3 ways retail warehousing impacts profitability

3 ways retail warehousing impacts profitability

Lauren Koppelman Last Updated: August 28th, 2020

With more brick-and-mortar stores shutting their doors than ever before and demand for warehouse space on the rise, retail warehousing creates a profitable opportunity for many companies. Not only does retail warehousing enable companies to bolster regional distribution efforts and reduce last-mile delivery challenges, but the repurposing of prime real estate space is a boost to the economy, as well. In this post, we’ll discuss the trends contributing to the retail warehousing trend and three ways retail warehousing impacts profitability.

eCommerce growth and the impacts of COVID-19

3 ways retail warehousing impacts profitability: eCommerce growth and the impacts of COVID-19

In 2019, consumers spent $601.75 billion with U.S. eCommerce retailers, marking 14.9% growth compared to the $523.64 billion spent in 2018. The COVID-19 pandemic has interrupted global supply chains and caused massive shifts in demand across product categories. According to Visual Capitalist, eCommerce demand for disposable gloves grew by a whopping 670% in March 2020 compared to March 2019, while demand for bread machines grew by 652% over the same period. The other fastest-growing eCommerce product categories as of March 2020 (compared to March 2019) include:

  • Cough medicine: 535%
  • Soups: 397%
  • Rice & dried grains: 386%
  • Packaged foods: 377%
  • Fruit cups: 326%
  • Weights: 307%
  • Milk & cream: 279%
  • Dish washing supplies: 275%
  • Toilet paper: 190%
  • Fitness goods: 170%
  • Vitamins: 166%
  • Dog food: 159%
  • Pain relievers: 99%

While the permanent effects on eCommerce vs. brick-and-mortar shopping as a result of the widespread pandemic stay-at-home orders remains to be seen, it’s likely that at least some consumers will continue to take advantage of online shopping for essentials like groceries and toiletries. Also likely is a return to close-to-normal eCommerce demand for non-essentials like clothing and jewelry as the economy recovers.

While COVID-19 has had a significant impact on eCommerce demand, eCommerce as a whole has grown year-over-year for more than a decade, and brick-and-mortar retailers have been feeling the heat from the shift to online shopping for several years. In fact, more than 9,300 stores closed their doors for good in 2019, a 60% increase over the 5,844 stores that closed in 2018. According to Forbes, an analysis from investment bank UBS found that with every 1% increase in eCommerce penetration (currently at 16% of total retail market share), an estimated 8,000 to 8,500 stores will need to close. With online retail penetration projected to reach 25% by 2026, that means 75,000 stores could be forced out of business by that same year.

Limited available warehouse space poses challenges

At the same time, the available warehouse space for the logistics sector is tight, with just 7.3% of all warehouse space available in the first quarter of 2020, according to Statista. According to the Journal of Commerce (JOC), “Retailers, 3PLs, and manufacturers in 2019 were on track to occupy 200 million square feet of industrial property, the sixth consecutive year that level was achieved and the longest period of such sustained demand growth on record, according to the Q3 2019 MarketBeat US Industrial report published by Cushman & Wakefield.” In 2020, CBRE expects “more renewal activity and fewer leases available for new space.”

In terms of rent increases, smaller properties – those with less than 120,000 square feet – are leading the market, driven by an expansion of same-day and next-day delivery services by both brick-and-mortar and online retailers. Companies strive to balance transportation costs with the costs of real estate and labor. Logistics spaces located in more suburban areas often offer lower rental rates and labor costs, but higher transportation costs. Companies like shipping providers who handle a large volume of last-mile deliveries may opt to pay higher labor and rent costs to benefit from lower transportation costs and the benefit of a better position for meeting the demand for same-day and next-day deliveries. Likewise, eCommerce companies find facilities located in urban areas more appealing and are driving up rents in these areas, but primarily for smaller facilities.

3 benefits of retail warehousing for profitability

3 benefits of retail warehousing for profitability

Enter retail warehousing: the repurposing of vacant retail spaces into warehouse space. With brick-and-mortar retailers closing their doors, smart companies are leveraging this prime real estate to gain much-needed warehouse capacity in ideal locations. Below, we’ll discuss three ways retail warehousing impacts profitability.

