June/July 2001

In an ideal world, e-tailers would operate from dedicated premises, specially fitted-out and provided on flexible terms in areas of plentiful labour. The reality, as Chris N Lewis has been learning, can be somewhat different

Despite the high-tech image surrounding e-tailing and home deliveries, many of the tasks involved in what has become known as e-fulfilment are much the same as in conventional logistics. In both cases you need to store the goods somewhere, order-pick them, pack them and despatch them to end users.

There can be striking differences, though. In an e-fulfilment operation you probably need to pick the products in single-item quantities rather than by the carton or pallet; and you need to get them to customers very quickly, wherever they are in the country. Such factors can have a major impact on where you place your warehouse, and how you configure and resource it.

So just how do e-fulfilment premises differ from any others? How far is the property market responding to the demand for specialised facilities, and would these be affordable even if they were there for the having?

They're easy questions to pose, but not so easy to answer. Matthew Peacock, chief executive of e-fulfilment specialist iForce Logistics, cheerfully admits that whatever decisions people in the industry make will turn out to be wrong. "The interesting thing about this industry is that what you need now is not what you'll need in three years' time. It's a challenge for all key players."

The question of where to put an e-fulfilment warehouse is probably fundamental, and Neil Banwell, a consultant at Kurt Salmon Associates, offers some down-to-earth wisdom on the subject. Because e-fulfilment warehouses are often more labour-intensive than other types of distribution centres, he points out, they often have to be in places with plenty of people - namely a big town or city. So, turning on its head what has become received wisdom in the logistics world, forget about greenfield sites just off the motorway.

If you are aiming to offer a next-day service, nationwide, it certainly helps to be somewhere in the Midlands, preferably not too far from the motorway network. That way, the express parcels boys can get their vans into your premises in the evening and get away again in time to hit their hubs for the nightly sort.

Remember, though, some of the cardinal points about being in a big town. You've got to hope that your neighbours are all deaf, extremely tolerant or far enough from the immediate vicinity not to complain about the frequent comings and goings into the small hours of the morning.

Not easy, is it? You could almost turn it into one of those mind-bending board games.

IForce has recently opened a brand new facility at Erdington, north Birmingham. Erdington lies in the logistics "golden triangle" that allows express parcels operators to hit all major centres of population next day. It also has relatively high unemployment, which brings a measure of workforce availability and flexibility, which is vitally important in e-fulfilment operations, where changes in demand patterns can occur almost hourly. (Matthew Peacock has painful memories in his previous job of operating a distribution centre in Northamptonshire, an area of near-zero unemployment.)

"An astounding percentage of our workforce catch the bus to work." As for those who work there, "it's an unusual mixture of warehouse operatives and IT people - it's very different from what you'd find in a conventional third-party logistics warehouse facility." However, the relatively high proportion of IT people is due mainly to the start-up nature of the iForce business; as it develops, the proportion of "techies" can be expected to fall.

The company's decision to locate in Erdington was also partly influenced by the fact that it already had an existing facility nearby. "If you're starting from scratch, the region to the north of Nottingham could offer similar advantages of proximity to carrier hubs and population centres, but at a lower cost than north Birmingham." That's the view of Charles Binks, partner specialising in logistics at property consultancy Fuller Peiser.

There is an abundant supply of labour, including female labour, and it is close to the M1 and the motorway network generally, Binks explains.

What about the question of ownership? Does it make sense for e-fulfilment occupiers to run their own warehousing, or should they look for other solutions?

There are two essential approaches to the bricks and mortar conundrum. One is to own all the assets you need. This means that you need to be fairly confident that you know what the e-fulfilment future will look like (though, arguably, you can actively shape that future). You can also try and use existing assets - though, in Matthew's Peacock's opinion, "the guys who have got into the business to utilise existing assets better almost certainly haven't got the right ones."

The other approach is to use other people's assets, which theoretically gives maximum flexibility. On the other hand, Web firms entrusting a crucial part of their operation to you might look askance if you don't own any of the assets yourself.

