E-Commerce Impacts DCs
Distribution centers have evolved alongside trends such as just-in-time manufacturing and the rise of overnight shipping. Now they are changing again, this time to accommodate omnichannel consumers.
One of the most prevalent trends is the move to larger centers. New warehouse facilities of more than 250,000 sq. ft. — called “big box” buildings — are today designed and built to accommodate both e-commerce fulfillment operations and traditional store distribution operations under one roof. The need to serve both stores and e-commerce operations from a single location requires additional space for staging different processes.
For example, fulfilling traditional store orders means the distribution center receives and ships large volumes of product at one time. To serve e-commerce customers, the facility must be designed to ship single packages, like a single dress. And many times, orders include individual shipping and packaging instructions, personal notes and even personalized giftwrap.
The new crop of omnichannel-oriented centers also reverses a long-term distribution trend by requiring more people. Technological advancements have made inventory and order processing an increasingly automated system in store-oriented distribution centers, which have become larger while requiring fewer people to run them.
But that level of automation has not caught up to the e-commerce fulfillment world, where an order may include one flash drive rather than a case of them. Picking several of these small items, packaging them and in some cases giftwrapping items is not a process that traditional distribution operations are equipped to handle.
These overarching trends — larger, more complex centers with more people populating them — result in other design changes as new DCs come out of the ground, including:
• More parking: The labor-intensive picking and packing process to fill online orders means more parking for employees, which in turn necessitates a larger overall site.
• Higher ceilings: Standard ceiling clear heights in distribution centers increased from 18 ft. some 25 years ago to 32 ft. about five to 10 years ago as the two limiting factors — racking technology and fire protection systems — improved to allow the higher ceilings. Today, technology readily permits clear heights of 36 ft. to 40 ft., enabling significantly more inventory to be stored in a smaller footprint. That’s an important factor for omnichannel retail distribution, given the larger space needs of facilities and surface parking, as well as the desire to be close to urban centers, where large sites can be costly or simply unavailable.
• Mezzanine spaces: New buildings can typically accommodate two or even three levels of mezzanine for picking, packaging, gift wrapping, returns and other back-office tasks. The extra mezzanine levels also provide a strong driver for higher ceiling clear heights.
• Life systems upgrades: ESFR fire protection systems, driven in the past by inventory, must be geared primarily for employees. New designs must also consider evacuation methods for larger numbers of employees, many working on mezzanine levels.
• HVAC and lighting: In newly built facilities, the omnichannel trend dovetails with another mega-trend in real estate development — the focus on energy efficiency and sustainability. DCs seeking to reduce energy costs are investing in LED lighting for cold storage, efficient HVAC systems, solar power systems and photo sensors that adjust electric light levels based on the available amount of natural light. Prismatic skylights that diffuse sunlight across a wide area for maximum daylight harvesting are ideal for a DC’s large footprint.
• Employee comfort, safety and productivity: HVAC systems are not just geared to lower energy costs, but also occupant comfort and safety. Night purge ventilation ensures high air quality; LED lighting in dock areas ensures appropriate light levels for reading documentation; and more stable temperatures result in environments that maximize worker productivity.
Tripp Eskridge is senior VP at Jones Lang LaSalle, overseeing the firm’s national industrial project and development services practice.
Navigating Today’s Debt Capital Markets
For mid-size retail companies — those with anywhere from $10 million to $1 billion in revenue — the combination of today’s steady growth and affordable capital is rare indeed. There is also ample liquidity as traditional middle-market lenders are being joined by institutional investors with deep pockets and a strong desire to participate in these loans. What’s more, new products are available that give borrowers more flexibility. In short, it’s a near ideal environment for midsize company borrowers.
However, that doesn’t make navigating the debt capital markets any easier. New products and more lenders give borrowers more flexibility, but it makes the marketplace arguably more complex. There are new senior debt options available from banks, financial companies and institutional investors that can be structured as either asset-based loans (ABL) or cash-flow-based loans. Junior debt offerings in the form of second liens and mezzanine funding remain widely available in the private market.
Institutional Investors return
CEOs and CFOs looking to take advantage of the current environment to ramp up borrowing should keep a few developments in mind.
In the past, lending to mid-size retailers was dominated by banks and finance companies. But today, large institutions such as pension funds, hedge funds and bank-run mutual funds account for 60% to 70% of senior lending at the higher revenue end of the middle market.
A big reason for this increase in lending is institutional investors’ desire to diversify their holdings from fixed-rate debt to include more floating-rate debt, which offers some protection should interest rates start to rise. Plus, the yield is relatively good.
