David L. Welch is CEO and President of Robinson Weeks Partners.
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It’s no secret that industrial real estate has fared much better than other asset classes as the pandemic continues to fuel tremendous growth in the e-commerce arena. New data from Digital Commerce 360 reveals that consumers spent $861 billion online with U.S. retailers in 2020, up 44% from 2019. Amazon hit almost 40% year-over-year growth, while online sales, in general, jumped 45% year-over-year for the holiday season. The rise in online orders has forced companies to reevaluate their supply chain operations and develop production enhancements to keep pace with the rise in demand.
While the accelerated e-commerce activity has been a boon for many businesses, the uptick has also sparked a substantial increase in e-commerce returns. A growing number of returns are inevitable given the larger pool of consumers, but they can strain profit margins and negatively impact an organization’s bottom line if not properly managed. $1 million in returns can potentially erode $500,000 in profits, prompting many major retailers to simply allow shoppers to keep merchandise rather than process a costly return.
Often an afterthought, a reverse logistics plan provides a solid framework that minimizes the cost impact of returns and creates new efficiencies within the supply chain. Industrial developers and third-party logistics companies (3PLs) have the infrastructure and know-how to help companies implement an operational reverse logistics plan and avoid cost overruns. Here are three ways to utilize real estate and on-site data to stay ahead of the curve in a fast-changing reverse logistics landscape.
1. Leverage second- (and third-) generation facilities.
According to a recent CBRE report, a reverse logistics supply chain requires approximately 20% more space and labor capacity compared to forward logistics. While industrial development is increasing in most major markets, the amount of available industrial products remains inadequate to counterbalance inefficiencies in the supply chain.
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The swell in additional Class A industrial space over the coming years creates an opportunity for second and third-generation facilities to be revitalized as reverse logistics sites. CBRE forecasts that an additional 400 million square feet of Class B space, which leases at lower rates than ground-up developments, will be reallocated for the process.
These second- and third-generation warehouses are an obvious play for companies seeking to cut costs on their reverse logistics pipeline. For real estate owners with older warehouses in their portfolio, reverse logistics can extend the lifespan of the building and create new revenue streams that boost overall value. Local municipalities also stand to benefit from the evolution of these facilities that bolster the existing tax base.
2. Repurpose underutilized sites for industrial use.
Underutilized buildings and dilapidated parking lots can be reimagined to support a variety of industrial users. Since reverse logistics doesn’t require the same level of functionality and sophistication as traditional supply chains, converting properties such as an abandoned mall anchor space into a basic warehouse facility can help manage the rise in e-commerce returns. A rezoned parking lot can be redeveloped into a functional warehouse, transforming a blank asphalt canvas into relief for an overextended traditional supply chain.
Minimal stacking and racking at these reimagined spaces allows for lower ceiling heights compared to traditional distribution centers, opening the door for creative repurposing of vacant facilities, such as post offices, vacant schools or abandoned retail centers. These properties are also often well-located near key transportation arteries, further amplifying their value.
By redirecting return traffic from facilities that also process outbound shipments to adaptive reuse warehouses that are equipped to support reverse logistics, companies save money and create valuable supply chain system efficiencies. This template can be replicated in e-commerce hubs across the nation.
3. Use data to right-size strategy
Warehouses offer a deep well of data that provide insight into returns activity at a site and help inform a workable reverse logistics strategy. Gathering and analyzing warehouse data about how often consumers are returning products, which products they return most often and where they are making returns is critical to eliminating waste in reverse logistics networks. Whether due to color, size or packaging, logistics providers can drill down into the data and provide insight that will allow retailers and manufacturers to become more efficient.
This information can help decide how large of a facility is needed to support returns and where these facilities should be located, in addition to the scope of an interior build-out and which products should have higher storage volumes. Even in non-pandemic seasons, the percentage of products returned is much higher than most realize, and some product lines, namely clothing, contribute to that figure on a wider scale. According to data from the National Retail Federation, consumers returned $428 billion in merchandise last year, a direct result of increased online spend and bracketing, or consumers purchasing multiples of one item. Utilizing these new and improved methods of data collection will keep organizations lean and ahead of the pack.
A solid reverse logistics strategy is key to optimizing supply chains across the changing distribution spectrum, and having the right mix of industrial facilities are the threads that stitch it all together. A development and portfolio strategy that is mindful of the impact of reverse logistics will enhance returns and reduce costs, building long-term value for both real estate owners and industrial users. Investors and developers who prioritize these principles will be well-positioned to capitalize on the next chapter of the e-commerce revolution.
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