Avoiding ownership does give you the flexibility to vary your assets as your business grows, ensuring you have the best facilities for your requirements. But what constitutes an e-fulfilment warehouse anyway? Is there really such a thing?

Charles Binks of Fuller Peiser feels that because e-fulfilment is still such a relatively small and specialised segment of the logistics market, it is a little too early to talk about specialised property requirements for the industry. "But in an ideal world," he adds, "an e-fulfilment warehouse would be fairly standard in height (around 10 to 12 metres) so that it can incorporate a block storage area. Material would then be taken from there to pick lines and sorted, and there would be the opportunity for quite a degree of automation in that process. Loading at two elevations would also be an advantage - one for inbound and the other for outbound vehicles."

He adds that space for a mezzanine level above the pick face would be useful, either for further expansion or for storing packaging material (obviously a lot more of the latter is required than in a conventional DC).

As specialist e-fulfilment operations develop, serving several customers in what could be described as "a virtual high street", typical warehouse size can be expected to grow to around 10,000 sq m, although the industry probably still has some way to go before it can confidently fill this sort of space.

What of speculative warehousing developments, which have been such a common feature of the wider distribution world in recent years? In the e-fulfilment sector the general view is that this is too early to talk about speculative facilities - although, interestingly, Fuller Peiser has had discussions along those lines with developers in the past. But the cost of kitting the building out could make such a development unattractive, Charles Binks believes. At the moment, the level of automation is relatively low in any case.

Obviously, start-up e-fulfilment companies want the most flexible terms possible but, lacking a track record, they usually find their options limited. "Obviously, they'd all like a new building on as flexible a lease as possible, but for a new property landlords will want rent deposits and bank guarantees - money which they need to fund the development of their businesses." Hardly surprisingly, most of them compromise by accepting somewhat older premises.

Arguably property developers and landlords have become somewhat over-sensitive to "dotcom hype", which has perhaps clouded judgements to some extent about what would make a viable letting proposition. Nevertheless, Charles Binks is confident that the market will one day take off.

According to property consultancy FPD Savills, which published an extensive report on the impact of Internet shopping in spring 2000, there is a significant though somewhat erratic market in industrial property for e-tailers. In 1998 it was 32,000 sq m, then it blipped upwards to 180,000 sq m in 1999. It then promptly collapsed to 50,000 sq m in 2000. However, in the first four months of this year, total demand had already reached 30,000 sq m.

Even the 1999 figure would give the e-tailers no more than 6 per cent of the logistics/warehousing property market, although the spring 2000 report forecast, perhaps somewhat optimistically, that take-up of office and industrial warehousing by e-tailers and e-commerce companies would hit 13 million sq ft by 2004.

Fiona O'Callaghan of Savills' research department says that requirements in this sector are "typically above 4,000 to 5,000 sq m", although some sites serving specific urban areas could be smaller. With a few specific (and spectacular exceptions) such as Amazon.com's vast operation at Milton Keynes, which includes its own Post Office sorting operation, or some of the bigger grocery retailers' sheds, the industry tends to use secondhand buildings, "mainly because of the timing factor."

At the time the spring 2000 report was published, Cleddau Park in Wales was being touted as the country's first e-business park, but many claims have been made for other sites since then, Fiona O'Callaghan says. Some of these probably do not bear close examination, however.

"E-fulfilment warehousing is a market that is only just beginning to emerge," says Robert Dunston, partner in charge of the northern region for international property consultants GVA Grimley. However, its close cousin mail-order warehousing has been around for a very long time, and several of the big players have set up operations throughout the North West.

One big player, N Brown, has until now favoured redundant mills, into which it has poured millions in computerised handling equipment. In general, the industry favours large, reasonably modern but not prestigious or state-of-the-art buildings, although there are signs that some of these players are considering upgrading their operations. QVC, one of the better-established Web retailers, also has a 20,000 sq m facility at Knowsley, Merseyside, Robert Dunston points out.

