1 The global omni-channel revolution Logistics and real estate implications for retailers
2 2 The global omni-channel revolution Introduction The retail landscape is changing rapidly and radically because of the impact of e-commerce. As everywhere commerce becomes a new normal, retailers are realizing that it is no longer enough to offer customers multiple shopping channels - instead these need to be fully integrated and managed so as to provide customers with a seamless omni-channel shopping experience. What is more, this transformation is challenging the very notion of retail and definitions of what it means to be a retailer. More manufacturers are selling direct to consumers, and marketplace providers - such as ebay and Alibaba - are creating platforms for third parties to sell their goods whilst not owning, or selling, any stock themselves. Google, the internet giant, has also entered the retail space, collaborating with retailers to provide an express shopping service. Last year, we published a white paper showing how this e-commerce boom is driving a global wave of demand for new logistics facilities. In this short follow up paper we consider some of the latest trends and provide our view on what retailers need to do from a logistics and distribution real estate perspective to stay competitive. The global omni-channel revolution is already having dramatic impacts but in many respects it has only just begun. As it unfolds it will heighten the importance of supply chain optimization for retail performance and highlight the significance to retailers of having the right logistics and distribution real estate. Craig Meyer Chair Global Industrial Board President Industrial Brokerage, Americas
3 The global omni-channel revolution 3 Key Takeaways The transition to omni-channel retail requires a total transformation of retail supply chains so that these become consumer, rather than channel, focused. In an omni-channel world, supply chain optimization will become even more important for retail success and the brand reputation of retailers. Retailers must ensure that their real estate is fully aligned to support their omni-channel supply chain strategy and may seek to do this by working with third party logistics partners. Having the right physical real estate, retail and distribution, in the right locations with the flexibility to change will be critical success factors for retailers. The specification and internal layout of distribution facilities that retailers will require for omni-channel logistics will be different from those that service stores because of the different types of operations undertaken and the different vehicle types employed.
4 4 The global omni-channel revolution Recent trends 1 Online sales to grow apace cross border e-commerce will grow fast and online grocery will take-off Total global B2C e-commerce sales will top $1.5 trillion in 2014 and jump to over $2.3 trillion by 2017, according to emarketer. Separate forecasts continue to show robust online retail sales growth, far outpacing the growth of sales from physical stores. Forrester predicts that US online sales will increase by 9.5% pa between 2013 and 2018, while Europe will post growth of 12% pa. Emerging markets will become major engines of growth, as their middle class populations expand and smart phones and tablets become more widespread. Global B2C E-commerce sales, North America Ç 53% Western Europe Ç 43% Central & Eastern Europe Ç 48% $431bn $660bn $312bn $445bn $50bn $73bn $27bn $51bn $384bn $1053bn $48bn $75bn Ç 90% Middle East & Africa Ç 55% Latin America Ç 174% Asia - Pacific E-commerce spending Worldwide 2013 $1,251bn 2017 $2,357bn Source: emarketer Ç 88.4% Increase
5 The global omni-channel revolution 5 International (cross border) e-commerce is predicted to boom. A recent study by OC&C Strategy Consultants shows that global search volumes already exceed local ones and predicts that e-commerce export values will increase by 30% pa between 2013 and A separate analysis by EMOTA, the European Multi-channel and Online Trade Association, suggests that across Europe cross border online sales will grow twice as fast as domestic rates between 2013 and This growth will make the retail competitive landscape far more international or global than previously, opening up opportunities for retailers to access new consumers in new markets, but at the same time exposing retailers to new competition in their existing markets. Online grocery spending is also predicted to take-off. The single biggest category of retail spending in many countries, grocery has to date been the most resistant to the advance of online shopping. Even in the UK, where online spending is relatively mature, it only accounts for 4.4% of total grocery spending according to the Institute of Grocery Distribution (IGD). However, this is predicted to change as retailers in many countries are now ramping up their online food offer in response to rising demand, and a need to maintain market share. The Boston Consulting Group (BCG) predicts that the global online grocery market will increase from $36 billion in 2013 to $100 billion by This growth will generate new requirements for logistics facilities. Existing models for online grocery vary. In the UK, the major supermarket chains mostly pick orders from their stores, but as volumes have increased there has been a movement to more dedicated distribution centers, notably around London. In France, click and collect and drive thru, which was first introduced by Auchan, are the main models. In the US, Peapod, which is owned by Dutch retail giant Ahold, picks from dedicated warehouses and smaller warerooms in Shop & Stop markets to serve more than 20 markets, while online retailer Amazon Fresh picks from dedicated warehouses to service four major markets, with reports saying that it is planning to expand into another 10 to 20 new markets. Instacart provides a same-day grocery delivery service in a number of cities, using personal shoppers who pick up grocery orders from local supermarkets and use their own vehicles for delivery - the company does not own any stores, warehouses or trucks.
