National distributors face ever-growing competition and erosion of margins with the advent of e-commerce, free shipping and returns, and best way to deliver goods “the last mile”.
When comparing distribution centers for major retailers like Target or Wal-Mart, you find that they have a ratio of 40-80 retail centers per distribution center. For every distribution center located on the west coast, there are two within the east coast. MWPVL International also shows that major retailers are lowering the ratio of retail square foot to distribution center square feet. This “reduces the net landed cost of the product to the retail shelf by increasing the amount of control that the company has over distribution.” MWPVL further adds, “The fact that Wal-Mart has strategically increased its distribution space relative to its retail store space provides a clear signal to the market that they have found a winning formula. Increasing control over distribution as a means to success is the most powerful lesson that Wal-Mart can teach the rest of the world.”
Most major retailers locate their distribution centers nearest large metropolitan population centers and spread out coverage across the Los Angeles/Long Beach, Seattle/Tacoma, Oakland/Hayward, Chicago, Dallas/Houston, Pennsylvania/New Jersey, and Atlanta areas. In Europe, retailers are utilizing product pick-up locations and collection lockers in an effort to provide convenience to the customer. With the trend towards the younger generation renting their primary residence and the rise of new higher end lifestyle focused apartment communities, developer/investors are having a yard time catering to the onslaught of Amazon boxes flooding their communities front desks.
It is important to focus geographically on each region to optimize the city and county placement of each distribution center. For example in Southern California, is it financially and operationally more feasible to locate in an expensive infill market adjacent to the port complex like Carson, CA or reduce rental expenses 20%+ by going by locating 1-3 hours east into the Inland Empire. Each county and city will have its own economic incentives, for example, cities like Anaheim, Riverside and Vernon own their own utilities and can offer more attractive electricity for cold storage distributors, or Enterprise Zones whereby tax incentives are given on labor and capital expenditures.
Most major retailer’s setup their distribution center locations within Class A property. Class A property characteristics are 32’ warehouse ceiling clearance, a maximum of dock high loading positions, ample truck court dimensions for loading, trailer storage spaces, Early Suppression Fast Response (ESFR) sprinklers, and motion controlled LED warehouse lighting at a minimum, with many newly constructed properties being LEED certified for energy savings. Most distributors focus reverse logistics, where they process returns, out of a few concentrated locations.
Most private companies are closely held corporations that value owning property. They tend to own their headquarters, manufacturing plants and often times their distribution centers once they have established greater than $100 million in revenue. This is often times where a company has grown to a stable enterprise and knows what its long term needs are. Part of the decision to own revolves around the company owners inherent need to contain cost. An owned facility is most likely for capital intensive operations like manufacturing and locations of strategic importance like the corporate headquarters. Owned facilities can also be of strategic importance in high barrier to entry markets like Honolulu. The distribution center is likely the last level of importance when it comes to owning or leasing as size needs change with time. Most astute and well-heeled private company owners will own a distribution center larger than its current needs and will lease out excess space when needed so that they can gain the benefits of ownership without the drawbacks of inflexibility.
Large public companies lease all of their properties that are not critical to their operation. They lease properties because they usually generate higher returns on their capital through the operation of their business, then they can investment in commercial property. Leases shorter than 15 years are not currently capitalized so that corporations do not have to report them on their balance sheet. This is in the process of changing as new FASB regulations recently passed will cause all corporations to start reporting their lease obligations in their financial statements so that investors can gain increased visibility into the organizations financial commitments. This will likely cause the last of the Gross leases to convert to NNN leases so that all the rent obligations can be clarified separate from the property tax, insurance and maintenance expenses for purposes of reporting.
After finalizing location and property type, most occupiers will then focus on optimizing the warehouse layout and reducing operating expenses by focusing on racking layouts, material handling equipment, dock equipment and supply chain optimization. These solutions are most often times created internally or with the help of space planners, architects, supply chain consultants and/or industrial engineers.
A recent report by the US Green Building Council highlights multiple case studies of how companies have become more efficient in selecting LEED certified energy efficient industrial facilities. The study can be found here: https://readymag.com/usgbc/industrial/. There are many case studies of companies with similar challenges that used supply chain and network optimization to reorganize their distribution centers. The studies can be found here: http://www.llamasoft.com/resources/?solution=&media=case-study.