With shoppers holding on to their purse strings tighter than ever, Retail Week explores the impact the cost-of-living crisis is having on retailers’ supply chains.
The warehouse has always been central to retailers’ operations, acting as a hub for stock, order fulfilment and logistics to help get orders out to customers quickly and efficiently.
However, modern warehouses have come under the spotlight recently. Amazon workers have complained about warehouse working conditions, leading to a series of strikes.
In addition, Next has announced the upcoming closure of its Bradford warehouse to expand its South Elmsall site, “centralise its online operations” and improve stock availability.
Ongoing demand
The global pandemic saw a huge rise in retailers wanting to take up warehouse space. Grocery, multichannel and pureplay retailers accounted for 21.3 million sq ft of the 50.5 million businesses that acquired warehouses in 2020, according to Savills.
But has the bubble burst?
Segro UK managing director James Craddock says there is still a demand for warehouses among traditional retailers “who need to service their stores and omnichannel offering”, but current demand for space has weakened.
”While warehouse take-up is now more in line with the pre-pandemic growth trajectory, and a smaller proportion of that demand is coming from e-commerce linked needs, there are still many other businesses looking for warehouse space,” he says.
‘Unprecedented’ expansion
Post-pandemic retail has been defined by softening demand in online shopping, rising inflation, cost-of-living crisis, not to mention geopolitical issues. So how are warehouses adapting to the ever-changing economic environment?
Occupancy of warehouse rental space in the third quarter of 2020 reached a record of 13.3 million sq ft, according to property firm CBRE.
The main driver behind the pandemic rental surge was the rise in ecommerce – online retailers drove 33.3% of rental deals. Pureplay giant Amazon acquired three ‘lockdown’ fulfilment centres in Darlington, Durham and Nottinghamshire.
“It was an exceptional and impressive time,” says Dan Myers, managing director of UK and Ireland at XPO Logistics. “So many businesses in many verticals fundamentally transformed their route to the consumer.
“The pace at which capacity was expanded was unprecedented. It was another demonstration of how supply chains and logistics react to changing circumstances, both planned and unplanned.”
Retail Week data and insights director Lisa Byfield-Green says the pandemic caused retailers to ”build up stock levels and increase warehouse capacity” – which has led to excess stock.
Stuart Ager, managing director at Metro Supply Chain UK, echoes this point. Its recent survey of 100 UK retailers showed that “reduced consumer spending and the complexity of having to manage excess stock are challenging businesses.”
“Our latest research showed the retailers surveyed are seeing softening demand,” says Ager.
“Almost two-thirds (61%) of businesses said they are experiencing too much stock, citing a reduction in consumer spending as a direct contributor to the issue.”
Adapting to challenges
Experts agree that retailers are adept at being responsive to market conditions. Ager says: “Whether it’s a global event like a pandemic or an unexpected change in consumer demand, retailers have always had to manage variable supply and demand.”
While Myers acknowledges that there is still ecommerce growth and consumer appetite, he is aware that the current financial pressures are causing consumer behaviour to change.
“While consumers are spending the same value in the ballpark, basket size in items has reduced; and, consumers are trading down to value brands and retailers,” he says.
“The current climate is a shock. It will change behaviour in the short term, but some will perpetuate long after the economy has settled.”
Meanwhile, Byfield-Green agrees that the cost-of-living crisis is affecting consumer demand – which, in turn, is driving the retailers’ response.
“In many discretionary categories, particularly big-ticket items, electricals and fashion, retailers are having to adapt strategies, adjust capacity and take measures to become more efficient,” she says.
Future-forward innovations
Retail Week’s survey of 50 retail leaders working in senior supply chain and IT positions revealed that 74% felt “very” or “somewhat positive” about their business’ retail supply chain.
The survey also found that warehouse robotics automation and driverless delivery were viewed as the top two solutions to have made the biggest impact on positively transforming the supply chain – which the likes of Amazon, Asda, Ocado and Ikea have utilised.
Ager agrees that innovation is the way forward for retailers adapting to both changing consumer needs and the wider retail environment.
He said: “More than half of the businesses we surveyed [at Metro Supply Chain] said they needed to integrate more intelligent storage solutions into their operations, including the introduction of robotics and other technologies such as AI.
“These technologies and systems help maximise the use of expensive and limited warehouse space and quicken the response to large shifts in demand.”
Businesses and retailers usually lease warehouses on a long-term basis, and James Craddock says it can take years to develop the supply chain infrastructure they need now and for their future growth.
“Businesses that are asking us to build space for them today are looking to their requirements 2-3 years from now,” he says.
“The current inflationary environment has, however, resulted in a higher focus on costs, including energy and labour, so we’ve found customers care more about the energy efficiency of buildings as well as features such as solar panels. They are also looking to automate their processes where possible.”
While the cost-of-living crisis and weakened post-pandemic consumer demand have certainly impacted stock levels and capacity, it seems that retailers are strengthening their supply chains by boosting efficiency, including digital automation.
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