Tackling E-commerce's "Last Mile" Warehouse Networks

Winter 2016/2017 Issue
Many e-commerce retailers have found that warehousing space in the “last mile” of the distribution chain can be the most challenging and potentially the most expensive to establish.

Chicago, New Jersey and Los Angeles are well-positioned to lead the nation in establishing state-of-the-art last-mile warehousing networks.

EARLIER THIS year, Amazon found out the hard way that promising same-day delivery of online purchases is not as easy as it sounds. The retail behemoth garnered some unwanted headlines when it was forced to concede it simply did not have the warehousing infrastructure in place to meet its delivery pledge on the South Side of Chicago. Amazon has since announced plans to rectify the problem, but not before there were some calls for congressional investigations into the matter.

Amazon is not the only e-tailer facing the daunting reality that fulfilling ambitious delivery promises — a key battle line in the increasingly competitive retail sector — requires not only cutting-edge logistics, but also a warehousing network capable of meeting demand near major population centers. Many of these retailers have found that warehousing space in the final leg of the distribution chain, or “last mile,” is the most challenging and potentially the most expensive to establish.

The Challenges of Last-mile Fulfillment

Ryan Phillips

Ryan Phillips

In the midst of ballooning e-commerce sales, many online-only retailers are experiencing rapid growth, while traditional brick-and-mortar stores, including many industry giants, are altering their business models to better compete in the online marketplace. One strategy traditional retailers are employing is the “Domino’s Pizza” model, which is centered on speedy home delivery. Target now offers free delivery for purchases over $25, while Wal-Mart is trying to aggressively ramp up its online retailing presence in urban areas, especially after the closure of its smaller-format Wal-Mart Express stores. Among the more ambitious goals being pursued by some retailers with physical storefronts is allowing shoppers to place orders in the store for out-of-stock items that can then be delivered before the shoppers return home.

Brick-and-mortar retailers also are carving out space in their stores for online order pickup (also known as “buy online, pick up in store,” or BOPIS). While most of the items in these orders come from nearby warehouses, some retailers have started using store inventory to fulfill orders placed online, a practice that can facilitate even faster home delivery for customers who live nearby. Rather than going directly to the end user, warehouse inventory is then used to restock store shelves, further justifying the need for a larger warehouse nearby.

The downside to this strategy is that the brick-and-mortar retailer sacrifices in-store inventory to fulfill online orders. While some retailers may take the attitude that “a sale is a sale,” they could potentially be missing out on impulse buys if shelves are empty. Online shoppers are typically more targeted in their searches, while in-store shoppers may purchase items they see on an aisle end cap that was not on their shopping lists.

The real estate footprint of the e-commerce fulfillment process will only grow more complex. Prologis, the country’s largest industrial REIT, estimates that online retail fulfillment centers require three times the square footage of warehouse space as traditional warehouses used to stock stores. (In other words, it takes three times as much industrial space to store and distribute merchandise in small orders to individual purchasers than in bulk to stores.)

The real estate challenge of e-commerce is especially pronounced in large cities, where there are not only high concentrations of online shoppers — many of whom live and work in high-rise towers that are dealing with a deluge of deliveries — but also a limited supply of nearby warehousing space. And while the potential of drone delivery of parcels has garnered a lot of attention, it probably won’t be “coming soon” to dense urban areas, where it faces strict regulatory review.

Finding Suitable Space for Last-mile Fulfillment Centers

The most important features for potential warehousing operations are sufficient clear height ceilings and loading dock infrastructure. As a result, vacant manufacturing buildings often are strong candidates for last-mile fulfillment centers, particularly in dense urban areas with limited land availability. As big-box retailers like Sports Authority and Circuit City go out of business and others look to shrink their real estate footprints, the retail spaces they leave behind may also be viable candidates for warehousing, thanks to their flexible floorplates, ample parking and, in many cases, infill locations.

While these fulfillment centers need not be located in city centers, they must be accessible within 30 minutes or less during non-rush hour periods. Often this means locating along or near major highways. This presents development and redevelopment opportunities for many urban and inner-ring suburban communities that have suffered from deindustrialization and seen little in the way of business investment in recent years. Old buildings in federal Empowerment Zones — distressed areas that offer tax credits and other economic incentives designed to spur investment — may also be prime targets for repurposing as warehouses and fulfillment centers.

Robust Industrial Markets Are Ideal Test Labs

Because of their easily navigable geography, high population density and abundant industrial inventory, markets like Chicago, New Jersey and Los Angeles are well-positioned to lead the nation in establishing state-of-the-art last-mile warehousing networks. In Chicago, major portions of the South and West sides — which have easy highway access, but where there has been little business activity — could benefit. This is especially true as land and construction costs downtown and on the North Side continue to climb. As planned manufacturing districts are amended or abolished and high-rise multifamily development surges, last-mile warehousing needs, particularly downtown, will grow, requiring significant up-front planning with city officials.

New Jersey’s prime location, especially sites along the New Jersey Turnpike, has resulted in unrelenting demand for industrial space there. A distribution center in this market can reach 40 percent of the U.S. population within a day’s drive. Facing historically low vacancy rates and limited land options, developers have turned to other product types with creative redevelopment proposals. Heavy attention is being paid to the replenishment of the state’s Transportation Trust Fund, as smart investment in infrastructure projects is absolutely paramount to achieving shorter delivery times among a large population.

In Greater Los Angeles, especially in the infill markets of Los Angeles and Orange counties, available land is at a premium. Industrial developers are increasingly competing with multifamily, retail and office developers for the same sites. As a result, it is no surprise that industrial developers have looked at redevelopment in existing industrial areas to replace functionally obsolete buildings that may be several decades old. Despite the region’s notoriously congested freeways and major streets, the demand for newer and local population-serving warehouse space will continue to rise as consumers increasingly expect both next-day and same-day delivery.

While every market — and every retailer — faces unique challenges in the growing e-commerce environment, addressing the last mile of the supply chain is becoming crucial for everyone. The winners will no doubt be those who are first to provide effective and efficient solutions.