6 6 The global omni-channel revolution 2 Omni-channel challenges existing retail economic and operating models, but offers significant benefits The transition to omni-channel retail will strain traditional retail economic models because channel migration will change revenue streams and undermine the productivity of physical stores, and greater price transparency will put pressure on margins. In addition, omni-channel challenges traditional operational models. While most multi-channel retailers have supply chain structures that are based around independently managed channels, the need to deliver a seamless and integrated customer experience across all shopping channels will require significant business restructuring embracing people, processes, technology and external partners. Instead of organizing the business around different channels, retailers need to be completely consumer centric to provide a superior customer experience based on choice, cost, convenience and consistency. Omni-channel retailers need to organize their business around the consumer, not channels CONSUMER Once implemented, an omni-channel approach has potential to provide retailers with significant benefits including an increase in sales through enhanced availability and responsiveness and a stronger brand reputation based on providing a superior customer experience. In fact, in today s digital world, brand reputation is more at risk than ever before if retailers fail to meet increasingly demanding customer expectations.
7 The global omni-channel revolution 7 3 Logistics will become an even more important source of differentiation Logistics is already recognized as a differentiator for retailers but the transition to omni-channel retailing will reinforce this because efficient logistics will be essential for retailers to provide a high level of service across all their channels, whilst simultaneously enabling them to take advantage of any synergies that may exist between them, such as using the store network for fulfilment, click and collect or handling returns. become a more significant component in fulfillment because consumers often consider it a more convenient and consistent method of fulfillment than home delivery. Many retailers offering click and collect are now introducing collection from a wider range of locations, such as mainline or underground train stations, airports and convenience stores. This choice is attractive to customers but introduces more challenges for retailers. Fulfillment is critical to any omni-channel operation and is increasingly recognized as a source of competitive advantage. In the early days of e-commerce, the competition between retailers was largely based around delivery reliability but in more mature markets retailers are increasingly competing on the basis of time. For example, Amazon has recently gained a patent for anticipatory shipping, to compress the order fulfillment time 2 and in the UK it has launched a Sunday delivery service to Amazon Prime members in seven cities to speed delivery in these markets. However, while speed of delivery is important it is not the only consideration, as customers also value convenience and delivery reliability. Click and collect is rapidly growing in certain countries and will Returns can be hugely challenging, and for some retailers their customers are becoming their biggest suppliers. Returns may be as high as 50% of online orders in retail sectors such as apparel and while the customer wants a convenient and low cost service with a quick refund or replacement, retailers need to reduce costs and maximize the value of returned items. The key to this is to focus on the value curve for returned products. Typically, a product s value and relative handling costs determine its final disposition on this curve. This is an area that presents many retailers with an opportunity to improve efficiency. These logistics challenges will have significant implications for retailers real estate including the configuration of retail store portfolios and distribution networks. The challenge of returns processing the key is to focus on the value curve Product value and relative handling costs determine final disposition High Margin Recovery Source: IForce Scrap Charity Recycle Jobber /Auction Return to Web and vendor Sales Outlet Return to stock Low Margin Recovery 2 In this system Amazon says it may ship products it expects customers to want, based on previous orders and other factors, to a holding position until an order is actually placed.
8 8 The global omni-channel revolution 4 Different countries pose different challenges Although omni-channel retailers face similar general challenges around the world, including stock availability, visibility, responsiveness and fulfillment, different countries pose different specific challenges, reflecting variations in technology and in the way people shop, pay for and expect to receive (and return) goods. Levels of internet penetration vary significantly around the world as does how people access the internet. In some countries, such as China, internet access is more mobile-driven, while in others, including the US currently, it is more desktop-based. The uptake of new technologies with potential to shape e-commerce and consumer behavior, such as wearable technologies and 3D printing, is also highly variable. Beyond technology, these differences are highlighted in numerous ways. For example, consumers in different countries have different preferred payments systems: in India, cash on delivery is widely used, in Brazil payment by instalment is often preferred and in Russia cash rather than card is preferred. more significant in last mile fulfilment, but click and collect is less common in the US and not yet a significant feature of the Chinese market. The significance and growth potential of online grocery also varies widely. Currently this is relatively small in the US (under 1%) compared with the UK (approaching 5%), but both markets are expected to see strong growth in online grocery sales. The quality of the logistics infrastructure in different countries is also highly variable as is the presence of major logistics operators and the quality of local postal services, including the ability to track purchases and manage returns. In some countries where the logistics infrastructure is relatively undeveloped, retailers may need to build their own warehouses and delivery networks, often with the support of logistics service providers. In China, for example, market leader Alibaba is partnering with parcel delivery companies to develop a warehouse and logistics network to make 24-hour deliveries possible nationwide 3. How orders are fulfilled also varies widely. For example, in the UK and France click and collect rather than home delivery is becoming 3 DHL Supply Chain Matters. E-tailing in emerging markets: The last-mile challenge
