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Why are urban fulfilment centers so important?

The race to offer consumers more delivery options, more quickly, has been gaining momentum since the big e-commerce players laid down the gauntlet back in the 90s. Since then, consumers have only become more connected, using multiple devices from multiple places and demanding products be available when, where and how they wish to shop.

Hot on the heels of e-commerce came m-commerce – you’re now able to buy products from wireless handheld, mobile devices without having to be at home using a desktop. A survey by Mordor Intelligence reports that North America will lead the way in m-commerce transactions as smartphone adoption is set to grow to 91% by 2025.

Most retailers have invested in improvements to their supply chain in recent years by way of utilization of existing real estate to implement “click and collect” services, but they have been reluctant to develop a comprehensive urban fulfilment strategy which includes moving away from colossal out-of-town warehouses and getting inventory closer to customers; this could be in part perhaps, due to their perception of the prohibitive costs of a city-center fulfilment hub.

The last mile delivery market was estimated to grow by around 39% between 2018 and 2022 , from 31.25 billion USD to just under 51 billion USD, however this estimate might now prove conservative given the onset of the COVID-19 pandemic and the ensuing boom in online shopping.

The need for e-commerce and Omni channel retailers to keep pace with consumer demand for same-day delivery has never been so apparent and developing urban fulfilment centers is a necessity for any retailer wanting to ride the relentless wave for on-demand delivery.

The case for getting closer to consumers

Increase Revenues

It stands to reason that if you can service a bigger market, a market that has more propensity to buy, then increasing revenues should follow. Having one or more sites in an urban area also allows for quicker re-stocking of high-demand locations (negating lost revenues through out-of-stock inventory) and it frees up space in retail stores that might typically have been used for storage and returns. This space can then be used for other initiatives which maximize revenues through improvements to in-store experiences such as hosting events or simply making the check-out experience more efficient.

Alternatively, given that retail property is still more expensive than warehouse space, companies may look to scale down their retail space in favor of more inexpensive fulfilment properties which can handle multiple business operations for them.

Taking the strain of servicing online customers away from brick and mortar stores also means employees can concentrate on selling product.

Decrease Costs

Contrary to popular belief and due to the timely convergence of several different factors, urban fulfilment centers can actually serve to lower the cost of servicing customers, if executed well.

A case study by Deloitte analyzed the financials of providing a same-day delivery service from a location inside NYC versus an outside location. This study found that it was at least 22 percent more cost-effective to service this market out of the Bronx city location versus locations much further away.

Whilst it’s true that the cost of real estate and labor will be higher, other costs can be dramatically reduced. Rather than goods travelling longer distances from a single site hours away from the destination, retailers are taking advantage of the cost savings afforded by using local delivery drivers who can operate efficiently and on-demand inside of the city.

This has been made possible by the new technologies being used by the emerging industry of shared services. Airbnb and Uber are known to be huge success stories as disruptors in the traditional hotel and taxi industries respectively and these companies have used innovative shared service technologies to bring on board a relatively low-cost, flexible workforce and provide solutions to modern-day customer pain-points. It’s likely that the same technologies will be embraced by retailers wanting to get an edge and offer their customers the increasing involvement and visibility that they crave in a transaction; who knew a few years ago that you would be able to track a loved-one from start to end on their journey from the airport for example? Having been raised in the digital era, millennial consumers and even Gen Xers to an extent, don’t see why the tracking of product should be any different.

Differentiate your brand

Notwithstanding the ability to deliver to customers more quickly, which improves customer experience and is a differentiator in itself, several good news stories can emanate from the investment into urban fulfilment centers.

Younger populations are increasingly placing their allegiances with companies that show real commitment towards “going green’. With sustainability never far from their thoughts, less vehicles on the road, travelling shorter distances is something to be publicized and may help with gaining customer loyalty.

With all the doom and gloom around unemployment, retailers can speak to the thousands of jobs being created in these centers and beyond. Tesco, the UK’s biggest supermarket chain finished the construction of its first UFC recently after a stall due to the coronavirus outbreak and plans on at least ten more during 2021. This comes after they saw their online business grow from around 9% to 16% of their total sales and they’ve announced 16,000 new permanent jobs will be created to support this.

The future of urban fulfilment

Traditional retail supply chains are going through a period of immense transformation. This was happening at breakneck speed before the pandemic and is now happening much faster than anyone predicted with retailers scrambling for ways to rival the likes of Amazon and take a share of the growing millennial spend in e-commerce. Consumer need for delivery speed shows no signs of abating and spaces big enough for urban warehouses inside of cities are in short supply and big demand, keeping vacancy rates at all-time lows with rents on the rise.

We don’t yet know the full repercussions of the global pandemic on our city centers but smart investors will already be looking at the myriad of opportunities presented by the growth of urban and micro-fulfilment centers; estate previously used for commuter parking, obsolete industrial buildings and under-performing retail outlets will need to be cleverly re-purposed to provide for growing retail and forward-thinking start-ups.

In order to meet demand, North America will also need to push boundaries further, embracing Asia’s model for multi-story warehouses requiring a smaller footprint but with much greater thought to automation technology. Indeed we’ve started to see the likes of these go up with a 700,000 square-foot, last-mile development in the heart of Bronx , New York City. Previously the site of a cinema, this will be the biggest of its kind in the US, offering truck access at the first three levels, van access at the fourth and it will be the only site in the region to boast direct rail access. Interestingly, this building will be able to accommodate multiple tenants which further signifies the lack of available space for this burgeoning market.

It’s crucial for investors to look beyond the next year or two and consider the needs of retailers with regards to reducing delivery costs further; some of the most progressive projects in urban fulfilment are incorporating electric vehicle charging stations and rooftop parking for delivery vehicles.

Finding the right space

We leverage our extensive network and years of expertise to be able to bring you off-market deals. If you need help realizing your urban fulfilment strategy or finding the ideal space, contact us today to be the first to receive these deals directly to your inbox.

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