The latest in our blog series on the Retail Property Analyst Conferences concerns all things to do with logistics. The first RPA event of the year, hosted by TH Real Estate approached technological developments in an industry perceived to be, by many, slow to change. The speakers addressed topics from the viability of warehousing as an investment vehicle, to the shifting retail environment and its new logistical requirements.
The event began with a cautious message: “Keep your friends close and your enemies closer”. With the ongoing present technological threat to brick and mortar establishments, RPA conferences allow us to keep track of developments in technology and their impact across retail and related industries conferring a greater understanding of the threats and opportunities present.
James Gammon discusses the warehouse of tomorrow and the prevailing themes of the coming decade. Two major technologies have the capability to drastically change how ‘sheds’ are perceived and operated. The ‘Internet of Things’ will allow for superior tracking of products within a warehouse and improve the ways that products move within the environment allowing for greater efficiency. Robotics too will continue to grow to become ubiquitous throughout the warehousing sector as labour costs grow and capital investment becomes more cost effective. Due to regulatory restrictions on workers and robotics’ capability to work tirelessly, we are fast approaching the 24 hour warehouse.
In the age of next-day delivery, soon to be same-day delivery, a continuously operating warehouse extracts far more value from the land resources it consumes, meaning warehouses can be located closer to their consumers and can thus improve services and reduce transportation costs. When the premium on hyper connected spaces increases, land will need to be used more effectively. With the proliferation of 3D printing, a blurring of the lines of manufacturing and distribution might well occur.
The above conditions herald a shift towards more market centric warehousing rather than the standard shed in a field strategy used by many now. A possible model to emulate comes from the Far East, Hong Kong, which has utilized multi-storey distribution warehousing since the early 80’s in the form of the ATL Logistics Centre.
John Munnelly regales the story of Magna Park, John Lewis’ distribution hub. In 2001, John Lewis made its first foray into the e-tailer market by purchasing the UK arm of ‘Buy.com’ and, from then, became an omni-channel retailer. However, in 2005, the firm still struggled with its logistics with large volumes of stock sitting downstream. John Lewis identified that much growth would be experienced in the industry and adopted a strategy to pursue online retail, predicting it would grow in value to £300m by 2015. In actuality, John Lewis’ online sales grew to £1.64 billion in 2015. The shift made towards online in 2005 heralded the need for new logistics spaces which could serve online purchasing. John Lewis identified three important principles for their warehousing strategy: empowering partners, being agile (improving operations) and consumer fulfillment. Click and collect now represents about 50% of John Lewis’ sales nationwide as its considerable investment in warehousing and logistics during the credit crunch allowed it to place itself ahead of competitors in the omni-channel sphere.
John highlights the importance of having the right balance between automated and manual processes; the utilisation of both allows for processes which can be more effectively automated allocated to robotics and technological capital whilst other jobs are allocated to highly skilled workers.
Through maximizing the height of and minimization of walls, parcel reduction technology and a modular warehousing structure, John Lewis has managed to improve its processes, cut costs and drive value from every square foot occupied within their warehousing. Magna Parks’ technological capabilities allow it to service 73% of John Lewis’ online sales. The growth of online and pressure on John Lewis’ logistics is engendered in the growth of demand over the seven years from 2009 to 2016, whereby one week of online demand in 2009 now equates to a mere three hours of online demand in 2016. As online growth is projected to reach 50% of all retail sales by 2020, flexibility, tenacity and capability will be key themes in ensuring that John Lewis stays ahead of the game and remains competitive in the environment.
Henry Harris-Burland of Starship Technologies presents his view on the use of drones in logistics. Much has been said about the utilization of drones to get goods from point A-B, regardless of whether it’s flying drones or driverless cars. However, starship’s drone services a very different market.
What Henry refers to as ‘the last mile’ is considered generally to be the most expensive mile for a product to reach its intended destination. The drive to make the last mile more efficient has driven Starship Technologies to develop a small ‘pedestrian’ drone which can deliver within a neighborhood or suburban environment. Directed automatically but with the capability to communicate, the service texts and calls recipients to alert them to the delivery, thus eliminating ‘mis-deliveries’ which currently plague our last mile delivery system.