9 The global omni-channel revolution 9 Required actions - real estate alignment and re-configuration The transition to omni-channel retail requires a complete transformation of the business embracing people, processes and technology, but the reconfiguration of real estate is a critical part of this change. Retailers need to ensure that their real estate is fully aligned with their omni-channel supply chain strategy and, if not, restructure their retail and distribution real estate to stay competitive. As sales migrate from conventional to digital channels, most retailers will need less physical retail space but our research suggests that stores will remain at the center of retail operations for most retailers as they integrate physical and digital experiences to provide an interactive and all inclusive in-store experience 4. As a result, stores will become increasingly important in terms of delivering a superior customer experience to shoppers, for example by being places where consumers can learn about and experiment with products and engage with knowledgeable staff. In addition, stores will increasingly be part of fulfillment operations, either by supporting click and collect, or by providing a channel for fulfilling online orders or for receiving returns of online purchases. In this respect, the growth of omni-channel will blur the distinction between shops and distribution centers, and retailers will have to leverage all their real estate to maximize advantage. As retailers expand online they will require additional logistics facilities. For example: Retailers seeking to expand their e-commerce operations internationally may need to establish additional fulfillment facilities and local return processing facilities to provide the expected level of customer service. As online grocery expands, retailers in this market will also need to acquire an appropriate logistics network to meet this growth - and in areas where sales densities are highest this is likely to be achieved most efficiently from dedicated fulfillment centers rather than stores. Retailers seeking to provide faster delivery times, or even a same day service, may need a network of logistics facilities to provide quick response times to the major urban areas in the markets they are serving, as Amazon is developing in the US. In many respects the specification and internal layout of facilities that retailers will require for omni-channel logistics will be different from those that service stores because of the different types of operations undertaken and the different vehicle types employed. From a distribution network perspective, retailers need to ensure that they have appropriate facilities to support their supply chain objectives and, or, an appropriate logistics partner that can help them in this respect. This means that retailers need to decide how to structure their distribution networks to service their different channels, products and geographical areas and to decide whether to manage their facilities themselves or to use third party logistics operators on either a dedicated or shared user basis. For example, whereas store orders typically involve pallet and case quantities, online orders usually involve individual items that have to be individually packed prior to distribution. In addition, with store replenishment delivery is usually undertaken by articulated trailers or rigid vehicles whereas with e-fulfillment smaller vehicles or vans may be used. Retailers also need to plan for processing returns and decide whether to do this within their fulfillment centers, in dedicated facilities or to out outsource this a 4 JLL (2014), Redefining Retail Places. The role of physical space in an increasingly virtual world
10 10 The global omni-channel revolution third party logistics operator. These considerations may affect the shape and height of the building (length, width and height), the number and type of doors required and the external yard space especially. Given the speed with which the retail landscape is evolving, retailers need to plan their distribution networks and buildings with flexibility in mind, so that these can respond to changes in consumer demand. In some situations it may be appropriate for retailers to pass responsibility for order fulfillment upstream to their wholesalers or suppliers with the result that orders are sent direct to customers bypassing the retailer s distribution network entirely. This practice, known as drop shipping is a growing trend, which has been facilitated by improvements in IT infrastructure and supplier collaboration. This is often difficult with real estate, because buildings and networks are difficult to change quickly, a factor that often leads retailers to work with a logistics partner particularly to cover peak periods in sales. An omni-channel logistics model Retailer Store RDC Retail Store 3PL Supplier goods warehouse e-fulfillment center Regional collection center Ground sort hub Parcel delivery center Source: JLL, 2014
11 The global omni-channel revolution 11 Conclusion The transition to omni-channel retail challenges the logistics operations of retailers and requires a total transformation of their supply chains in order to provide the choice, low cost, convenience and consistency of service that consumers demand. Going forward, retail supply chains must be organized around the consumer, not around channels, and they need to be increasingly agile and innovative to respond to volatile consumer demand. In the emerging omni-channel world of everywhere commerce, supply chain optimization will become even more important for retail success and the brand reputation of retailers. Retailers must ensure that their real estate is fully aligned to support their omni-channel supply chain strategy. As a result, having the right physical real estate, retail and distribution, in the right locations with the flexibility to change will remain critical success factors for retailers even in an increasingly virtual world.
12 JLL contacts The best way to learn more about how we can deliver real value to you and your organization is to talk to one of our experts. We look forward to hearing from you. AMERICAS Craig Meyer President - Logistics & Industrial +1(424) Kris Bjorson Head of Retail/e-commerce Distribution +1(773) Rich Thompson Head of Supply Chain & Logistics Solutions +1(773) EMEA Philip Marsden EMEA Head of Logistics & Industrial +44 (0) Guy Gueirard EMEA Director of Logistics & Industrial ASIA PACIFIC Michael Fenton Head of Industrial Australia Stuart Ross Head of Industrial China RESEARCH Jon Sleeman Director EMEA Logistics & Industrial Research +44 (0) Aaron L. Ahlburn Senior Vice President Director of Research, Industrial & Retail, Americas December 2014 COPYRIGHT JONES LANG LASALLE IP, INC This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.