Analysis: Retailers get to grips with warehousing challenges

In an environment of such fierce competition for every pound, no retailer can afford to have an outdated supply chain slowing things down behind the scenes. With margins squeezed, stores need quick replenishment of stock if they are going to stay in the game, while online shoppers expect increasingly quick and efficient deliveries at home.

Which means sheds matter more than ever. The type of warehousing property a retailer takes, where it’s located, how well connected the whole network is and, perhaps crucially, how advanced its systems are, can make the difference between success and failure.

The possible problems are made all the more alarming by what has been described as a potential crisis looming in the sheds market, which will reduce supply of space. The start of the downturn in 2009 effectively put an end to almost all retail warehousing development after years of growth, and now the long-term
effects are becoming starkly clear. One consequence is that a new generation of more bespoke, state-of-the-art facilities - crucial to a modern, large scale retail operation - has been almost halted until the construction pipeline can be fixed.

So what is the state of the sheds market, and what do retailers need to know about the year ahead?

The figures speak a thousand words. Between 2005 and 2008 some 58 million sq ft of speculative warehousing space was built around the UK. Between 2009 and 2012 the figure dropped dramatically, to just 2.5 million sq ft.

A pipeline that was once flowing in abundance, arguably too much, dried up so suddenly that the whole market is still struggling to come to terms with the new conditions.

While on the high street the slowdown in shopping space development has been more or less matched by shrinking demand for new stores, it’s not that simple in warehousing. One reason that retailers are taking fewer stores - the growth of ecommerce - is the same reason that distribution is becoming more important.

The strength of online is reflected in projects such as Asos’ 2010 investment of £20m in a new 1.1 million sq ft distribution centre in Barnsley, a crucial factor in the etailer’s phenomenal growth story continuing. As Asos and others know well, the type of property deployed behind the scenes is now more crucial than ever.

So what happens if, as the above figures show, the space just isn’t being built any more?

Andrew Griffiths, managing director of UK warehousing developer Prologis, says: “There is a shortage of stock in the market and there’s a good reason for that. The lack of pipeline means that retailers might struggle to evolve their supply chains at the pace they wish to. If they can’t find the opportunities to evolve they won’t be able to drive the benefits to their own customers at the pace they want to either.

“It’s the quality stock that has the lowest availability and I can’t honestly see how the current dynamic in availability of stock is going to change.”

The situation is creating some stiff challenges for retailers that are in many cases desperate to find the right type of space.

The right space

Andy Gulliford, chief operating officer of property developer Segro, says: “It’s still a difficult operating environment; I don’t see people delivering large-scale speculative sheds for some time. With speculative building there was always property there and available, not any more.”

This is bad news for the retail industry as a whole, but particularly worrying for those that will rely on their ecommerce performance for growth in the coming years.

Jones Lang LaSalle research director Jon Sleeman says: “A lot of retailers are grappling with internet retail and trying to understand how far it could grow. They need to ask themselves what the best way of handling this growth is.

“Different logistics models are generating requirements for different types of warehouse facilities including large e-fulfilment centres, sortation centres, parcel hubs and dedicated facilities for online food fulfilment centres.”

As Sleeman suggests, it’s not just that retailers need more space, it’s vital that the right type of space becomes available. The type of space needed is what Helios founder and chief executive Mike Hughes describes as the “new generation of property”, with specifications suited to the detailed requirements of a big online retailer.

He says: “They are built to deliver, with online retailing in mind. They’re complex projects.”

Without its state-of-the-art distribution centre in Barnsley, built in a year where it was one of only 13 units completed nationally according to property management consultant Gerald Eve, Asos might not be in as strong a position at the moment.

Highlighting the significance of the centre, at the time Asos chief executive Nick Robertson said that the move would be a big part of the retailer’s journey towards being a “billion pound business”. Now two years on from opening, the 34% sales increase over Christmas 2012 is just one sign that the plan is working.

Asos is an example of one retailer pushing the boundaries, but as a sector it’s the grocers who generally lead the way in innovative distribution. The fiercely competitive food market is in overdrive despite the slump, with more stores being added, particularly in convenience locations, and the battle for the ecommerce pound being fought harder than ever.

It’s sheds that are helping to make the difference.

Griffiths says: “The whole supply chain is continuing to evolve. Grocers are pushing the evolution of the supply chain and they are the ones who can commit to the locations they want. As an industry they’re relentlessly trying to drive stock through the supply chain and improve how quickly they can replenish and get stock to the point of sale.

“This is changing the nature of demand and impacting the specifications of the facilities and the physical nature of the buildings themselves.”

Maximising resources

To see this evolution in action, you only need to look at Tesco. The big beast of the market, Tesco has sought to maximise every penny of the resources it has put into logistics, particularly towards its ecommerce arm.

From its first e-fulfilment centre in Croydon, to its latest opening in Crawley, West Sussex - which was unveiled in January - Tesco’s facilities have become more sophisticated and more automated. Given the complexity of picking and packing in grocery, perhaps the most challenging of all the ecommerce environments, Sleeman says such automation is absolutely vital: “The model has changed a lot. Small orders from grocery shoppers need a very intensive picking operation, which requires a high degree of mechanisation. The warehouses where this happens are highly mechanised.”

And it is also in grocery that stores have become a central part of operations. The dark store exists entirely to fulfil online orders, and for the grocers it has become vital to get this part of the business right.

Currently in the midst of its biggest expansion to date, Waitrose is bolstering every element of its business, including the warehousing space behind it all. The opening of its first dark store in 2011, a 37,000 sq ft unit in Acton, north London, marked a significant shift for the retailer.

As the fastest-growing online grocer in 2012, with online sales up 50% in its September results, Waitrose is expected to open more dark stores to serve this growing demand and support its bid to continue growing market share.

While there have been no announcements about the next opening yet, Waitrose asset manager David Garnett says the retailer is “exploring opportunities for another dark store”.

He adds: “Although we still need to be conveniently accessible to our market, dark stores allow us to be far more flexible about their location. For example, you are not reliant on footfall and providing parking for customers as we need to when delivering new shops.

“We continue to invest in new warehousing space to support our ambitious growth plans.”

While it might prove little consolation for retailers looking for a similar growth strategy, arguably the lack of new space could prove to be positive long term. Although the abundance of new space made expansion very easy, it isn’t healthy to have a massive oversupply that far outstrips demand.

As tough as things are, Griffiths says this phase is merely a reaction against the days of booming development, often funded by cheap and unsustainable debt.

He explains: “What we’ve seen in terms of take-up in stock has been eroding an overhang of space built up by too much cheap stock, and the funding for that is not coming back. It’s an adjustment of the market.”

The downside of this adjustment of course is that the space that is out there is going to be much more highly sought-after, and rents are already reflecting that.

Griffiths adds: “The lack of availability means that the ones that do become available are going to fetch higher rents and have less incentives than the retailers are used to.

“Demand is weak but it is there. It’s whether people will have the confidence to take bespoke facilities. We are getting geared up so as soon as a retailer can commit we will deliver a facility for them.”

Uncertain future

What is emerging is a tense wait-and-see situation. With demand from retailers as tentative and selective as it has become, developers are unwilling to build on anything like the scale seen pre-crash. The onus has moved onto retailers to provide detailed requirements, and prove commitment to the plans, on an unprecedented scale.

With the outlook for 2013 as flat as it is and no sign of the financing dynamic changing this year, it’s unclear how the next 12 months will unfold.

Retailers have had to become bespoke shoppers for very complex and specific property. And given how little choice is readily available, it’s a risk for both the retailer and the landlord if it’s not done very carefully.

Gulliford explains: “Everybody has got to work together to be sensible. There’s got to be a good working relationship between the retailers and the developers, otherwise there’s going to be a hiatus.”

This potential hiatus is the last thing retailing needs if the sheds market, with all its complexities, is going to continue through the current rough storms.