Technology is transforming the shopping experience. The share of online retail sales (7.8 percent in 2017) continues to rise as consumers take advantage of the convenience and potential cost savings it offers. Forrester Research expects that share to climb to 17 percent by 2022. The success of legacy bricks-and-mortar retailers depends on the ability to adapt their supply chains to respond to changing consumer demands.
To date, investors have considered retail and industrial real estate as distinct, albeit closely linked property sectors. The change in the bricks-and-mortar retail industry has destabilized some of the tenant base, introducing some risk to investors. At the same time, realignment of supply chains to provide direct-to-consumer delivery has boosted tenant demand for industrial real estate. To investors, these related patterns may appear to position industrial as a beneficiary of a declining retail sector. The reality is more complicated. The success of both sectors is linked to the underlying health of the retail industry.
Amazon model
Analysis by One Click Retail estimates Amazon accounted for $200 billion in online sales in 2016, 44 percent of all e-commerce and 4 percent of all retail sales. The retailer’s supply chain network emphasizes speed of delivery, direct to consumers, supporting its Prime Now (same-day delivery) service in addition to its two-day service offering to Prime customers. Shipping costs accounted for $5 billion, a significant drag on net revenue in 2016. Amazon achieves delivery speed for Prime customers through operating agreements with the FedEx, UPS and the USPS’s Postal Select service. Shipments are routed through the facilities of the delivery services.
However, Prime Now (and related Prime Fresh grocery service) services require dedicated infill locations operated by Amazon itself to deliver to a critical mass of customers. Prime Now was available in 30 cities and growth of this number depends on the retailer’s ability to add customers of sufficient density and spending power to maintain an efficient operation.
Complicating factors
The scarcity of facilities to support same-day delivery complicates the spread of this model. A high volume of deliveries requires sufficient loading and staging areas to prevent bottlenecks forming and slowing delivery. High land costs in infill locations discourage development of properties with a small footprint relative to the size of the land parcel.
In comparison to Amazon, Walmart’s online sales totaled $16 billion (4 percent market share in 2016). Its sales across all channels accounted for $363 billion (more than 6 percent of all retail sales). Walmart’s supply chain is optimized for delivery to a store, not direct to the consumer. The expense of overlaying a direct-to-consumer network over the legacy supply chain has slowed Walmart’s ability to compete against Amazon. However, it has helped to pioneer use of buy online, pickup in-store, which is substantially cheaper to a retailer than home delivery. Retailers can pass on cost savings to a consumer to encourage in-store pickup.
Consumer proximity
According to the 2018 Alix Partners Home Delivery Shopping Survey, consumers demand faster and cheaper delivery, with the first demand favoring pureplay online retailers like Amazon and the second favoring bricks-and-mortar retailers like Walmart. The blending of these demands is leading to fulfilment via multiple outlets, or omni-channeling. As e-commerce becomes more widespread, successful retailers will need to operate out of facilities close to their consumers even if that means paying higher rent than they pay for distribution centers away from population centers.
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