Is retail now facing a warehouse crisis?

Discussion
Photo: Getty Images/Art Wager
Aug 11, 2022

With supply chain bottlenecks easing, a scarcity of warehouse space is promising to replace shipping container shortages as the biggest headache in the global supply chain.

Logistics real estate giant Prologis recently predicted an additional 800 million square feet of U.S. warehouse space will be required beyond earlier projections to handle excess inventories.

NPD’s recent monthly “Global Port Tracker” report indicated that a slowdown in cargo from Chinese factories facing pandemic-related lockdowns gave West Coast ports a chance to clear built-up congestion.

Inventory build-ups across retail, however, are being attributed largely to softening demand from consumers in the face of skyrocketing inflation and as spending shifts to experiences (i.e., travel, eating out). The elevated inventories also reflect the fact that stores are bulking up on orders as a precaution against supply chain disruptions, including a potential West Coast port strike.

The vacancy rate for U.S. warehouses is the lowest in decades, at around three percent overall and close to one percent near ports, according to Warehouse Quote’s “Warehouse Pricing Index” (WPI).

Warehouse rents have also increased 20 percent year-over-year in the second quarter due to warehouse shortages, according to Prologis. Steve Denton, CEO of Ware2Go, a UPS-owned third-party fulfillment services provider, told DC Velocity, “That means the margin evaporates if you carry [inventory] too long.”

Efforts to quickly add warehouses could face challenges due to shortages of steel and other construction materials, higher land costs and interest rate hikes.

Retail options to avoid paying for a warehouse premium include using stores as mini-fulfillment centers, although costs and executional challenges have to be overcome. Retailers are also exploring flexible or alternative warehousing, such as using vacant stores.

Retailers will have to balance the benefits of carrying extra inventory, including avoiding holiday stock-outs, against the costs. Some supply chain observers feel ongoing efforts to reduce prices, cancel orders and sell unwanted goods to off-pricers or liquidators will help rebalance excess stocks without requiring a warehouse building boom.

Chris Caplice, executive director of Massachusetts Institute of Technology’s Center for Transportation and Logistics, told The Wall Street Journal. “I don’t think it’s going to be like, we need to double the amount of warehouse space.”

DISCUSSION QUESTIONS: Is procuring adequate warehouse space a short-term, long-term or not much of a problem for retail? What factors should go into determining whether to mark down inventory or cancel orders to avoid warehousing costs?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Ramping up store fulfillment capacity is a faster option, can help delay capital investments, and provides more overall flexibility to weather unpredictable demand changes."
"It is crazy to think that we need to massively increase warehouse space to get over a short term problem."
"Stock will right-size once retailers create a more accurate, predictive system for end-to-end transparent supply chain management."

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7 Comments on "Is retail now facing a warehouse crisis?"


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Nicola Kinsella
BrainTrust

The challenge with building out new warehouse space is that it takes time, often years. Both time to build, and time to get necessary software, labor and operations up and running. Ramping up store fulfillment capacity is a much faster option, can help delay large capital investments, and provides more overall flexibility to weather unpredictable changes in demand.

Re: markdown best practices, that’s not my area of expertise, but making sure you can fulfill online orders from the location where stock is most likely to be marked down can help keep margins higher. As for canceling orders, typically this is not a voluntary decision. It’s due to inaccurate inventory – which is a problem across retail, and more important than ever to fix. This means that investing in the tools that help you keep inventory positions in sync across systems and locations, and optimizing safety stock, potentially at the SKU-location level, is key. Both to prevent the need for overbuying, and to reduce overselling and underselling.

Melissa Minkow
BrainTrust

Procuring warehouse space should be a short-term problem. If retailers get closer to matching supply and demand, with more accurate forecasting and lessened supply chain bottlenecks forcing over-ordering, they should also calibrate back to an equilibrium in warehouse space. However it still wouldn’t hurt to leverage drop-shipping and store-based mini-fulfillment. If retailers are hyper-reactive to this issue, like they were to the supply chain crisis, there’s risk of over-investment in building out additional warehouse space that won’t end up being utilized.

Lucille DeHart
BrainTrust

This is a case of the pendulum swinging the other way. Stock will right-size once retailers create a more accurate, predictive system for end-to-end transparent supply chain management. The current bottleneck is a direct result of front loading inventory post pandemic depletion and labor shortages. But, as with most business challenges, the solution could be beneficial to another transforming industry — shopping center development. Using retail space for commercial use is saving a lot of overdeveloped malls.

Andrew Blatherwick
BrainTrust

It is crazy to think that we need to massively increase warehouse space to get over a short term problem. We have spent decades educating retailers to manage their inventory wisely and not hold excess stock at huge carrying costs. Why now are we looking to throw all that away and increase warehouse space to hold unnecessary inventory? Technology is even better now at managing inventory, management need to look at their strategy and ensure they are not simply panicking which will only increase costs and reduce profitability.

Jeff Sward
BrainTrust
It’s easy to see why retailers and brands would want to beef up inventory models as a hedge against supply chain uncertainty, at least momentarily going into the holiday season. But when the eyes-open decision to beef up inventories is coupled with a slowdown in demand, that’s a double whammy that becomes especially painful. Plus — how many products actually have the shelf life that will tolerate a long visit sitting in a warehouse? Not apparel. Not food. Maybe certain CPG products. So more inventory sitting in warehouses for longer periods does not feel like a solid long term solution. The financial incentive to minimize inventory and not tie up the cash will always be there weighing against the financial incentive to not lose sales. Demand forecasting has to be smarter (less overbuying). Factories need the ability to operate on shorter time/action calendars based on the more accurate forecasts. And then the transportation segment can do their job more efficiently. Nobody can forecast a pandemic, but contingencies for that kind of event now have to… Read more »
Brandon Rael
BrainTrust

The supply chain and inventory optimization imperatives are as critical as ever, with the biggest warehouse in America running out of room. If the Inland Empire warehouses in California are running out of space, then we have a significant problem. It’s a booming area visible from space, anchors an industrial corridor encompassing 1.6 billion square feet of storage space that extends from the busiest U.S. seaport. When it runs out of room, we have a significant challenge on our hands.

A more prescriptive, fully integrated supply chain, assortment planning, merchandise planning optimization, and accurate forecasting processes would help to mitigate the level of contingency planning and overbuying.

The legacy year-long plus merchandising calendar needs to be re-engineered for the new world we live in to make it more agile, flexible, and adaptive to the changing consumer shopping behaviors.

Al McClain
Staff

It’s not talked about much, but another issue is the environmental impact of all this additional warehouse space. At a time when climate change is accelerating, we need to be setting aside more space for forests, marshes, etc. instead of continuing to pave everything over and building on virgin land instead of rehabbing some old warehouses, malls, shopping centers, etc. because it’s deemed too expensive.

wpDiscuz
Braintrust
"Ramping up store fulfillment capacity is a faster option, can help delay capital investments, and provides more overall flexibility to weather unpredictable demand changes."
"It is crazy to think that we need to massively increase warehouse space to get over a short term problem."
"Stock will right-size once retailers create a more accurate, predictive system for end-to-end transparent supply chain management."

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