Urban Distribution Networks – The Last Mile is a New Frontier
This is Part 5 of a multipart series, please see past posts for context – Part 1, 2, 3 and 4.
Your Neighborhood Warehouse
Amazon announced this month that it will advance its standard “two-day” free shipping plan to a “one-day” shipping plan for Amazon Prime subscribers. While the reduction of a single day may not sound like a lot on a grand scale, it is a major reduction in time the e-commerce giant has to get merchandise to a shopper’s door after a “buy it now” click has been registered. Accomplishing this goal will not be easy or cheap, Forbes reports that Amazon will spend $800 million in Q2 alone as part of this initiative with more spending to come. Why is it so expensive and difficult? Because it means that more and more goods must be pre-positioned near everyone’s’ home if they are to execute this plan in any cost feasible manner. This means we all must have a neighborhood amazon warehouse, and that means a lot of warehouse leasing and construction must take place in the years to come.
Urban Last Mile Distribution – New Models on the Horizon
Historically, warehouse districts sat in parts of the city that were well connected to highways, railroads, and sometimes airports; this meant that they were often isolated from the core center of the city and away from the well-to-do residential neighborhoods. Unfortunately, this is not close to optimal for one-day or even same day delivery in many dense, urbanized communities. The solution will be new models of warehouse and distribution space. Multi-story warehouses, long popular in Asia, are coming to cities like New York and Seattle where vertical density is a solution to high land costs and slow, congested roads. It is likely that small-scale distribution and sort facilities will open up in locations close to residences that never had significant industrial activity. These facilities may appear in old factories and loft-type spaces, or they may even be created out of re-purposed retail space and vacant land. In reality, it is the retailers’ foot print and location choice model that will now dictate where distribution facilities are needed.
Retailers’ Response – Amazon is Just a First Mover
Amazon is throwing down the preverbal gauntlet by moving to one-day delivery; do not expect its retail competitors, both online only and physical store, to sit back idly. Competitors will likely make several moves. First, some will match the plan and thus require their own urban distribution network, increasing overall demand for last-mile industrial space. Second, retailers with existing footprints in prime locations nationwide can explore delivery options that essentially allows a physical store to simultaneously serve as a distribution warehouse. It is in this dimension that some retailers can reclaim an advantage; but, competition will be fierce as Amazon has a commanding lead in the tech and brand presence of home delivery of basic goods. Finally, expect Amazon to take a larger physical store front presence; even if in the form of pickup lockers and drop-off/pick-up counters; for operational reasons, this is almost a guaranteed reaction in many cities (and the Whole Foods acquisition essentially gives away the strategy).
The Battle of Transportation Costs – Why Rent Cost Isn’t So Important
Real estate professionals think of occupier costs, typically in costs per square foot or similar metric. Logistics and delivery professionals think in terms of cost per delivery, or cost per unit/weight of delivery. In total delivery costs, the portion allocated to warehouse space is relatively minute compared to fuel costs, truck costs, and labor costs; all of which increase as a function of distance and time. Thus, a “very expensive” warehouse rent may actually lower the cost of delivery, sometimes dramatically, if it shortens the distance and time of each delivery. Just think of cost per mile to drive a truck given fuel and wages, if it can be shortened, that is a savings on each and every delivery to leave the facility. This is why urban, in-fill distribution centers are so critical; they are the only hope of making a next-day delivery business model profitable. Amazon is not simply waging a ground war; they are also opening an air war with their own airline and growing set of air hubs (Lakeland was recently announced as a new Amazon Air hub, joining Cincinnati in the network). Air freight is critical as it is one of the primary means of restocking the last-mile distribution network and providing for the timely delivery of unique items that would not be stocked locally. The combination of strategic air delivery and front-line last-mile distribution centers makes Amazon the strong leader; but this is still just one battle in a long war.
The development of urban distribution networks is very much in its infancy today, Amazon is just one competitor in what is likely to be a growing landscape of day-of-delivery option for a range of goods including pharmacy orders and fresh groceries. For the real estate industry, this is a huge opportunity as space will be needed in more and more cities of all sizes nationwide. This will not just occur in traditional “industrial” space, this will become a use for vacant and/or re-purposed retail space and other buildings like underutilized parking garages. The key for any site’s potential will be its proximity to consumers and linkages/access to transit; essentially, industrial site analysis will require retail site analysis skills.
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