Too Many Malls – Not Enough Warehouses: What Does this Mean for Retailers?
Have you been following the mall-pocaylpse? The rate of brick-and-mortar store closings is escalating at an alarming rate and it’s got everyone wondering exactly what it means for the future of retail.
The short answer, of course, is e-commerce but it's not as easy as just moving business online and out of stores. As the percentage of e-commerce rises, new challenges are created – challenges that retailers will need to deal with right away.
First is the challenge of operating a fully e-commerce fulfillment model. To process millions of single-parcel orders and ship them to consumers, retailers will need a lot of space.
In fact, e-commerce fulfillment requires three times more square feet of warehouse space to operate than traditional industrial operations.
And that space will need to be as close to the customer as possible, since it’s the retailer who will be expected to pay for the fast, free shipping and returns (a cost burden that makes e-commerce orders less profitable than brick-and-mortar purchases, per the Wall Street Journal)
But securing space in strategically placed locations has become nearly impossible for businesses of any kind. Warehouse space is at a 15-year low, with demand outpacing supply by 2:1. That short supply is driving up prices. Warehouse cost in Q4 2016 was up 6.6 percent over prior year, marking that the 12th consecutive quarter of increased rates.
Retailers that can secure enough space to ramp up e-commerce fulfillment to meet consumer demand will be met with a second problem. While physical stores will be shedding retail jobs, there will be labor shortages to contend with inside warehouses and out on the road.
Labor inside the warehouse has become more expensive to obtain and harder to keep with turnover rates continuing to rise. The cost of replacing a lost worker has been calculated as little as $7,000 per worker and as much as $48,000.
The retail orders that used leave the store inside a shopping bag now travel in the back of a truck. But on the road, the average age of a truck driver is 49, and many of them are now retiring. This, combined with industry turnover in general, has some projections showing a need for 100,000 drivers heading into in 2017.
Lastly, this shift in how commerce happens is also changing the very nature of how consumers connect with brands. New brands used to need an in-store retail presence to build momentum, showing up on end caps or near registers as a testing ground for consumer interest. Now, a new brand can launch through an online retailer without having to battle for shelf space or build a reputation slowly market to market, diminishing the element of “discovery” that used to be a hallmark of the in-store experience.
Storefronts also used to be the ultimate purveyor of brand experience – the décor, the deals, the music, the service – all designed to make you browse longer and return often. Now shoppers make buying decisions based on delivery speed, shipping cost, and return policy – the highest level of convenience at the lowest possible price. Standing out from the competition and compelling consumers to build long-term loyalty will require a different approach.
In fact, all of these challenges will require a new set of tools and processes if businesses want to hang on until the next (inevitable) retail revolution.
Investing in space-conscious, labor-friendly solutions for warehouse fulfillment. Retailers will need to invest in equipment and materials that take up less space and are effortless for employees to use so that they can maximize every square foot of their hard-won, high-cost warehouse space and also reduce the time required to ramp a new labor hire up to full capacity (and keep him or her there).
Creating smaller, smarter parcels. High labor turnover and absenteeism leads to mistakes (up to 30 percent in variations between orders), and can also lead to wasted cost. In our work observing the operational efficiency of high-volume fulfillment facilities, we estimate that employees are putting a minimum of 10 percent too much packaging in every box than is needed, and even still, most orders go out the door with 45 percent void inside.
That’s empty space and extra packaging that takes up too much precious room on the back of trucks and for which retailers have to pay to ship. Retailers need smarter solutions that dispense the right amount of protective material for every order, and smaller options that provide equal or higher levels of protection with less packaging.
Thinking creatively about ship from store. Restructuring your sagging storefront to operate more like a mini-fulfillment center can have significant benefits (avoid the high cost of warehousing, close proximity to the customer, make use of existing labor), but it can also be the source of a lot of hidden risk if it’s not designed with packaging solutions and strategies that will deliver a consistent brand experience.
Elevating the at-home unboxing experience. Doors to stores may be closing but doors to consumers' homes are opening. Creating memorable, tactile, colorful, customized experiences through enhanced packaging can increase the likelihood of return shoppers by as much as 77 percent.
Retail as we know it is definitely changing, and it’s happening faster than we might have imagined. How will you keep up?