Neil Weightman of IForce discusses ‘reverse logistics’, focusing on a problem touched on by other presenters. A retailer must ensure returned items are quickly fed back into the value chain in a consumer environment which is increasingly buying more with the intent to return some if not most of their purchases.
Shoppers want the three C’s from retailers: choice, convenience and control. It is these attributes which create the environment where returns’ abuses proliferate. As retailers pander to these consumer demands, 72% of retailers offer free delivery and return services. Consumers feel irksome when required to pay for delivery and, as such, gravitate towards retailers which offer free delivery and returns. This is a concern for retailers as between 20-40% of items bought are returned and 60% of these returns are noted as having nothing wrong with them.
Neil purports that more remote and cheaper returns services centers are important because minimising costs is paramount. Many of the attributes of the warehousing required are similar to others: motorway access, a good and flexible local workforce, with shorter leases and prices below £5.50 per square foot.
Tim Robinson of Doddle explains how a broad distribution network and closely aligned goals are key for serving consumers. The positive externality resulting from Doddle is considerable; it both pulls consumers to a retailer and helps reduce the considerable costs of returns. 31% of those using Doddle in Morrisons were first timers with the grocery retailer.
Tim asserts that 43% of those who have a negative delivery experience with a retailer will not return to that retailer within the next month. 38% won’t go back at all. Thus, stresses Tim, the way retailers handle their logistics should not be considered as a secondary or merely a cost consideration; it is in fact an experiential factor which is becoming increasingly important in the minds of consumers. Doddle locates numerous types of retailer as well as transport nodes, from train stations to high streets and shopping centers.
Alice Breheny of TH Real Estate discusses investment in a changing market, looking at how megatrends are reshaping the world of logistics and the industrial investment class. She also delves into the influence of location, build and tenant make up in investment strategies.
With geographical placement, locations which can service large populations within a range of three to four hours’ drive are the most attractive locations for warehousing. The locations relative distance from manufacturing centres are also important as goods are transported from these locations to warehousing. Alice considers the most promising markets lie in France, Spain and Italy, as their locations are convenient for servicing local markets and these countries’ industrial real estate markets are less mature than those in the Benelux countries and Germany.
The trend of ever-increasing mechanization of warehousing is a particularly challenging phenomenon when considering strategy. Tech investment can result in much more productive assets that can be leased at a higher value. However, technology can be tenant specific, thus the space can be overly specialized and lead to increased risk exposure. Recognising useful E-commerce property can be challenging as some formats will become redundant with ever-increasing polarization.
Maggie Simpson of the Rail Freight Group discusses infrastructure and the railways. With cross party support for more and better infrastructure in the form of HS2 and other developments, it is encouraging news for the rail freight industry. The development of HS2 might not necessarily directly influence freight as it will be designed to more effectively transport people rather than goods. However, this should take pressure off existing infrastructures which can be allocated towards freight transportation.
Helene Demay of MSCI discusses the key drivers behind the strong performance of industrial real estate for the best part of the last decade. In the industrial property sector, IPD’s property index has shown an average return of 6.4% from 2000 to 2015. The industry has performed strongly on capital growth as well as the income component.
Before the 2008 credit crunch, retail had performed best as an asset class within the real estate sphere. Post-2008, changes in the rate of consumption due to both the recession and a change in how consumers shop online has shifted focus towards industrial real estate as distribution networks so connected warehousing becomes more important for consumer fulfillment.
Peter Ward of the UK Warehousing Association discusses the different requirements of retailers and the kinds of property needed to meet the changes in the retail world and examines why the current stock is not fit for purpose. Only 17% of logistics managers believe their processes are optimized, with ever-increasing complexity in the way that we distribute goods and the increasing pressure to remain flexible.
The growth of convenience has widely influenced the change in logistics practices and required space to service these changes. Smaller shops require smaller volumes of a wider range of goods to be replaced in their shops. In these convenience conditions, less high volume logistics is required; more localised, highly connected warehousing is required to address the needs of these retailers. Warehousing has become more agile and fulfillment focused as attitudes towards shopping change.
Mark Faithfull, is a leading financial journalist who has spent his career reporting on the sector, He is also CEO of leading online retail news service, Retail Property Analyst. You can follow Mark on twitter here at: https://twitter.com/RPAnalyst
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Retail Research Analyst, Alasdair Pocock, Bayfield Training