Clearly e-fulfilment does need slightly different warehousing from conventional distribution. But until it emerges from its infancy, it is going to have less muscle to dictate what facilities it can use. It may have to rely on some imaginative compromises; and in some cases this is bound to mean making do with resources that contrast sharply with the hi-tech image the industry aims to project. Then again, few consumers will ever see them, so perhaps this doesn't matter.

"To create a sensible shop-front for consumers, e-tailers have to have a wide breadth of offering, even if their actual sales account for only a small proportion of what is theoretically available. That's important from a marketing point of view; people like to see a lot of products on a site, even if they buy only a narrow range."

This is the analysis of Matthew Peacock, chief executive of e-fulfilment specialist iForce Logistics, who explains: "That's why we've tried to give ourselves as flexible a warehousing space as possible."

This approach is intended to address the challenge inherent in the fact that a significant proportion of the range being stored will have a comparatively slow stock-turn. "In fact we might have to handle a whole spectrum of fast and slow-moving items that, nevertheless, need to be got to the customer within the same delivery window."

Peacock says this could suggest high warehouses, in which stock is brought down from storage to the pick-face as required. But he adds: "On the other hand, some e-tailers are using their inventory suppliers as the bulk storage location, and that approach implies a smaller amount of warehousing with lots of pick faces."

He says this applies particularly to companies using a mix of traditional and electronic channels to market, since they are often able to draw the slower-moving items off the stocks held for conventional distribution.

Iforce therefore has looked for very high-quality space that is also highly flexible, "so if we're wrong, we can reconfigure it easily." At Erdington in Birmingham, it has taken on a complete 7,000 sq m, six-bay high new build in conjunction with developer Prologis.

It was a long and difficult search, Peacock admits. "There weren't a lot of things that fitted the bill. We wanted it to look high-quality, so in truth we slightly over-specified it, although the level of automation is at the moment relatively low." A "tier 1" warehouse management system (WMS) from Manhattan Associates has been installed, but there is as yet no radio-frequency tagging. "Until volumes reach a certain level, there is no value in automation, and more automation means less flexibility."

IForce, therefore, has purposely tried to steer a middle course, using a mixture of its own and hired-in assets. It now operates four major warehouses - at Birmingham, East Molesey (Surrey), Hamburg and Madrid.

The East Molesey site is broadly similar to Erdington, though less modern, while the 100,000 sq ft in Hamburg and 200,000 sq ft in Madrid are still in the early stages of development.

In a slightly different category from the pure-play e-tailers are the large operations set up by or on behalf of existing bricks-and-mortar retailers, particularly the major grocers. One of the latest of these is the 37,000 sq m operation scheduled to be opened by Ocado (formerly Last Mile Solutions) in association with UK retailer John Lewis at Arlington's Hatfield Business Park. This is being taken on a lease, and will be run by Gist (formerly BOC Distribution Services).

There are some significant differences from a conventional grocery distribution centre, explains Ocado's logistics director Robert Gorrie. "Obviously, the operation is geared towards picking individual customer orders, not whole cases, and there has to be provision for large numbers of relatively small vehicles rather than a comparative handful of large 40-foot trailers." In terms of individual vehicle movements, there is likely to be a lot more traffic relative to the amounts of goods being moved.

Slightly less obvious, perhaps, is the fact that unlike conventional retailers, which can to some extent "manage out" peaks and troughs during the day, e-tail grocers face an order pattern that is expected to show a pronounced peak during the day. Another major difference is that one single facility will have to include four different temperature zones - ambient, frozen, chilled and "produce" - because, where supermarket deliveries would be carried by separate vehicles, here goods in all four bands will have to be loaded on the same delivery van.

Sainsbury's, one of the other major operators of dedicated e-fulfilment centres in the UK, has sites at Park Royal in West London and at Gorton, serving Manchester and Liverpool. These are bespoke buildings; the Park Royal centre operates on two floors and uses a highly automated German-developed picking system. But apart from this, there were apparently no particular property issues associated with the site development, other than the need to locate the facility reasonably close to the conurbations served.