they are aiming to roll out same- and next-day delivery? Will department stores keep open less- profitable stores that they might otherwise have closed, in order to use them as fulfillment centers? The answers are likely to evolve as quickly as e-commerce itself in the next few years.
For more information:
Attend NAIOP’s E.CON – the E-commerce Conference, March 27-28, 2014, at the Hyatt Regency Phoenix; for more information on this conference, visit the conference website.