Retail isn’t Dead. It’s Just Moved into a Warehouse.

With the exponential rise in online sales over the past few years, and an expected additional increase of 54% by 2020 according to Forrester, retailers as a category are hurting. A June 2017 article in the L.A. Times predicted that up to 25% of U.S. malls will close in the next five years.

It is not that people are buying less, it’s that Amazon (mostly) and others are selling more product directly from a warehouse. The game changer that is making this possible is speed. Today’s consumers value speed to such a degree that many are willing to pay in advance for it: take Amazon Prime as an example, where $99 a year buys you a year’s worth of free two-day shipping upgrades on purchases.

So, how is this speed achieved? The answer lies not just in the faster shipping, but equally in the rapid processing mechanisms. Sellers are increasingly investing in more sophisticated warehouses located closer to customers to increase the speed of delivery.

How much faster? In larger cities, online retail giants are rolling out one to two hour delivery windows on a variety of products. Waiting two days for a delivery is so 2016.

Like a lot of other industries, online retailers are expanding their use of technological capital. Automated warehouses are becoming increasingly de rigueur, as features like robotic palletization, automated pickers, software improvements and faster conveyor systems all help to reduce the time it takes to deliver goods and add to the bottom line by cutting labor to the bare minimum required. This explains the processing aspect, but moving shipments to their destinations also needs to be considered, and it certainly has been with the advent of automated driving systems.

Driverless cars have been all over the news in the last couple years, and the possibilities they could bring to commuters everywhere are endless. But, the most significant impact will be for commercial trucking.

Not only would human error (which accounts for 90% of crashes according to the National Highway Traffic Safety Administration) be cut out of the picture, but the economic benefits would also be huge due to a few simple factors: 1) Labor cost almost disappears, 2) driverless trucks don’t need rest unlike their human counterparts, so range is extended from the current distance that can be covered in a 10 hour shift to nearly 24/7/365. 3) This means that companies could operate their trucks around the clock, multiplying their productivity and allowing a reduction in the number of distribution centers (DC’s) required. 4) Operating costs can be reduced by locating the DC’s on inexpensive land outside of town and companies will be able to further reduce costs by hauling the same amount with less trucks. And finally, 5) driverless trucks can daisy-chain in a convoy spaced 2 meters apart each and follow in the draft of the vehicle ahead not unlike the peloton in a professional bike race, which results in 40% lower fuel consumption.

These many benefits of this would of course help companies, and ultimately lower costs will trickle down to the consumer in the form of lower product prices and shipping charges. Until Amazon takes over the world anyway.

Generally, this technology would not completely remove the human truck driver from existence: secondary distribution areas, like local delivery, would still likely be conducted by humans as the savings from automating this part of delivery is simply not large enough to warrant the capital investments (yet). Overall, the automation of the warehouse and proliferation of driverless trucks is not too far off in the future.

Increasingly most products that you purchase will be picked, sorted, and delivered without ever being touched by a human hand. And neither you, nor the product, will have ever ever visited a retail store in the process.

amazon prime logistics

Amazon Prime’s Logistics Strategy

A few months ago, I joined Amazon Prime.  That’s a $79/year program that Amazon developed that gives members free 2 day shipping on Amazon-stocked products (which is most of the stuff that they sell).  For me, having nearly anything I want conveniently delivered anywhere I want in two days is fantastic.  However, the second time I bought from them, I was given a choice:  Free 2 Day Shipping, as I had signed up for, or Free No Rush (5-7 day) Shipping with a $1 credit to their Amazon MP3 Music Store (with most songs priced $1 or less).

Now the offer isn’t a huge incentive, but you have to appreciate the strategy behind it:  Many times customers just don’t need things as fast as we’re able to deliver them.  By effectively “polling” my needs, Amazon just created an amazingly flexible logistics model.  Can you imagine having a pool of pending deliveries that you can pick and choose when to fill and when to ship based upon your labor and transportation capacities?  That’s what Amazon has accomplished.

The strategy is absolutely brilliant:

  1. They’ve got customers to pay a premium for shipping (most orders over $25 ship free 3-5 day anyway).
  2. They’ve created a membership organization which builds loyalty – if you’re in the Prime program, you’re likely to buy from Amazon or at least check there first.
  3. They are determining customer’s true time requirements, and thanking them for the flexibility with a token MP3 song – a near universal currency in today’s world.
  4. By having up to 7 days to select orders based on size, weight, or delivery area,they are able to optimize shipping strategy to lower costs.

Now, based around the requirements of their 2 day must-deliver products, they can fill trucks and planes based on available capacity.  They can have geographically revolving flights (Pittsburgh on Mondays, Cleveland on Tuesdays, for example).  They can lower inventory based on order time.  If their suppliers can supply them with inventory in just a few days, perhaps they don’t carry the inventory at all!

If your business delivers products, think about how you might apply this to your business:  A brand loyalty program, rush delivery when your customers need it, flexibility when they don’t, a small reward to thank them for both the information and permission to be flexible.

It happened that, as I was placing my order I was about to leave town for a week so certainly didn’t need it in a rush.  I took the credit.  A handful of times since then, I was in less of a hurry so received more credits.  Less = More.  I recently used $6 in credits to buy a $5.99 MP3 download of the Rolling Stones’ Sticky Fingers.  Thanks Amazon.

key performance metrics

Corporate Real Estate Best Practices: Key Performance Metrics

Every business has a learning curve as it grows, and the collective wisdom learned along the way becomes an invaluable knowledge base.  This is especially true in regard to your facility strategy.  By analyzing  what was done right and what could be improved in each new location or lease renewal process, you can develop rules to achieve the greatest return and avoid pitfalls.

If your firm has multiple branch locations, try this simple exercise:  Take your annual Total Occupancy Costs (Rent + all Operating Expenses) and divide by an annual revenue metric such as Adjusted Gross Profit or Gross Sales.  For example, if a location has $240,000 in TOC and AGP at that location last year was $5M, then your real estate costs represented 4.8%. Now do that for each site.

What you’ll find, of course, is that each location has a different real estate cost as a percentage of revenue.  The magic question is:  WHY?

Some locations will be more efficient than the others.  You need to dig out the reasons behind that efficiency. Likewise, some locations will be grossly inefficient.  You can also learn from them what not to do.

If you are a sales organization, perhaps one facility has more seats/SQFT than the other.  If each sales person brings in an average of $200K per year, then every 5 extra seats in that facility represent $1M in revenue.  Fit them in without increasing the square footage, and you’ve just added some real value for your organization.

You can be certain that there are more savings to be had by developing best practices for your unique business operations than in negotiating another $1/SQFT off of the rate.

The same is true when it comes to using a real estate representative.  While local market knowledge is always important, it is more critical that they have a detailed understanding of these nuances of your company:

  • WHY renew or relocate?
  • WHERE is the ideal location?
  • WHO will use the space and in what way?
  • HOW does the space compare to your competitors?
  • WHAT makes a layout efficient? and most importantly, 
  • WHAT is the long term objective for this part of your business and how can you structure a lease that will help accomplish those goals in the most cost-effective way?

Using metrics like the one described above, and taking the time to understand what makes your space efficient for your operations or not, will ultimately deliver more cost effective space solutions.