The Amazon Effect and the Rapid Growth of Distribution Projects
arry Gigerich was recently asked to present at a Site Selectors Guild webinar focused on the logistics industry and economic development incentives. His portion of the discussion focused on how Amazon has been shifting consumer shopping behavior for some time and is well positioned to benefit from the COVID-19 pandemic forcing consumers to embrace e-commerce for obtaining many types of goods and services. In this article, we will outline the information shared and how Amazon’s service model and distribution projects are here to stay.
Amazon Primes the Pump for Consumer Shopping Behavior
It may seem hard to believe, but Amazon Prime launched 15 years ago in 2005. When it debuted, subscribers paid $79 for two-day shipping on an unlimited number of items. Today, the membership fee is $119, with 112 million U.S. Prime customers and growing. Since its inception, the data on consumer shopping behavior continues to shape future business strategies. We now know that same day delivery shoppers purchase more frequently as consumers become addicted to the service’s convenience. We can all appreciate the delight of getting home to find a package sitting on your doorstep. The average Amazon Prime member spends around $1,400 per year, while non-Prime members spend $600.
Pandemic Drives Growth of at Home Delivery Model
By now, we’re all too familiar with stay-at-home orders and physical distancing requirements that force everyone to shop differently, including whole consumer segments that have had to adapt to online shopping. Since COVID-19 began, more than one-third of consumers have shopped online weekly. Amazon has significantly benefited from this shift to online shopping, seeing North America Amazon sales increase 42% since COVID-19 began. This shift is now becoming a well-worn habit of convenience, with US consumers also reporting an intent to shop online even after the COVID-19 crisis has ended. The at-home delivery model has further accelerated e-commerce sales and the decline of brick and mortar stores, creating other types of challenges for communities and consumers alike.
Serving the Last Mile of Deliveries: The Commercial Real Estate Equation and The Talent Factor
While accelerated growth is undoubtedly exciting, the newfound demand for online shopping has put additional pressure on logistics operations. Notably, the pressure compounds on the “last mile” which completes the delivery journey from the distribution center or warehouse facility to the buyer. While convenient for the buyer, it is also the most inefficient piece of the supply chain and comprises up to 28% of the total delivery cost. Where industrial real estate is located for the last mile will continue to be a central focus in the e-commerce profit equation, as seen in the proliferation of distribution centers in North America.
Amazon opened 100 operational buildings in September 2020, including fulfillment centers, delivery stations, sorting centers, and other sites. Other retailers and third-party logistics firms are also in hot pursuit of the successful “Amazon model” of serving customers. Over the past five years, approximately 4,000 new distribution centers have opened in the U.S. Commercial real estate firm Jones Lang LaSalle (JLL) estimates that demand will drive another one billion square feet of warehouse space by 2025, in addition to the 14 billion square feet already in place in the U.S.
Rapid location expansion for e-commerce can also facilitate rapid employment growth. Amazon plans to hire 100,000 additional employees in North America, growing to more than 700,000 employees. This figure includes warehouse employees, drivers, and office workers. Meanwhile, the Bureau of Labor Statistics estimates that more than 1.25 million people already work in warehouses and 4.75 million people work in transportation services in the U.S. Future projections estimate the number of warehouse workers will double by 2030, and the number of transportation service workers will grow by approximately 10% per year.
Serving the Last Mile of Deliveries: Third-Party Logistics Partners and Heated Competition
Today, many businesses, especially those in the e-commerce industry, rely heavily on third-party logistics for supply chain management, warehousing, distribution services, and beyond. The frontrunners in this space continue to include UPS, FedEx, and XPO.
Amazon has also grown significantly in their delivery model. The company shipped 415 million packages in July 2020 compared with a monthly average of 389 million between April and June. UPS saw volume grow 26% in July 2020, compared with the average monthly growth of 23% in the April to June period. FedEx volume rose 22% compared with 19% growth, on average, in the first three full months of the coronavirus pandemic. XPO is the largest provider of s logistics for heavy goods in North America, delivering more than 10 million items per year, and growing. In the third quarter, e-commerce expects to reach a new peak, with approximately 23% of all retail purchases made online.
While consumers are accustomed to buying online from Amazon, Walmart can also boast about growing at a record setting pace. Walmart’s e-commerce division grew 97% (year over year) in Q2 compared to the industry sector’s 27% growth rate. The company recently launched Walmart Plus, a new membership program that provides same-day delivery of groceries, provides fuel discounts, early access to products, scan and go, and other benefits. The retailer also benefits from a competitive edge to growing its business with its extensive network of physical stores that are local and close to consumers. Walmart’s forward-thinking and significant investment in e-commerce in recent years is showing continued promise in future growth outlooks.
Serving the Last Mile of Deliveries: Economic Development Incentives
The upward trend of distribution center projects shows no signs of slowing down with the rapid adoption of e-commerce. As companies scan the country to decide where to invest in its last mile facilities, incentives will remain an essential differentiator. Companies will have several location options competing within a region to serve the last mile into a significant market. Key incentive areas that companies and site selectors will evaluate will include property tax reductions, infrastructure improvements, site preparation work, job training grants, job creation tax credits, and impact/permit fee waivers. Communities, states, and regions need to identify their target when addressing opportunities in this industry sector. Decision makers will see incentives that help address project and operating costs as the most meaningful.
Amazon may have paved the way for e-commerce but expect to see more players enter the market and forge more new roads ahead for all of us.