More products and flexibility
Historically, the long-term financing available in the bond markets has only been open to larger mid-size companies with revenues closer to $1 billion. Most middle-market companies have had to settle for bank loans that amortized in five years. But following the financial crisis, institutional investors are re-emerging to offer bond-like loan facilities with virtually no amortization to smaller middle-market companies. They’re offering loans with virtually no amortization, as low as 1%, so these loans function more like bonds.
Other borrower-friendly products include “delayed draw facilities” and “incremental draw facilities.” In a traditional loan, the company gets all the money up front and immediately begins paying interest on the whole loan. For a fee, delayed draw facilities give a company the flexibility to draw down the cash and begin paying interest when they need it — often over a one-or two-year window. It’s similar to a revolver but in the form of a term loan. This can be a cost-effective option for borrowers.
What’s more, as banks and institutional investors compete for assets in a slow growth economy, “covenant-lite” loans have also returned. Loan covenants are certain measures that serve as early warning signs should a borrower run into trouble. Covenant-lite loan agreements have fewer restrictions and allow the borrower greater flexibility and often fewer reporting requirements.
CEOs and CFOs should remain attuned to the regulatory issues that lenders face, which have become more burdensome since the financial crisis. This year, the Federal Reserve released new guidance for highly leveraged transactions (HLTs) directing all lenders to be extra vigilant when underwriting loans and to demonstrate adequate capital to withstand losses. It’s too early to know the effects of the new guidance, but it could dampen some bank lending in the future.
Overall, the environment for mid-size company borrowers has rarely been brighter. According to the National Center for the Middle Market, retail executives expect a 4.2% increase in revenue in the next 12 months. More lenders, new products and good terms mean that quality companies have access to capital to grow and take advantage of the country’s economic recovery. By keeping a few key developments in mind, CEOs and CFOs can successfully navigate today’s debt markets and build a long-lasting relationship with the right lender.
Jim Hogan is senior managing director at GE Capital, Corporate Retail Finance, a leading provider of senior secured loans to retailers in North America, supporting working capital, growth, acquisitions and turnarounds.
Today, large institutions such as pension funds, hedge funds and bank-run mutual funds account for 60% to 70% of senior lending at the higher revenue end of the middle market.
Pricing Data Fuels Conversions, Revenues and Margins
Alexander Rink, CEO of price intelligence solutions provider 360pi, recently spoke with Chain Store Age to discuss the importance of accurate pricing data to retail success. By obtaining timely internal and external pricing information, retailers can ensure a consistent omnichannel customer experience and also prevent the loss of sales to lower-priced competitors.
What are the advantages of having up-to-date pricing information on your competitors?
The reality of price transparency, promulgated by comparison-shopping engines and mobile devices, means that retailers must now assume that a large percentage of their shoppers are checking their top competitors’ prices before making a purchase. Consequently, a price difference of even a few dollars can, and often does, translate into a lost sale.
It is essential that retailers know where they stand with respect to competitors’ prices in order to successfully execute any pricing strategy. Up-to-date pricing information gives retailers the price intelligence they need to “right-price” their offering in order to maximize conversions, revenues and margins.
How has the advent of omnichannel commerce affected retailers’ pricing strategies?
While many retailers may still be formulating or experimenting with their omnichannel pricing policy, shoppers are increasingly demanding a consistent experience across channels, and that experience includes the price they pay.
All retailers need to consider their and their competitors’ online pricing when formulating an omnichannel pricing strategy. It is imperative for retailers to leverage online price intelligence, regardless of the extent of their own e-commerce presence.
How can retailers use pricing technology to combat “showrooming”?
With the ubiquity of mobile devices and price comparison engines and applications, brick-and-mortar retailers must be right-priced at the point of purchase or risk having their in-store shoppers leave empty-handed and purchase the items from competitors.
What types of decisions can retailers fine-tune with pricing data?
Retailers can use price intelligence to fine-tune their pricing strategies and day-to-day pricing decisions. These include reducing overpriced products that are damaging the retailer’s price reputation, increasing the prices of underpriced products that are unnecessarily leaving margin on the table, strategically ensuring the retailer’s pricing is in line with their brand messaging, and tactically responding to new competitor price moves in hours instead of days or weeks.
Retailers can also use competitive pricing data to go on the offensive in the market, such as by dynamically highlighting products where they are priced most competitively, or by powering comparison shopping on their own websites through “Compare at [higher competitor price]” banners, which helps to increase site conversion rates.
What specific capabilities is 360pi providing its users via pricing tools?
360pi delivers continuous price intelligence for identical and comparable products along with supporting product information, such as shipping fees and product availability. Our proprietary platform enables retailers to access this product and price intelligence online and in-store, and provides easy integration into back-office systems.
The 360pi Competitive Intelligence solution suite includes capabilities for real-time price comparisons of exact and “like” products, evaluation of competitive assortments to identify gaps and opportunities, support for dynamic rules-based pricing, and other features.