LOGISTICS AND E-COMMERCE - The impact of E-commerce on logistics real estate
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LOGISTICS AND E-COMMERCE
The impact of E-commerce
on logistics real estate May 2013
© Copyright 2013 CBRE. All rights reserved. Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CBRE clients, and cannot be reproduced without prior written permission of CBRE.
Introduction is the physical result of the functioning of supply
The stormy growth of online retail sales has chains. More specifically: imperfections in supply
received ample attention, but its impact on the chains lead to the creation of logistics property.
logistics behind it is to a large extent still unclear. The demand and supply of goods need to be
Although e-commerce is recognised as a driver coordinated and geared towards each other in
of demand for distribution space, it cannot be terms of location, time, and quantity. Imperfections
matched with the fact that retail sales volumes are in these factors result in the need for storage and
not growing. This implies that the functioning of the distribution processes. Storage and distribution are
logistics property market is not well understood. the two basic functions of logistics property and to
Reason for CBRE’s Dutch Industrial & Logistics accommodate these processes, logistics property is
team to conduct in-depth research into the topic developed and used.
of e-commerce logistics. This report provides
an overview of the research and its conclusions, In a traditional supply chain, the physical and
explaining the way logistics property functions and commercial channels are equal. The end of
how e-commerce is changing the requirements the chain is formed by the retail store, where
for warehousing. The results provide essential consumers can make their choice out of the
information for all parties involved in logistics available products. Consumer behaviour is,
warehousing, with a focus on investors and therefore, partly determined by the available
developers. product range. These traditional supply chains
have a hierarchical structure in which one or more
Why logistics property? central distribution centres supply the stores with
To be able to explain the impact of e-commerce, products. These distribution centres, in turn, receive
the nature and purpose of logistics property need the products from wholesalers, who also have their
to be understood first. In contrast to general own distribution centres. A final step back in the
belief, logistics property is not a clearly marked chain is the distribution centre of the producer.
category that ‘ticks boxes’ in terms of building Following the chain ‘downstream’ both stock size
specifications, such as loading docks, free height and shipment size are reduced.
and floor load capacity. Logistics property, in fact,
Classification logistics real estate The interaction of the two basic functions of
storage and distribution determine the role of the
logistics property that results from it. If we display
PARCEL HUB the two basic functions on an X and Y axis, we
get a simplified matrix that allows us to determine
X-DOCK DISTRIBUTION
YES CENTRE basic types of logistics property.
1ST LINE
BUILDING
The different combinations of distribution
Basic function
and storage provide us with different types
Distribution
of property. Cross docks or cargo terminals
are, for example, sites where no storage takes
PRODUCTION COMMIDITY place. Goods enter the site, are rearranged and
STOCK
NO DATA repacked in different shipments, and leave again,
CENTRES
often in a short period of time. The other side
of the spectrum offers facilities which are only
meant for storage. Goods only occasionally enter
or leave these sites, and little staff is needed.
In a distribution centre, both the storage and
distribution function are combined on a high-
NO YES grade level. This requires a high degree of
Basic function organisation and an efficient building lay-out.
Storage
4 Logistics and E-commerce
E-commerce logistics we will find a large range of products and low
The growth of e-commerce has a profound stock levels per product. The products can no
impact on traditional supply chains, where the longer be stored on pallets, but are mostly kept in
commercial and physical channels are combined crates or boxes, or on shelves. The products must
in the retail stores. In the case of e-commerce be readily accessible for order picking, so a floor
operations, the commercial and physical channels location is preferred above storage in racks. The
are split and operate independently. An important result is a strong reduction in the stock density (the
consequence is that consumer behaviour is not amount of products per square metre), compared
restricted by the physically available range of to traditional storage solutions.
goods anymore. Consumers can order virtually
any product they require, in every quantity and at E-fulfilment
any time. This changes the supply chain from a It may be argued that the handling of e-commerce
“push” (to the store) to a “pull” process (by the final orders is not only about logistics, but also about
consumer). The physical spot where this change is marketing. In e-commerce, the distribution process
implemented is the distribution centre. Previously is no longer just an efficient logistics operation, but
structured to arrange large shipments (fully loaded also, and perhaps especially, a means to live up to
trucks) at fixed times to fixed delivery addresses, the expectations of the customer. If the service of
the key factor now becomes the direct delivery to a web shop is not reliable, consumers can switch
consumers (B2C) and, as such, the fulfilment of to the competition ‘by just one click’. E-commerce,
consumer requirements. therefore, is moving the commercial channel into
the distribution centre. This is why reliable logistics
Consumers, who before convened in a store to services are more important than ever. Errors in the
make their purchase, are now separately placing logistics process will have a direct impact on the
their orders which have to be processed directly consumer and hence on any (follow-up) purchase.