Retail warehousing takes advantage of prime real estate space

Retail centers are typically situated in prime locations where they can be accessed by as many customers as possible. Being in such locations sometimes pays off. Other times, though, it doesn’t. As mentioned previously, the eCommerce boom ushered the shutdown of many stores, and property owners struggled to manage the costs of maintaining vacant properties. In some cases, real estate prices for these properties can drop to rates much lower than those of traditional industrial-type assets.

Retail centers have multiple innately attractive qualities. There is, again, their prime location. They are accessible. They have a sizable space, backend docks, ample parking, high ceilings and easy access for trucks, among other features. In other words, converting a vacant retail location into warehouse space is often less costly compared to building new industrial space from the ground-up, and in many cases, companies can lease or purchase these properties at an affordable cost – particularly for properties that have been vacant for years, leaving property owners anxious to sell.

Retail warehousing helps meet the growing demands of eCommerce

Amazon Prime’s two-day delivery promise has shifted consumer expectations. According to Clutch, prior to the COVID-19 pandemic, 48% of shoppers reported that they typically receive packages within two to three days, and 5% of online shoppers said they typically received packages within one day. Among members of Amazon Prime, 31% said they expect delivery within three days, compared to just 20% of non-Prime members. In a survey of 2,500 U.S. consumers, Convey found that 18.7% of consumers surveyed cited speed as the most important factor related to shipping, and 28.6% said they’d be more likely to place an order that would arrive within a week. What’s more, 72.7% of consumers are unlikely to do business with a company again following a poor delivery experience.

Smaller eCommerce retailers strive to keep pace with demand to compete with giants like Amazon and Walmart, but last-mile delivery is a challenge. Retail warehousing enables eCommerce retailers to strengthen their distribution networks with strategically located warehouse space near busy intersections or highway interchanges that can help to reduce transportation costs and speed delivery.

Retail warehousing supports omnichannel fulfillment

In Convey’s survey, nearly eight out of ten (79.3%) respondents said that free two-day shipping is important, while 30.8% of respondents said that in-store pickup options are important. Thanks to prime real estate locations that were once home to brick-and-mortar retailers, companies can offer a greater variety of delivery options, including on-site pickup, with the proper building configuration from a retail warehouse.

Companies can also move their merchandise closer to their consumers and to brick-and-mortar retail locations with a network of smaller retail warehouses in strategic locations. Retail warehouses in proximity to high-traffic brick-and-mortar locations makes it easier and faster to transfer products to customer-facing storefronts to support in-store pickup options.

Leveraging intelligent automation solutions for retail warehousing

Leveraging intelligent automation solutions for retail warehousing

Faster and more reliable delivery, coupled with seamless omnichannel shopping experiences, drives customer satisfaction, enabling companies to retain existing customers and attract new business. Leveraging technology such as collaborative mobile robots enables operators to get retail warehouse spaces up and running in less time, as well. Collaborative mobile robots are faster and less costly to implement compared to bulky, expensive conveyor systems that may not be practical for former retail locations, which are often smaller compared to traditional warehouse spaces.

A flexible automation solution like collaborative mobile robots require no permanent infrastructure changes and can be scaled up or down to accommodate shifts in demand and adapt to changing market conditions. Operators can rent additional units to increase capacity during peak demand, for example, and return them when demand returns to baseline. Alternatively, operator-owned robots can be quickly moved from one warehousing facility to another with no disruption to the site’s daily activity.

Collaborative mobile robots help to speed fulfillment processes, too, giving companies a boost for meeting demand for rapid delivery. Leveraging machine learning and AI to optimize pick routes in real-time and prioritize work based on the current conditions on the warehouse floor, collaborative robots like Chuck by 6 River Systems guide associates through each task to help them minimize walking, stay on-task and work more efficiently.

To learn more about how collaborative mobile robots can benefit retail warehouses, watch our webinar, Optimize Fulfillment with Collaborative Robotic Picking.