Nelsen: u201cLittle dynamics have to be taken into consideration.u201d

ORANGE COUNTY, CA—Parking, transportation and HVAC costs in industrial facilities are some of the issues e-commerce retailers are facing in an attempt to shorten delivery times. As reported earlier this week in Part 1, logistics has become sexy again as retailers aim for this goal. In Part 2 of this two-part story, we continue our discussion with Mike Nelsen, chief development officer of online merchandising and fulfillment platform CommerceHub in Albany, NY, and Jim Linn, SVP investments for Illinois-based Centerpoint Properties’ Southern California presence, regarding some of the logistics challenges retailers face and how they are being met. What can you tell us about the role smaller infill industrial facilities are playing in the logistics game?

Linn: You’ll see pure industrial facilities in the infill markets. Companies like Macy’s, which has maybe 700 stores, will handle e-commerce orders in more than 500 of those stores, so some retailers are able to take care of it out of retail locations. But you’ll start to see smaller industrial facilities in heavily populated areas like West L.A., North Orange County—pretty close to the population centers in Southern California. Where and how many there will be will depend on the number of infill locations they already have, but you may see one in the South Bay, maybe one in the north, and San Diego could be another.

In addition to spending money on e-commerce facilities instead of new retail spaces in malls, a lot of investment is going into inventory-management systems as stores reduce the amount of inventory they carry and reduce distribution costs. It’s not difficult for them to figure out, and I suspect many retailers are prepared to answer the question of whether they can satisfy delivery needs internally or not—and they probably have already done so. Some of the leaders in the market—not just Amazon, but Nordstrom, Zappos and Walmart—are fulfilling out of existing retail facilities. Walmart has a pick-up service where you can order online, but go to the local Walmart to pick it up. They have warehouses within their retail stores and can send orders out of there. What are some of the logistics challenges these suppliers face in trying to provide direct-to-consumer service?

Nelsen: If they’re looking at cost, they may consider a 3PL that can do the job cheaper than they can. They have to consider the cost of moving the freight and incorporating that into their margin. They also have to consider shipping costs at a zone 1 rate vs. a zone 8, which may offset some of those costs. There also could be tax implications if they buy real estate in a state that’s new to them; there could be regulations at play. These things may not be significant, but they’re little dynamics that have to be taken into consideration.

Linn: Suppliers need to consider if a building is ideal for e-commerce or not. Larger buildings need super-flat, higher-strength floors, also requiring insulation and need to be 100% air-conditioned. The shape of the building is also important: most e-commerce sites are shaped like sausages, and they may share the same conveyer system for incoming freight as outbound. The parking issues need to be addressed since they may need to hire several-hundred employees. Being close to public transportation is also nice. You also want to be near a UPS or FedEx hub so you can send your shipments out the door later in the day. You want to be in a zone that can handle 24/7 operations, so you aren’t close to residential with trucks running in and out at all hours. Some of these e-commerce buildings are three stories in some parts of the building—a mezzanine section is put in—so you need a very tall building, which is harder to find in an infill market, but easier to find or build in the Inland Empire. What’s the next wave in retail/industrial customer service?

Nelsen: There’s a lot of talk about taking advantage if existing real estate to provide opportunity. But the question is, how far can the customer’s perceptions be changed? Is there another round of evolution? The reality is, yes, there is. How far can the envelope be pushed to where people can still make a profit in regards to selling merchandise, and how much is the consumer willing to pay for increased service? Some people pay for valet parking, and some don’t. Some will pay for enhanced service, but many won’t. Those end up being the factors and questions in play.

Linn: The change happening is that the transit time for the customer is going to get shorter, and retailers will figure out a way to get even closer to the customer.