The UK now conducts over a fifth of retail transactions online which is a five-fold increase in the last 10 years and there is no sign, and no obvious reason, why this trend won’t continue to grow. Amazon recognised this 20 years ago but some of our best-known retail brands didn’t. Consequently, Amazon’s share price is soaring whilst many high-profile retail brands are facing administration. The traditional model of retail on high streets is in rapid decline and e-commerce is where the battleground is now, starting in the warehouse.
Traditional high street retail is now in rapid decline
The high street, in terms of traditional retail shopping, is in rapid decline. People simply don’t buy on the high street like they used to. Whilst major cities may have the necessary footfall to continue to support retailers, provincial towns certainly do not. A walk down many towns’ high streets across the UK bears this out – empty and boarded up shops are commonplace.
The only way high streets will survive is to diversify their offering. They need to attract smaller independent shops, offering products that potentially can’t be sourced online or providing a service that can’t be replicated online. To facilitate this, landlords will need to decrease rents and, in all likelihood, the government will need to work with local authorities to reduce business rates. Both landlords and the government seem a bit slow on the uptake in this respect. In fact, in April business rates are increasing and will reportedly cost the retail sector £3bn more over the next 3 years than the previous 3 years. This seems the wrong direction to be going in when major high street brands such as Toys R Us and Maplin have gone into administration, and other well-known brands such as New Look, Mothercare, Carpetright, Jamie’s Italian, Prezzo and Byron are struggling.
Out of town retail units will be next to go
Whilst high streets are already seeing a sharp decline in footfall, out of town retail units will be next to suffer. Whilst high streets may survive through diversification into independent shops and service orientated retail, that may not be so straightforward in out of town locations. These units tend to be big, affordable by only the major retail brands, and unlikely to be able to match the diversity and ‘personality’ of high streets. Whilst retailers of big-ticket items, such as furniture, may continue to flourish in these types of locations, any retailer selling anything that can be bought on Amazon will struggle. If you think we’re overstating the case here, then consider that both the Toys R Us and Maplin retail models were/are focused on out of town retail units.
These issues aren’t lost on major retailers and they certainly aren’t lost on e-commerce start-ups. The traditional storefront is fading in importance from a brand’s commercial mix but its costs are not. Over the coming years expect to see a rapid divestment, either voluntarily or involuntarily, of major high street units in favour of increased investment into logistics. The high street of the 21st century is online and whilst the user interface, search engine optimisation, branding and so on are all critical to e-commerce success, logistics is the real battleground, starting with warehousing. However, there’s a problem on the horizon…
There isn’t enough warehousing to go around
The first issue with the new online retail market in the UK is that there aren’t enough warehouses. Speculative development has reduced by 75% over the last 10 years and the need to build housing means that competition for available land is fierce. It’s also worth noting that currently only 50% of business rates on warehouses are retained by the local authority, whilst 100% of council tax is retained. Whilst there are government plans to increase local retention of business rates, this may well have had an historical impact on the number of warehouses being approved by local planners.
When these factors are combined with the e-commerce boom, and the fact that e-commerce can require up to three times more warehousing space than traditional retail models, then you start to understand why there’s a shortage of warehouses.
Amazon seems to be recognising the potential shortage of warehousing space and has started looking at how they can increase their warehouse capacity by turning to its sellers’ warehouses. They are already working with a small number of sellers who participate in Prime without sending their goods to one of Amazon’s fulfilment centres through “Seller Fulfilled Prime”. Amazon is, therefore, trying to make the seller’s warehouse an extension of their current fulfilment centres and facilities. The next feasible step is to allow other suppliers to stock their products at these chosen warehouses. All this would then be managed by Amazon’s software as this would coordinate all the logistical and distribution requirements. It’s a similar model to how first and second tier suppliers work in the automotive industry.
The general warehouse shortage is, of course, good news for the property sector. David Sleath, the chief executive of the industrial properties landlords Segro has even started touting the idea of using multi-storey warehouses. This idea doesn’t seem that absurd when you consider we already have multi-storey car parks and high-rise commercial and residential buildings. Also, multi-story warehouses are already being used successfully in places such as Tokyo, Singapore and Hong Kong.
Sleath is keen to point out that land is becoming a premium in places such as London and he is right. London is already over-populated and demand for space of any sort is high. The capital city already has a big housing crisis with only around half the number of properties being built yearly than actually required. Segro is therefore actively looking for multi-storey sites in London to feed the warehousing demand.
With all this demand for space, companies are questioning their warehousing strategies and space optimisation plans. But what strategy should a company be adopting?
Get out of the city
Undoubtedly Segro has done their homework and recognise that there will be a continued demand for warehousing in major cities. However, any e-commerce retailer whose market is national, and not solely focused in London, should avoid distributing from London like the plague.
London may be the capital city of the UK, but when it comes to distribution it’s pretty much exactly the wrong place to be: it’s not geographically central to the UK; arterial routes in and out are congested; it’s expensive; and it’s difficult to recruit and retain labour. It may well be the case that your e-commerce business has its roots in London and it may well be the case that all key stakeholders are London based. However, consider that warehousing space, if you can find it, is likely to cost three times more inside the M25 than in the Midlands. Prices of £18 per sq ft are not uncommon inside the M25 versus typical prices of around £6 per sq ft in the Midlands. Business rates are also significantly higher in London as they are based on the property’s value.
We’ve written extensively on warehouse location assessment. If you want to understand more about deciding on a warehouse location, take a look at our article Warehouse Location – How Do You Decide Where to Locate a Warehouse?.
Maximise the space you have
Many companies focus on warehouse floor space utilisation and don’t fully consider cubic utilisation. Height in a warehouse can be a valuable commodity if used correctly. Slow-moving products, bulk products and even SKUs for picking can be held at height in racking provided you have the right manual handling equipment for retrieval. Further to this, mezzanine floors can be a very good option for fast moving pick and pack operations with simple gravity conveyors taking the orders to ground level for despatch. Also, remember that business rates are charged on a square foot basis so effectively you don’t pay for height.
Logistics is a complex and fast-evolving field of expertise. We’re seeing unprecedented change in the logistics arena, especially through the application of AI in planning and robotics in execution. Modern supply chain and logistics managers need to be highly adept at complex problem solving and the application of these new technologies, as well as more traditional operations management. Third-party logistics providers have these skills in abundance, so not only can you utilise their physical networks but also their professional intelligence.
Take a look at our article Logistics Outsourcing – 5 Reasons to Partner with a 3PL to read more about the benefits outsourcing logistics can bring.
As the online retail sector continues to grow, more companies are going to start looking into innovative ways and solutions to meet the change in customer demands. As we can already see, Segro and Amazon are looking at two different approaches and this evolution is set to take on many forms over the coming years. However, what is becoming abundantly clear is that e-commerce relies heavily on warehouse space and to survive companies need to become adaptive in the way they see their warehouses evolving and growing to cope with demand.
The team of consultants at Paul Trudgian have significant expertise in the design and implementation of best in class e-commerce warehouse operations. Call us today on 0121 517 0008 or email [email protected]