Online sales create instant short-term demand for warehouse and distribution center space, a potential headache for retailers.
By Jeff Berman
November 15, 2017
At this time of year, holiday shopping takes precedence with many consumers making trips to local shopping malls and retailer big box stores, as well as making myriad online purchases, too. This happens every year, without exception, to be sure.
And with holiday sales commonly viewed as make or break time for retailers, coming with that are different ways for them to brace for the rush. That is a major theme of research recently issued by Chicago-based industrial real estate firm CBRE in its 2017 U.S. Holiday Trends Guide.
This wide-ranging report takes deep dives into various holiday season trends focused on the intersection between online and in-store shopping, including: short-term retail leases during the holiday season, which the report calls “pop-up mania”; increased online sales activity through mobile commerce; and heavy retailer discount activity.
But the most applicable trend on the supply chain and logistics side cited in the report centers around what CBRE called “Warehouse Space, On Demand.”
CBRE explained that this trend is being paced by online sales essentially creating instant, short-term demand for warehouse and distribution center space, something it also labeled as a potential headache for retailers that want to ensure prompt customer delivery.
The way the pop-up warehouse model works, according to CBRE, is with short-term industrial space being matched with suppliers, which has resulted in higher efficiency and lower costs.
In the report, CBRE said makes it clear that as the demand for goods grows or shrinks, so does the demand for warehouse space, which makes projecting warehouse demand manageable on a broad scale, given that reliable macroeconomic projections are available.
But it countered that at the user level within a year or sales season, being able to accurately forecast warehouse demand becomes difficult, with users leasing space sufficient for an average inventory count. And it added that over the course of a year or sales season, inventory amounts in that space can see significant fluctuation, which becomes an issue during the holiday season run-up, due to inventory levels being high, coupled with a “massive strain on warehouse capacity” not to mention increasing e-commerce activity higher inventory levels, with a focus on a higher level of service have set the stage for a challenging environment.
This is where warehousing on-demand, or the pop-up warehouse, comes into play, said CBRE.
By matching owners of excess warehouse space with users, or retail shippers, that need it temporarily, it provides a way for both parties to “easily match both sides of the transaction…with greater transparency and fewer transaction costs to the process.”
David Egan, CBRE head of industrial and logistics research in the Americas, likened the pop-up warehouse to the natural cousin of the gig economy and its better-known players such as Uber and Airbnb in terms of how they also match demand to capacity.
“In the warehouse space, there will always be this excess capacity where people, or users, will have more space than they may actually need,” he said. “There is very rarely plentiful inventory in warehouses. There are things like seasonal issues that impact every single thing running through a warehouse [to varying degrees]. The traditional model says that you lease the space you need for your max capacity, which can lead to a lot of excess capacity over the course of the year as you are not always going to match your maximum inventory levels and it is also expensive.”
While sub-leasing may be an option to take advantage of empty space, he said those leases come with longer terms. This can be problematic because when that sub-leased space is needed back, it can be tougher to do so, and it can also impact long-term needs, too.
The concept of matching up users with excess capacity makes on-demand warehousing a natural fit, much in the way that Uber and other companies work, said Egan.
“In warehousing, there is a persistent problem of users having more space than they need,” said Egan. “We know there are seasonal situations, where users need short-term space, this leads to a situation to match two sides up [for a leasing transaction].”
Durations for short-term warehouse leases can range from two weeks to two months or longer.
Egan explained that retailers are paying for the convenience of having the space for a short period of time at a premium, as it is only for a limited time so they can lease it when it is needed.
But costs can vary, too, depending on how long a lease is, as well as its conditions, CBRE data showed. Citing data from Flexe ‘s (an on-demand warehouse provider) Warehouse Capacity and Trends, 2017, it found that users utilizing on-demand flexible warehouse space to augment a single-peak seasonal inventory surge are able to improve warehouse utilization by nearly 100% and reduce over all seasonal warehouse and inventory costs in half, while in a multi-peak setting, where inventory surges more than once per year, warehouse utilization sees a bump up to 40%, with costs cut 20%-30%.
No matter how one views it, on-demand warehousing figures to loom large in retail shippers’ holiday supply chain planning and strategy going forward.
About the author
Jeff Berman is Group News Editor for Logistics Management
, Modern Materials Handling
, and Supply Chain Management Review
. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman