Go large, go local: how real estate is fulfilling the customer experience

If it’s not near-instant, it’s inconvenient. Fulfilment has become increasingly integral to the customer experience. To keep pace, major retailers are optimising their real estate along every step of the supply chain (from warehouse networks to retail parks). Many are also adopting innovative distribution strategies. Underpinned by rapidly advancing technologies, this is a trend with significant (first and last) mileage for professionals investing in real estate.

Increasingly complex delivery networks will continue to drive change across real estate markets. Large-scale logistics buildings are more important than ever, and we continue to see companies investing into high-quality, new facilities. At the same time, the last mile requires well-located, technically capable and flexible real estate solutions that include a mix of industrial logistics, retail warehouse and supermarket assets.

Here’s what we’re seeing:

1.  The direction of the retail market is becoming clearer as the omnichannel model matures

Retail disruption, created by the rapid growth of e-commerce and turbocharged by covid, challenged thinking around consumption patterns. In the post-pandemic world, however, a more mature omnichannel model has emerged.

ONS data shows that around 27% of retail by value is purchased online. But with food at just 9% – reflecting the huge proportion (including many home deliveries) facilitated through store networks – other product categories such as clothing and footwear are higher than this average. Demographic shifts creating an increasing proportion of digital natives (with growing spending power) should continue to drive further e-commerce penetration.

This high-level delineation between on- and offline doesn’t fully reflect the realities of the customer experience, however. In practice, this often shifts between channels multiple times through the stages of pre-purchase, purchase, delivery and potential return. For example, analysis from Retail Economics suggests that of the 62% of buyers who browse for non-food items online, 20% then buy them instore. Even for those who buy online and have home delivery (on paper, a true online experience), the returns process is varied and uses a range of property types. An estimated 15% of e-commerce purchases are returned. These are facilitated in-store or via a drop-off point, courier pick-up or online postal return.

Purchasing behaviour will continue to evolve, but it’s likely that the buying and returns experience will continue to be facilitated by a variety of real estate types. Logistics buildings (first, middle and last mile) will play a crucial role, but the mix will continue to include more traditional retail spaces, such as supermarkets and retail parks that benefit from intentional shoppers, good road connectivity and the flexibility to offer omnichannel fulfilment.

2.  Changing shopping habits are driving network evolution

The last mile is critical, and the most challenging section of the supply chain to get right. While there’s no single solution, some interesting and innovative distribution models are emerging alongside the warehouse-based e-commerce model.

In the US, Walmart has created the GoLocal platform. Launched in 2021, this service enables others to leverage Walmart’s scale and delivery infrastructure platform for efficient local delivery and last-mile fulfilment. With more than 16,000 pick-up points across the US, it’s made 12 million deliveries since inception: creating network efficiencies through higher volumes and delivery density, along with a new revenue stream. Meanwhile, Target has been able to compete for speed of delivery by adopting a ship-from-store strategy, using its nearly 2,000 stores across the US to handle more online orders through new inventory management software.

In the UK, well-capitalised retailers, such as Next and M&S, have established successful omnichannel models. On the one hand, they are investing in and running increasingly efficient warehouse-based e-commerce operations, often leveraging third-party carrier networks to complete last mile delivery. On the other, they continue to right-size their extensive retail networks to serve traditional retail and click & collect. Their physical estate is also vital to facilitating returns, which remain challenging to process.

An upside of this is the ability to offer third-party brand fulfilment to open a new revenue stream. In doing so, retailers can get more out of their extensive supply chain networks. M&S, for example, shared plans in 2023 to increase the number of third-party brands it sells from 60 to 100 (targeting £1bn in third-party sales). Next now sells around 1,000 third-party brands (up from 500 just a few years ago). According to J.P.Morgan, M&S and Next are expected to see strong revenue growth and EBITDA margins to improve by at least 50bps in 2024.

Pure-play online and parcel delivery companies also continue to evolve their networks. After expanding rapidly to meet the extraordinary pandemic-driven demand, companies are now revisiting their networks: looking for ways to make them more efficient, improve coverage and support the transition to cleaner transportation. 

In mature digital markets, it’s become clear that there are many complementary ways to serve the modern-day consumer and (profitably) meet the demand for near-instant gratification. It’s not so much about online versus offline or a single property solution as continuing to optimise every element of a supply-chain network – with the right real estate along the chain. For most, this is still a work in progress.

3. No surprises here, but technology will continue to be a critical enabler

None of the above would be possible without rapidly advancing technologies. These include RFID (Radio Frequency IDentification) to track items in real time, improving visibility and reducing error and fraud; predictive analytics to better forecast demand and optimise what inventory is held in the right locations; and robotic picking to reduce human error and labour costs (vital in areas with labour constraints).

AI will take this to new levels. We’re already seeing AI-networked delivery (often in conjunction with fleet electrification) being deployed to optimise routes in real-time (for both end-customer delivery and between logistics hubs): creating more visibility on delivery times; reducing time in transit, dead mileage, congestion and carbon emissions; and optimising EV range. This has also opened revenue stream/Software-as-a-Service (SaaS) opportunities for leading retailers with Walmart’s Route Optimization software a prime example.

These technologies will continue to rapidly evolve. For the last mile, any real estate that wants to be part of this solution must be able to facilitate the technology and operations required by retailers. In practice, this means (renewable) power availability and the right building specifications (size, height, floor quality, mix of retail and storage space, EV charging, access etc.). Not so much ‘location, location, location’ as ‘location, labour and power’.

Key takeaways for real estate investors:

• We see a complex delivery matrix emerging at the extremities of the supply chain with companies making use of a diverse mix of real estate to facilitate the many different routes to market they now need to offer the digital consumer.
• In the first mile, we continue to see retailers consolidate into high-quality, large and typically new buildings that can facilitate modern, automated processes and greater technology adoption. For retailers, this is reducing the cost to serve; increasing speed and accuracy; and helping fulfil growth ambitions.
• Intelligently located real estate for last-mile distribution is more important than ever. Industrial/logistics property will remain the critical use-type. But along with innovative new solutions, retail warehouses, supermarkets, drop-boxes and lockers will have increasing roles to play.
• While location is as important as ever, a building’s physical attributes must still meet the current and future needs of occupiers. Facilitating an occupier’s technology ambitions will be key, as every location needs to be part of a complex data-driven network. Power provision and digital connectivity are vital. Given the pace of change, flexibility is important, but modifications often require capex, which needs to be carefully underwritten and deployed.
• Network evolution will benefit real estate that is well-located and well-configured. Investors must question: is my real estate priced appropriately for the role it now plays in the supply chain? This is increasingly the case for high-quality, well-located retail warehousing and supermarket assets, where we’re seeing increasing scope for rental uplift, as well as asset management opportunities to boost income – reducing reliance on the market for income growth.
• Finally, are you sure you know what role your real estate truly plays? Discerning relevant assets in a fast-evolving market requires detailed occupier and market insight.