Winter 2016 Issue

Bloomberg
FedEx workers sort packages during the busy holiday season.

It was the peak of the holiday shopping season in 2013 when the package delivery system fell apart. Retailers promising online shoppers fast delivery for last minute orders created a tsunami of packages that hit the parcel delivery companies so hard in the days before Christmas that they were unable to get planes to carry all the boxes flooding distribution centers.

The orders had far exceeded UPS and FedEx projections. Thousands of customers were issued apologies and UPS reportedly refunded more than $50 million.

The situation just over two years ago is a testament to the growth of online shopping. In 2014, more than $1 trillion worth of retail goods were purchased online worldwide, accounting for about 6 percent of all retail sales – a number that is only expected to grow in the coming years.

While technology has enabled this e-commerce boom, the failed deliveries also highlight the physical machinery and infrastructure on which online shopping relies – the planes, the warehouses and the trucks. UPS and FedEx, along with retailers like Amazon, vowed to never repeat the meltdown of 2013 and that has led to a dramatic expansion of the infrastructure that enables online retail.

And it’s not just big companies that have changed their business models to meet evolving demands. Smaller companies are also adapting to the online shopping habits of the market, though the transition has been more gradual.

Jonathan Gold, vice president for supply chain and customs policy at the National Retail Federation – the world’s largest retail association, which represents department stores, Internet companies, specialty stores, grocery stores and chain restaurants – said companies are questioning how customers are buying products, how those products will be delivered and what storefronts will look like down the road. "I think companies are really just delving into this now, as to how they're merging their brick and mortar with their online presence, and how that all works together and how the supply chains all work together," Gold said during a recent presentation before the North Jersey Transportation Planning Authority’s Freight Initiatives Committee. "It's very confusing for a lot of people right now and they're all really just trying to figure their way through it.” Gold said the traditional model of “bring your product in, send it to a distribution center, send it to a store” is changing and retailers are working to adapt.

Virtual act, physical impact


UPS
Delivery companies like UPS move undreds of millions of packages
during the holidays
In everything from warehouse locations to delivery routes to storefront vacancies, the placeless, virtual act of shopping online is having a very real effect on the physical world.

"The footprint of retail is shifting away from the retail store and towards the warehouse," said Jean-Paul Rodrigue, a professor at Hofstra University and an expert in transport geography. 

For large retailers, some storefronts may remain useful as showrooms, but a growing portion of their business is conducted between warehouses and mailboxes. From a logistical perspective, goods are increasingly being delivered by the parcel rather than by the truckload. 

"Overall, the amount of parcel delivery hasskyrocketed in the last five or 10 years, that's pretty obvious,” Rodrigue said. “And UPS and FedEx are pretty happy about that." 

Third-party logistics companies like UPS, FedEx and DHL handle the vast majority of e-commerce deliveries for retailers – what's known as the last-mile of the shipping trail. 

"For 99.9 percent of the retail industry out there, electronic fulfillment, transportation logistics and delivery direct to consumer are core competencies they just don't have. Look at Kohl's or Macy's or anybody like that, even Target," said Benjamin Conwell, senior managing director and practice leader for real estate firm Cushman & Wakefield’s eCommerce and Electronic Fulfillment Specialty Practice Group for the Americas. 

A small handful of retailers, including Walmart, handle most of their own shipping in-house and Amazon is pursuing its own strategies to reduce its reliance on third party logistics providers. For the rest of the world's retailers, these third-party logistics companies are a necessary part of the delivery chain. And Conwell doesn't see that changing any time soon. 

"I'm a really big believer that the third party logistics industry in the next five years is going to really, really grow much faster than it has in the last 10 years," he said.

But while this parcel-by-parcel distribution may save on the costs of providing store space, experts say it increases the environmental costs associated with shipping all these goods. 

"It's really wasteful to have these trucks running around neighborhoods dropping off one package at a time," said Genevieve Giuliano, director of the METRANS Transportation Center at the University of Southern California, which studies transportation systems in metropolitan regions. "And even though maybe it's offset because you don't drive to the store that often, we don't really know that."

'Gold mine locations'

To try to reduce these negative impacts – and to improve efficiency – retailers are increasingly looking to diversify beyond the giant warehouses out on the peripheries of metropolitan areas. 

"There's this other piece of the business which is much more oriented towards being close to the consumers," said Giuliano, who acknowledges there is still a use for national and regional distribution centers. "So we are seeing some land use changes in where the warehousing demand is."

Increasingly, the demand is closer to city centers and places with high population densities. These are the areas where most e-commerce is happening, and retailers like Amazon can cut delivery times by locating their warehouses as close to these customers as possible. 

These sites are popping up in places like Compton, 15 miles south of downtown Los Angeles, or pretty much anywhere within a 10- to 30-minute drive of a city's central business district. 

While big regional warehouses and distribution centers can spread out to 500,000 square feet or more, the close-in warehouse space that big retailers want in or near their urban customer bases are in the much more modest 20,000- to 70,000-square-foot range. And that real estate is relatively easy to find. While some companies are building highly optimized modern facilities to their exact technological specifications from scratch, Conwell said most are more willing to take on move-in-ready old warehouses if they are in "gold mine locations."

"For this kind of use, you're not seeing many people waiting around for really nice buildings in a great location if it's going to mean they fall behind, schedule-wise," Conwell said. "Much more so, we're seeing folks take existing product and make do."

That's created new opportunities for modest sized urban warehouses that had been pushed aside in recent decades for those mega warehouses farther out. But things aren't shifting completely one way or the other. 

"The days of the million-square-footers are not over," Conwell says. "There will continue to be substantial demand for those. But there is a unique opportunities for these smaller, close-in depots or last-mile terminals."