by the distribution centre. Due to this change, In order to meet consumer expectations, many
the number of orders in the distribution centre supporting activities have to be implemented.
increases substantially. Moreover, each order only These include services that add value to the
has a few products (order lines) - usually between products, control shipments or fulfil administrative
one and five, and the number of units per order duties. These services, generally referred to as
line is limited to one or two pieces. “Value Added Logistics” (VAL) and “Value Added
Services” (VAS) have already increasingly been
This process change is the driver of new demand implemented in traditional distribution centres,
for logistics space. In an e-commerce operation,
E-fulfilment Consumer
6 Logistics and E-commerce
particularly when it concerns international The table shows that the e-fulfilment centre in
operations. Such a distribution centre with a high fact hardly distinguishes any ‘new’ activities
level of VAL/VAS activities has been coined a compared to traditional solutions. The intensity
Logistics Service Centre. In e-commerce, however, with which the processes occur, however, makes
the scope and intensity with which VAL and VAS it necessary to structure the operation differently
are needed are of a different magnitude. The and, therefore, adjust the lay-out of the warehouse.
direct impact on customer satisfaction and sales Most importantly, the handling of returns can be
performance is the main reason. The result is the appointed as a new, e-commerce specific activity,
emergence of an enhanced type of logistics service due to the nature and size of this process in an
operation, called e-fulfilment. Below figure shows e-fulfilment center. The taking of product photos,
to what extent the e-fulfilment center distinguishes in order to be able to market them on the website
such additional processes in comparison to a basic within the shortest possible time, can also be seen
distribution centre and the traditional logistics as a new activity.
service centre, where VAL and VAS have already
been implemented.
Basic distribution Traditional distribution center E-fulfilment
Core activities: Core activities: Core activities:
• Storage • Storage • Storage
• Distribution • Distribution • Distribution
+ VAL-activities: + VAL-activities:
• packing & `labelling´ • packing & `labelling´
• customising • customising
• assembly • assembly
• quality control • quality control
+ VAS-activities: + VAS-activities:
• order management • order management
• inventory management • inventory management
• customer service • customer service
• financial services • financial services
+ e-commerce activities
• return handling
• photography
Logistics and E-commerce 7Returns Peak traffic
Returns of purchased products are often mentioned E-commerce operations experience strong
as one of the key processes of an e-commerce fluctuations in the amount of orders that
operation, and rightfully so. The scope of returns consumers place. There are seasonal effects
in an e-fulfilment center is such that it can be and differences within a day. In general, the
considered a new, e-commerce-specific activity. seasonal effects are similar to what is common
A wide array of return types can be distinguished in the traditional retail market. The daily pattern
in e-commerce: items that could not be delivered, shows low volumes in the morning and a sharp
defective or damaged products, incorrectly increase in the afternoon and evening, when
delivered products, products that do not fit the consumers return from work or school.
purchaser’s requirements and products that were
deliberately ordered in excess to allow a product Both effects have a different pattern frequency
comparison at home. and different peaks and troughs in volume. The
general trend is a deviation of -50% to +100%
The purchasing behaviour of consumers and the compared to the average order volumes. Both
service of web shops, therefore, cause substantial effects can strengthen each other, for example
additional return flows. As explained, the in the month of December, leading to even
consumer’s choice is traditionally limited to the greater peak traffic.
stock in the physical store and the amount of items
that can, or may, be carried into the fitting room.
Nowadays, customers of mail order companies E-fulfilment requirements
or web stores can order much more items than It is now clear that the roles of the two basic
they need, to try them extensively at home and to functions of logistics proper ty (storage and
subsequently send the products back that they do distribution) are changing profoundly by
not require. e-commerce handling. This requires a different
physical solution and, therefore, different
Research has shown that the percentage of requirements to the lay-out of the warehouse.
products that is returned differs by product type The impact is visualised in the following table.
and web store. A percentage between 10% and
20%, however, can be considered standard. As The changing nature of the storage and
studies show, rates of even 40% to 50% can be distribution functions are drivers of the specific
seen for women’s fashion. The pan-European requirements regarding location and building
retailer Zalando, for example, has reported specifications. These requirements can be
comparable figures. Returns are therefore an captured under “Location”, “Quantity of space”
extensive and costly process. Besides double and “Quality of space”. The effects, and their
transport costs, most companies have to set up a comparison to traditional distribution, are
separate process for the return flows. displayed in the following table.
