Shrinking delivery times generate strong demand for urban warehousing facilities
It didn't take long for Amazon Prime's same-day delivery service, available in just a handful of U.S. cities in 2014, to evolve from novelty to industry norm. Then, last year, Chicago became one of the pilot markets for Amazon Prime Now, through which everything from basic household items to TVs are delivered to customers' doorsteps in an hour or less.
The shrinking delivery times, together with rising e-commerce sales, have e-tailers and brick-and-mortar giants alike scrambling to adapt their distribution channels, with many focusing on the final leg - or so-called "last mile" - of a product's journey from warehouse to consumer.
Amazon has been particularly aggressive in its development of last-mile fulfillment centers near major population centers. In August, for the third time in as many months, the company announced another such facility in Chicago's suburbs - this time, an 850,000-square-foot warehouse in Monee. The news followed earlier announcements in May and June about similar facilities in Joliet and Romeoville, respectively.
Why so many distributions centers so suddenly? The shorter delivery times - which are just getting shorter, as demonstrated by Amazon Prime Air, a drone delivery service currently in development that is targeting delivery in 30 minutes or less - require more inventory to be on-hand locally. Not to mention, goods packed in separate boxes for shipments to customers take up much more space than those same goods stacked in pallets for bulk delivery to retailers.
Census data backs up the new retail reality: e-commerce sales accounted for 8.1 percent of all retail sales in second-quarter 2016. The e-commerce sales total of $97.3 billion represented a 4.5 percent increase over the first quarter and a 15.8 percent jump over the same period last year.
To compete in this arena, Wal-Mart Stores Inc. is spending heavily. Its recent $3.3 billion acquisition of Jet.com, the largest purchase of a U.S. e-commerce startup, was intended to level the playing field.
But catching up won't be easy. While Amazon Prime Air does not yet have an official launch date, the company already has introduced new services like Amazon Flex, through which independent contractors pick up and deliver goods in Uber-like fashion. In addition to developing massive suburban warehouses, Amazon is also pursuing urban infill opportunities, recently leasing warehouses on Goose Island and the South Side.
Although most brick-and-mortar retailers aren't as advanced in their delivery channels, they do have a distinct advantage: an established network of physical storefronts - many in highly accessible locations - that can function as mini-fulfillment centers. In order to stay competitive, Wal-Mart and other retailers have started reconfiguring the footprint of their brick-and-mortar locations in order to facilitate faster at-home delivery and in-store pickup. In some cases, this is done by reducing showroom space to make room for more efficient warehouse storage or by using shelf inventory to fulfill orders placed online.
It's a different approach compared with how online orders have historically been fulfilled by brick-and-mortar retailers. Rather than goods going directly from warehouse to consumer, they move from store to consumer - a faster model for retail chains that already have locations near residential neighborhoods. Larger suburban warehouses are still needed, but rather than inventory going directly to customers, it is increasingly being used to restock store shelves.
Brick-and-mortar retailers aren't the only ones taking a page from the competition. As they expand their e-commerce presence, Amazon is going the opposite direction to pursue brick-and-mortar opportunities. The company recently announced plans to open an offline bookstore on Southport Avenue in Chicago's densely populated Lakeview neighborhood, replicating a format first introduced in Seattle in fall 2015.
As Chicago, one of the country's main distribution hubs, sees its real estate landscape evolve to meet the increasingly complex needs associated with last-mile delivery, cities throughout the world are watching, ready to apply the best practices that emerge.
• Ryan Phillips serves as director in Transwestern's Agency Leasing: Industrial group in Chicago. He can be reached at ryan.phillips@transwestern.com.