Retailers: Embrace Logistics to Win in the E-Commerce Era
Retail has been evolving for years now, but mass shutdowns of brick-and-mortar retail locations brought about by COVID-19 has accelerated the process and driven more consumers to online shopping. Now, more than ever, retailers need a new data-driven real estate approach to servicing the new retail paradigm, and this approach will need to include not only traditional retail analytics, but also cutting-edge logistics analytics.
The United States is over-retailed and right-sizing of physical locations can be a healthy, though painful, process for many. What can be certain moving forward is that retailers will need to dramatically rethink their omnichannel real estate strategies. This holiday season, CBRE is predicting that e-commerce sales will increase by 40% from a year ago. That is almost triple the 14% increase we saw in 2019.
Many retailers have already seen sales rise in their e-commerce platforms during the pandemic, though resulting profits have been elusive. Last-mile logistics are costly. Delivery costs of a single package to a single house can negate or minimize profits and, in some cases, even end up costing the retailer. Not offering this service, however, would immediately eliminate a large portion of potential consumers.
This deposits retailers in a quandary: How can they make omnichannel retail available, but not unprofitable?
For decades, when retailers evaluated a location, they did so purely from a brick-and-mortar perspective and based on the strength of the retail trade area. Now, however, they have to layer in the site’s logistics value as well. They should do this for both existing and future stores. Part of the reasoning is that some locations may actually work better as fulfillment centers. If a site has excellent access to the surrounding population and transportation infrastructure, it could be ideal for ship-from-store and online fulfillment to cut down on delivery costs. Drive time and routing are among the biggest costs for delivery. If a location offers the opportunity to cut down on these costs, it can be a serious boon to a retailer’s e-commerce efforts.
DARK STORES. As of July, CBRE was tracking 59 retail-to-industrial conversion projects across the country. It is still a niche play, but one that retailers and e-commerce firms are starting to employ. Physical retailers going this route will have to perform a balancing act that will require weighing these fulfillment centers — or “dark stores” — against a healthy brick-and-mortar operation. As in-store sales tend to be the most profitable avenue for retailers, they will want to double-down on brick-and-mortar when possible.
It may be that the data reveals that stores could be a combination of both — with a smaller traditional retail footprint and a portion dedicated e-commerce fulfillment and shipping. Beyond the site’s logistics and retail data, another determining factor is rents. There is still a considerable delta between healthy retail and distribution rents. In many cases, it will not make sense to convert a brick-and-mortar location, even if it would be ideal for a fulfillment center. The economics simply would not work. We still see this scenario more often than not, but as this current retail cycle plays out and a large swath of real estate is re-priced and underutilized, we will see many of these locations open up to other uses.
Shutting certain stores down will be the correct way to create a more profitable enterprise — not only for sales and cost management, but also for inventory control. Inventory has been climbing with the rise of e-commerce. But the cost to carry the inventory has been climbing as well, because we have become less efficient and productive with its distribution.
The recent changes in our world have retailers pushing for even more inventory, a “safe stock” to be ready for unforeseen events. We believe that there will be more inventory in stores, but not more inventory in more stores. Retailers will have to consolidate into fewer locations and go through the new retail logistics data process to determine what those locations should be — brick and mortar, fulfillment and shipping, or a mix of both.
This best real estate strategy for 21st Century retailers? It will be an omnichannel approach that maximizes in-store sales and achieves more efficient delivery to online buyers. It’s possible, and the companies that figure it out will be the winners.
John Morris is the Executive Managing Director and Leader of CBRE Americas Industrial & Logistics, Retail.