Photography
Making pictures of the products immediately
after arrival in the e-fulfilment center is essential
for marketing. In-house photography has a
positive effect on the time-to-market: this way
new products received by the e-fulfilment center
can be made available for online purchase
within 48 hours. A second important aspect is
the accurate visualisation of the products. This
is decisive for site visits and successful sales. In
this way e-fulfillment and marketing have close
links with each other, whereas the amount of
space required for separate photo studios in the
e-fulfilment center is limited.
8 Logistics and E-commerceWhat does this mean for the real estate Pick-up points
market? Pick-up points are not a new phenomenon as
The most important aspect for the real estate such, but the business-to-consumer character
markets is the extra demand for space. In order of e-commerce is changing their nature.
to facilitate the wide product range and the large Initially, existing industrial property will be used
flow of returns, significantly more space is needed to establish Pick-up Points (PUP) or Pick-Up
than in a traditional operation with a comparable Drop-Off (PUDO) sites. Consumers can collect
volume of goods. Mezzanine floors are very well their products here, and in order to cater for
equipped to satisfy this extra need for space, as them, the property needs to have retail-like
the requirements in terms of free height and floor features. Above all, the strength of the location
load capacity are much lower than in case for is determined by the number of operators
traditional distribution. Immediate access to a using the PUP or PUDO, as this determines the
sufficiently large pool of labour is also essential, as amount of customers.
are the facilities required to provide efficient and
comfortable working conditions for the warehouse
staff. Mechanisation
Another difference with traditional distribution
As can be seen from the table, the requirements is the extent to which e-fulfilment processes are,
for an e-fulfilment (Multichannel/ Single channel) or can be, mechanised. Virtually no e-fulfilment
centre are more complex than for a traditional process can operate efficiently without a degree
solution. In order to place the e-fulfilment centre in of mechanisation. For combining orders and
a similar scheme as our basic storage/ distribution packaging shipments, conveyors and sorting
matrix, a different and more elaborate definition systems are frequently used installations.
of the axes is necessary. This can be seen in below This requires changes to the accommodation
figure where the classification of logistics property in terms of fire safety and climate control. This
is based on the complexity of the processes and means that for e-fulfillment solutions a high level
the stocking functions, rather than on a binary of investment is necessary. It is relevant to note
“yes/no” division. that investments have to be recovered through
high volumes (many orders) and a
long-term use.
E-fulfilment center
Multichannel
High
PARCEL HUB
X-DOCK DISTRIBUTION E-fulfilment center E-fulfilment center
CENTER Multichannel Multichannel
1ST LINE
BUILDING
PARCEL HUB
PARCEL HUB E-fulfilment center
X-DOCK DISTRIBUTION Single channel
CENTER
X-DOCK DISTRIBUTION
1ST LINE CENTER
BUILDINGPRODUCTION
1ST LINE COMMIDITY
Complexity of
DATA BUILDING STOCK
the processes CENTRES E-fulfilment center
Single channel
E-fulfilment center
PRODUCTION
Single channel
COMMIDITY
DATA STOCK
PRODUCTION
CENTRES COMMIDITY
DATA STOCK
CENTRES
Low
New Classification
Distribution
logistics real estate Bulk stock center
Essentially, a multichannel No Pick-stock
e-fulfilment centre is the Stock Virtual/ return
most complex form of the keeping Storage
Distribution
center
storage/distribution matrix.
Distribution
center
10 Logistics and E-commerceLogistics and E-commerce 11
12 Logistics and E-commerce
New development contracts with the end user. The risks are limited as
The requirements of e-fulfilment are creating a the fundamental change in consumer behaviour
challenge for the property market. On the one means that demand for this type of space will
hand, end users desire modern, high-grade remain. This provides the opportunity to create a
facilities that are customised to their own specific long-term investment product with a committed
e-commerce processes. On the other hand, they end user and an attractive direct return.
are very sensitive for occupation costs and are
generally only willing to commit to short-term Other real estate effects
lease contracts. Most existing properties are not Besides the emergence of e-fulfilment centres and
able to bridge this gap, leading to opportunities the consequences this will have for investors and
for developers. The limited availability of finance, developers, e-commerce is expected to have a
however, poses a severe threat. number of other effects on real estate markets. The
emergence of pick-up points is one of them.
Conceptual development might prove to be a
solution. Conceptual development involves the The impact on the retail real estate market itself
creation of a ‘concept’, or a vision on future market is much discussed and not the subject of this
developments. Conceptual development means the paper. The general conclusion is that the impact
realisation of this vision in a spatial context. The differs by type of retailer or product. Some shops
developer will have to take the initiative to work out will definitely disappear from the streets, as their
the e-fulfilment concept in close cooperation with products are easier purchased online. For products
his partners, the end user and the investor. They where the ‘look and feel’ are important features
will have to be involved in the early stages of the in attracting consumers, the online and physical
development process. retail channels appear to strengthen each other.
