Some retailers of bulk items, such as furniture, appliances and other household items deploy a drop ship strategy that is self-operated and use third party logistics firms (3PLs), but in more robust climes, inventory is turning over and sales floors need replenishment. Appliance and furniture retailers typically utilize a “floor model”-only strategy. Using high-tech communication systems, fulfillment distribution centers are instructed to deliver and restock as items are sold. Most of these same retailers lease some additional warehouse space within the retail shell to store high-volume SKUs, such as hand-carried products that have historically sold well and need immediate replenishment. But the additional space is not likely to be enough to reduce centralized warehousing requirements.

Some discount stores, such as the “dollar stores,” are experiencing steady sales volumes for obvious reasons. Customers are leaning on them as they re-engineer their lifestyles and purchasing habits. Many of these discounters sell SKUs of small items, such as toothpaste, shampoo and soap. These goods need to be replenished often, daily perhaps, and the items need to be stored in a favorable location.

“There will always be a need to store goods prior to their ultimate distribution to retailers,” says Jim Maneri, Senior Vice President of Liberty Property Trust, based in Malvern, PA. “However, many of the large retailers have pushed the obligation/burden of storing those goods (as well as the timeframe of ownership) onto the manufacturer. They do this because they can. The effect, of course, is that these retailers need less warehouse space for their goods even though the amount of warehouse space that is ultimately needed in gross terms has not changed.” 

“Other retailers have chosen to adjust their strategies and create more numerous but slightly smaller warehouses that are located closer to their stores,” Maneri explains. By locating their warehouses and stores more closely, they minimize the need to maintain inventory at the retail location, as goods can be quickly restocked from the geographically favorable warehouses. In so doing, they shift the need to store inventory at the store (at $50 per SF) to that of the warehouse (at $4.50 per SF plus transportation).”

Maneri adds that many of the warehouses that are being leased closer to stores have installed automation processes that allow for rapid deployment of inventory to the stores.

-Paul A. Waters, SIOR, CCIM, CRE, FRICS

Based in New York City, Paul Waters, SIOR, CCIM, CRE, FRICS, is Executive Vice President-The Americas at NAI Global, where he is responsible for business development and client relationships among major corporate end users of office and industrial space.

Marc Wulfraat, a transportation industry expert at TranSystems in Montreal, CA, suggests we look at the distribution strategy of Walmart, the world’s largest and most successful retailer, to better understand why retailers will still need distribution centers. “At last count, Walmart’s U.S. network consisted of 147 large-scale distribution centers, comprising flow-through general merchandise facilities, grocery distribution centers, fashion/apparel facilities and dedicated import facilities,” Wulfraat notes. “Walmart’s distribution centers are absolutely massive. The prototype general merchandise distribution center is 1.2 million square feet; the typical grocery distribution center is 880,000 square feet; and its largest import facility in Texas is 4 million square feet. Most of the distribution centers are an average of 125 to 150 miles from the stores—a huge competitive cost advantage compared to retailers who ship from farther away.”

 It is generally accepted that the world’s largest retailer set the stage for warehousing strategies. “It is estimated that Walmart self-distributes 85% of the cost of goods on its retail shelves as compared to less than 50% for its competitors,” Wulfraat says. “While Walmart has contracted with third party logistics providers for specific distribution operations, it owns and operates the vast majority of its 120 million square feet of distribution center space. In simple terms, Walmart’s entire business strategy is based on squeezing out cost across all levels of operations to achieve its low-price competitive advantage. For most retailers, logistics represents one of the largest controllable expenses on the income statement and Walmart’s distribution efficiencies are at the heart of why this company has grown to $405 billion since the first Walton’s five and dime was opened in 1962.”

The need for warehousing is directly related to the type of products sold. Turnover of product SKUs and restocking requirements will ultimately define the warehousing strategy. Calibrated correctly, calculating square footage will be a simple metric exercise. If short-term and long-term distribution strategies are not professionally determined and leveraged against best practices, spikes in demand will create expensive and disruptive challenges to the retailer. 

-Paul A. Waters, SIOR, CCIM, CRE, FRICS

Based in New York City, Paul Waters, SIOR, CCIM, CRE, FRICS, is Executive Vice President-The Americas at NAI Global, where he is responsible for business development and client relationships among major corporate end users of office and industrial space.

As we discuss strategic objectives with clients and review their portfolios to improve occupancy efficiencies, we are hearing common trends consistent with all types of industrial users. Some of the trends and best practices include:

• · Flexibility. Tenants are willing to pay a premium in exchange for the ability to modify or exit a lease down the road. “Quit” clauses, although difficult to obtain, are almost universally sought by large users today.
• · Companies are once again looking at the cost differential of owning vs. leasing their space, particularly those with cash, those run by entrepreneurial CEOs that want to leverage market conditions and those that will continue to think it paramount to own key assets.
• · Industrial users are weighing the cost and efficiency of several small facilities vs. one large facility.
• · Contraction, contraction, contraction.
• · Logistics is king. Drayage/fuel costs will continue to trump real estate costs.
• · Discount and retailers and wholesale clubs whose business has been somewhat stable because of price points are developing models to improve efficiency and maximize profit margins in a highly competitive market. Many are looking to stock less inventory at point of sale. The distribution costs are essentially the same but require smaller loads.
• · From a logistics standpoint, there are two choices—locate the distribution centers closer to the ports or closer to the customers/stores.
• · Some retailers need to locate their distribution centers into major hubs – Chicago, Dallas, Los Angeles, New Jersey – to get product to stores more economically.
• · With significant vacancies in the industrial sector, large occupiers are in an advantageous position to leverage market conditions and secure economically beneficial leases. One of the more interesting things we see occurring in this regard is that tenants are performing credit checks and other due diligence on prospective landlords. Also, companies owning surplus real estate are working closely with state and local economic development authorities on creative solutions to sell these properties.
• · Companies selling surplus real estate are pricing asset improvements, i.e. new dock doors, additional paving, upgraded office space, etc., prior to putting the property on the market.
• · Companies may hold their surplus real estate for two years or longer until the market improves. Instead, of disposing of these assets now they are entertaining short term leases.
• · Due to the credit market, companies are offering short-term seller financing to get transactions closed.
• · The advantage remains squarely on the tenants’ side of the table. In some markets, industrial landlords are executing $0 net effective deals so that NOI stays a little more respectable and debt service and other charters are met until markets conditions spike.

-Paul Waters, CCIM, SIOR, CRE, FRICS

Based in New York City, Paul Waters is Executive Vice President-Brokerage for the Americas region at NAI Global.