Trend No. 3: E-commerce is not Equitable
One of the things we often overlook about e-commerce is that it’s not equitable. For example, In the United Kingdom, around 96% of the population has made an online purchase according to e-commerce delivery software provider Metapack. But of that potential customer base, 70% of parcel volume goes to just 10% of households in the UK.
If e-commerce retailers need to effectively deliver packages to that 10%, what about the other 90% who will still expect quick shipping in the event they do order something online? It’s a tough balance. The “Amazon Effect” that forever changed consumers to expect next-day delivery categorically complicated e-commerce strategies across the board wherein they now need to design supply chains that can offer this service profitably. Add in a global pandemic where people were afraid to leave home and now e-commerce demand has grown in segments that typically had the lowest e-commerce penetration, like home goods, home improvement and grocery.
When you think about e-commerce and omnichannel fulfillment, they have to grow and shift. Understanding customers and where they live is an ongoing challenge. Logistics network design becomes bespoke.
What does this mean for CRE? Retailers need to understand where those customers are and how they shop—and that not all logistics locations will mean the same thing to different occupiers. As a result, we need to look carefully at how an asset is used when we are buying on the capital markets side to understand the criticality of the site and the head room an occupier might have for rental growth without impacting margin. This is particularly true for last mile where not every city and suburb will be impacted equally.
Trend No. 4: Time Management Alternatives Beyond Last Mile Facilities
Deploying inventory and order picking closer to consumers is necessary to achieving faster order turnaround times, but there are other ways to address time management within the supply chain with less reliance on relatively expensive last mile centers.
The leading e-commerce players in China, Alibaba and JD.com, have built scale by investing heavily in Artificial Intelligence (AI), predictive analytics, warehouse automation and intelligent transport systems. As a result, they have the lowest fulfilment costs in the sector—10-12% of Gross Merchandise Value (GMV)—which compares closely with many brick and mortar retailers. And it works—the share of total retail purchases ordered online External Link in China is now up to an incredible 46%.
What does this mean for CRE? In addition to leveraging technology to lower fulfillment costs, there is a growing synergy between warehouse and retail locations, pushing volume through stores. The back room of many brick-and-mortar retail locations are in essence being used as fulfilment hubs, shipping products directly from the showroom floor to consumers. This saves time and money because products can go from the warehouse in palettes and single orders can be packed at the store. Grocery stores provide a good example of this. Grocery has the lowest margins in retail, so adding a stand-alone last mile location often isn’t profitable. It makes much more sense to pick from in-store, which is why we will likely see a rise in grocery stores that have micro fulfillment centers.
Trend No. 5: Increased Focus on Reducing Carbon Emissions
Increasingly more businesses are looking closely at supply chain governance and, more specifically, at their suppliers’ ethical and sustainability practices. The brand impacts on unethical practices can be significant, and consumers and investors are rewarding brands and corporations that are seen to be better for the environment. Since transport is the biggest contributor to carbon emissions in most supply chains—up to 80% of total emissions for consumer products companies External Link—many supply chain managers are now being tasked with reducing carbon within the supply chain. When companies redesign their supply chains for the next five to ten years, they need to be making trade-offs now between costs and carbon to be able to meet aggressive future ESG targets.
What does this mean for CRE? Investors and property owners should have visibility over the decisions their customers are making in relation to their future supply chains and the downstream opportunities that this creates for logistics and industrial real estate. In addition, landlords need to understand how occupiers’ supply chains are impacting the environment and be able to report back. Research shows that where deliberate steps are taken to invest in sustainability features, the premium for these real estate assets can reach up to 21% External Link.
Trend No. 6: Automation and Remote Supply Chain Labor Opportunities
New technologies are not only making it possible to drive a forklift from a remote location, but remote truck driving is being explored, too. Considering an estimated 80-85% External Link of fulfillment warehouses in the U.S. have not automated any processes, this type of automation could open up many remote supply chain labor opportunities, which could be a huge win in the war for industrial talent.
The opportunity goes beyond the U.S., too. For example, only 10% of warehouses in the U.K. are utilizing high levels of automation according to a logistics study Cushman & Wakefield conducted. Labor arbitrage and restrictions in global flows of labor due to the pandemic are causing significant wage inflation, leading to a stronger case for automation there, too.
Asia’s rate of growth in automation, however, is well ahead of the other regions (see visual below). With growing consumer demands and the cost of automation reducing, automation adoption rates are strong in response to managing increasing labor costs as well as ensuring the speed, accuracy and efficiency necessary to satisfy customers and scale as volumes grow.
What does this mean for CRE? The ramifications of remote warehouse work on industrial real estate could be substantial. The war for industrial talent is fierce. Employing a smaller labor force within warehouse locations would mean having to identify and hire less talent while also freeing up more space within those locations. The automation wouldn’t replace all employees, of course, but would instead enable them to perform other more strategic skills, which would require additional training. The capital expenditures for this automation, however, would be significant.