Few of us have not been touched by the rise of e-commerce in recent years. The ability to shop and make purchases from virtually any location is quickly becoming a routine expectation for most Americans. Online retailers are taking advantage of the ways that technology enables more targeted marketing, creating a personalized shopping experience for customers that’s based on their past searching and purchasing behavior.
While online shopping is certainly growing more rapidly than in-store retail –at a rate of 5 to 1-it still has a long way to go in terms of total sales. It may be surprising to learn that the total for spending in-store is $144 billion, or 94% of all retail sales, so online shopping actually accounts for a small share of overall revenues; just over $38 billion annually.
All of this is having a profound effect on retail and industrial real estate. Innovations like free returns and same day delivery are tremendously accelerating the rate of change in approaches to retail and distribution. Shorter delivery times are changing the way that order fulfillment is done, creating a need for smaller, more nimble “last mile” distribution options. Omni-channel shopping is changing the in-store experience, driving the evolution of retail space. Here’s a closer look at how virtual activity is impacting physical space in CRE.
#1. Retail space
The Internet has blurred the line between the online and physical worlds, and retailers are moving toward making stores an integrated extension of their online presence, and vice versa. There’s more emphasis than ever being placed on a more personalized in-store experience, and retail space is sharply curated. Stores are streamlining in-stock options and including more events and experiences in-store that relate to their customers’ priorities and interests.
#2. Reverse supply chain
With the rise of free shipping and returns, retailers and logistics companies are grappling with the task of managing massive amounts of returned merchandise. Business Insider reports that reverse logistics eat up 10-20 percent of annual profits for retailers. Taking an omni-channel approach is one way that they are reducing the costs from returned goods. Another is to increase the use of “click and collect”, where shoppers buy online and then pick up in-store.
Shoppers who may have hesitated to make a purchase when they had to pay for shipping are now glad to order several items –a shirt in 2 different sizes, for example- to evaluate and possibly return if they don’t work. When large numbers of items are sent back, retailers must have facilities and systems on hand to manage them. This is leading to increased emphasis upon warehouse space that’s dedicated to that task.
As customers become more and more accustomed to fast, free delivery, the logistical challenges for retailers become more complex. With companies like Amazon offering same-day, and in some cases one-hour delivery, merchandise must be close at hand. This is leading to a good deal of repurposing of existing “light industrial” properties. Getting merchandise to stores in urban areas in a short timeframe is creating a demand for a wider network of smaller (under 200,000 square feet) warehouses and distribution points.
As e-commerce continues to grow, the demand for strategically placed distribution hubs intensifies. It’s estimated that the locations of Amazon's fulfillment centers bring it within 20 miles of 31% of population. Another retail giant, Walmart, acquired the e-commerce startup Jet.com for $3 billion this year, signaling its commitment to growing e-commerce within that organization. Macy’s department stores are transforming operations to accommodate their online arm.
Burgeoning e-commerce is injecting new vitality into retail, and it’s creating new opportunities in CRE as well. The brick-and-mortar store is far from dead, but it’s evolving to meet consumer expectations in the digital age.