This is also displayed by the fact that e-commerce
Investment opportunity retailers are opening physical shops. Such
Although there is no “one size fits all” when it multichannel retailing is becoming a new standard,
comes to the real estate solution for e-commerce, but the demands on the location and type of retail
e-fulfilment is a property segment that in terms unit are becoming more strict.
of location, quantity and quality has to meet a
number of basic requirements.
Labour market
This has implications for the marketability of the The availability of labour is an essential factor for the location
object. Property that was previously regarded as of an e-fulfilment centre. The immediate availability of flexible
obsolete, for example because the free height workers is necessary due to the typical peak traffic in e-fulfilment
was too low or the mezzanine floors were too processes. An additional requirement is good access by public
large, might again come into favour because transport, also in the evenings. Such locations are to be found
of its location. On the other hand, built-to-suit directly near cities and in the western ‘Randstad’ conurbation.
e-commerce warehouses might prove to be only Established logistics hubs that are more access to labour, such
workable for one specific user and can become as for example Maasvlakte or Moerdijk, are therefore less
obsolete very rapidly. One should bear in mind suitable for an e-fulfillment center.
that e-fulfilment centers are not user-specific, but
use-specific.
Type of distribution centre Staff per sq m floor space
Investors should understand that a new standard Low volume distribution centre ~ 1 per 1,000 sq m
for logistics property is created. E-commerce Traditional distribution centre ~ 1 per 500 sq m
is a separate process, with a growing need for High volume retail distribution centre ~ 1 per 300 sq m
space in the middle and long term. There is also E-fulfilment (peak) ~ 1 per 100 sq m
a strong need for higher property quality, which
requires a higher investment, but also provides
the opportunity to engage into long-term lease
Logistics and E-commerce 13Conclusion As e-commerce has changed the traditional
E-commerce logistics is a growth market which standard for logistics processes, in-depth
only stands at the beginning of its development specialist knowledge is required to determine the
cycle. Most likely, there will be a long-term appropriate logistics solution for a specific product
and increasing need for real estate solutions or user group. The realisation of e-fulfilment
that handle the processing of consumer orders centres depends on this knowledge, both from
in distribution centres. This does not mean the side of the logistics and e-commerce parties
that traditional distribution solutions are set to as from real estate parties such as investors,
disappear. Rather, e-commerce has created a developers and lenders.
new segment that will exist next to traditional
operations, albeit with an increasing market share. There is a long-term interest which brings these
parties together. High-grade sites and e-fulfilment
E-commerce involves more and, particularly, more solutions with a mechanised lay-out require a high
complex processes than traditional distribution, as level of investment. This commits the end-user
the split of the commercial and physical channels is to the project for the longer term. Although the
leading to profound challenges in the supply chain. project is use-specific the risk is limited, as on the
These have to be matched by the e-fulfilment one hand the end user is known and involved in
centre, which is essentially the most complex form an early stage, and on the other hand the need
of warehousing available. for e-fulfilment solutions will increase due to the
further growth in e-commerce. This long-term
This means that building specifications are no perspective makes it possible to achieve a solid
longer a sufficient tool for identifying logistics return on investment. For real estate investors,
property. It is firstly necessary to understand and this provides an opportunity and a valuable
measure the interaction of the basic functions of diversification of the portfolio.
storage and distribution. Although there is no “one
size fits all” when it comes to e-fulfilment, it is a
property segment that in terms of location, quantity
and quality of space has to meet a number of basic
requirements. E-fulfilment centres are, therefore,
use-specific but not user-specific. The extra
demand for space is a very important requirement,
which to a large extent can be met by mezzanine
floors. The access to a sufficiently large pool of
flexible labour is also essential.
Research findings e-fulfilment centers
Location factors
1. In the consumer market.
2. Proximity network hubs and/ or depots.
3. Proximity workforce that is sufficient, flexible and employable.
Quantitative space
1. Larger space requirements in floor area of warehouse space.
2. Larger office space requirements.
Qualitative space
1. Lower requirements regarding the constructive object specifications.
2. Higher requirements regarding the quality of the space, installations and facilities.
14 Logistics and E-commerceLogistics and E-commerce 15
For more information about this publication please contact:
CBRE B.V.
+31 (0)20 626 26 91
netherlands@cbre.com
www.cbre.nl
Dries Castelein
Senior Director Industrial & Logistics
Machiel Wolters
Director Research & ConsultancyYou can also read