Giuliano says there's even been some exploration of multi-story warehouses to serve these dense urban environments, thanks to advancements in robotics and inventory management algorithms that cut down space requirements. Warehouses in places like Hong Kong and Japan often climb five to seven stories. This type of facility is still uncommon in the U.S., but Giuliano says we're likely to see more of them soon. "It's all to serve the segment of the market that's very time sensitive," she said.

Clearly there's money to be made by selling more products. But there's also money to be saved by distributing all the goods being sold more efficiently, said Asaf Ashar, an emeritus research professor with the University of New Orleans' National Ports & Waterways Initiative. 

"Some of the savings will come from a better organized distribution system – where you put distribution centers, how you organize them,"Ashar said. 

These systems encompass all aspects of the goods movement chain, from ports to intermodal hubs to freight rail and trucking to distribution centers to retail outlets to last-mile delivery. Retailers and shipping companies are optimizing with better warehouse locations, data analytics for inventory management, route management software for truckers and load management systems that ensure a truck doesn't unload at a distribution center and drive back to a port empty.

Due to the massive scale of global commerce and the rapid growth of online sales, big retailers like Amazon and Walmart are looking at these processes more holistically. Some have even explored the concept of so-called "dark stores" – retail outlets that have been closed and converted into mini-warehouses or fulfillment centers where workers roam the customer-free aisles, manually collecting and packaging the products people have ordered online. This concept is becoming particularly useful to grocery retailers who are seeing a sharp growth in online sales. Major supermarkets in the United Kingdom have already converted more than 2 million square feet of real estate to service online orders, and U.S. supermarkets are expected to make similar adjustments.


Amazon
Some companies, like Amazon, are exploring their own delivery methods.

As e-commerce becomes more important to the business of retail, warehouses and retail outlets are becoming more physically intertwined. In terms of land use, that means operations are taking up more and more geographic space, according to Jesse LeCavalier, an assistant professor of architecture at the New Jersey Institute of Technology who's written a forthcoming book about the logistics of Walmart. 

The warehouses may be smaller, but there are more of them, and they're all interconnected in one way or another, she said. And this approach to retailing is even affecting manufacturing processes and the business relationships between manufacturers and retailers. 

"At a smaller scale you would have a factory that would make a thing, and then a truck would come pick that thing up and they would bring it to various companies' warehouses and drop it off, and it would sit in those warehouses for a while until someone orders it or a local retail place needs it," LeCavalier said. "That's just happening at a hyperspeed now. People don't start manufacturing the product until they know that someone needs it, or that their supply is low. So it's all calibrated at such a high degree of precision to eliminate stock."

The warehouses are less storage spaces than high-tech logistics centers. And for retailers with large, complex operations, these logistics centers require a lot of space. According to research by Jones Lang LaSalle's retail group, more than 60 tenants were seeking big box distribution centers of more than one million square feet nationwide in mid-2015. 

Bigger warehouses often require bigger workforces and therefore more use of land dedicated to trailer storage, parking and other worker facilities. And even at the slightly smaller scale of metropolitan distribution, retailers like Amazon will need many mid-sized warehouses and fulfillment centers to meet customer demands for their increasingly popular two-day, same-day or even same-hour shipping options. Whether fast delivery innovations like Amazon's proposed drone system are actually realized, the consumer expectation that almost anything can be delivered almost instantaneously means that retailers and third party logistics companies will only become more reliant on warehouses close to their customers. 

Planning for the future

As this new model takes hold across the spectrum, how it impacts cities and their land use will become even more important. Transportation and urban planners will need to start looking at the ways that all these goods are moving into and throughout their cities, which up to now has been a major blind spot.  Complete Street plans, a nationwide movement spearheaded by the National Complete Streets Coalition to integrate all users into design proposals, often fail to include freight and trucks.

"Local planning does not pay a lot of attention to local freight," Giuliano said. "Planners have written extensively on the concept of complete streets, and there's not a word of what you do with trucks on complete streets. And that's despite the fact that absolutely everyone needs those trucks to live their lives in a metropolitan area."

Other places like Japan, South Korea and Western Europe have been more proactive in terms of planning around local freight, which Giuliano largely attributes to their high densities. Some use small electric vehicles to handle neighborhood-level distribution. Others use bicycle-based delivery systems. Many places have begun to use centralized parcel pickup stations, such as the neighborhood-based mailboxes that the third party logistics company DHL has implemented widely in European cities.

Some U.S. cities are starting to catch up, albeit slowly. New York City's transportation department has developed an Office of Freight Mobility, which has implemented an off-hours delivery program that has reduced congestion and improved delivery efficiency. Rodrigue said most other big cities around the world are developing city logistics strategies that help manage the truck traffic caused by restaurant and grocery deliveries, as well as parcel delivery. Though these programs and strategies don't focus specifically on e-commerce, they are beginning to address many of the issues caused by high truck traffic in congested urban areas. 

To plan around the impacts of e-commerce requires a detailed understanding of its many complex and interrelated processes. From warehousing to delivery methods to new technologies, the growth of e-commerce has a physical footprint that urban and transportation planners will have to start to plan around at many scales. That might mean programs and policies that guide how parcels are delivered within neighborhoods. Or it may mean new regulations on the types of delivery vehicles allowed in certain areas at certain times. Or it may mean new zoning standards or tax incentives that prioritize close-in warehouses that serve high population densities. 

Much of the change to come may be driven by large market forces, at a speed far faster than city policies tend to move. But the better planners can see how these e-commerce trends are evolving, the better able they'll be to help cities and regions cope with their widespread land use impacts.

Nate Berg is a freelance writer based in Los Angeles.