Chasing the holy grail: where to warehouse

Retail Week heard from a senior source at a big warehouse property developer in April, who described finding suitable logistics sites within the M25 as “the holy grail” for retailers and developers alike.

London was followed by the South East in terms of demand for warehousing space, with the average pound per square foot of rents at £10.20 – the highest for the region on record, according to Savills.

The cheapest area in the UK to rent warehouse space in 2020 was the South West, where average pound-per-square-foot rents sat at £4.67, although that was also a record sum for the region.

Wren Kitchens has invested in warehouse and fulfilment facilities in this part of the country over the past year.

The next cheapest region was Yorkshire and the Humber at £5.90.

Across all regions of the UK, average rents hit £7.95 per square foot, again the highest figures on record, Savills notes.

Retail innovation starts with warehousing

From micro-fulfilment sites closer to the end consumer on the edge of towns or in more urban areas, to using stores as ‘warehouses’ for online orders, retailers are assessing various options to cater for greater online demand.

Majestic Wine and Ted Baker are among the retailers that have evolved their stock management systems to enable ship-from-store capability, while the major grocers are picking from store to serve ecommerce orders. Sainsbury’s and Waitrose for instance have ramped up their operations in such a manner over the past 15 months. 

There is already evidence retailers are thinking outside the box and adopting new measures for storing goods and distributing online orders. 

The Very Group went live with its highly automated warehouse in the East Midlands during the first coronavirus lockdown in 2020, supported by robots collecting products for dispatch or integrating returned items back into stock.

Chief information officer Matt Grest says the system includes a “pocket sorter”, which keeps popular products easily accessible, adding that The Very Group can accept an order and dispatch it in as fast as 18 minutes thanks to the automation.

JD Sports, Boohoo and Ocado are examples of other retailers that have increased investment in first-mile automation, integrating technology to drive faster picking, packing and processing at their warehouses.

And back-end tech is the direction of travel for the industry. According to analysis by financial and data software company PitchBook, supply chain tech is enabling a shift to connected networks “wherein a central hub helps orchestrate and coordinate data related to supply, demand, inventory and capacity”.

Investment in such tech, PitchBook says, is reducing costs across companies’ value chains and allowing them to respond more quickly and effectively to supply chain shocks, and respond to the ongoing growth in ecommerce.

Nigel Lahiri, general manager at GreyOrange EMEA, which provides automated fulfilment solutions, says the growth of ecommerce and the fulfilling of individual item orders is driving the need for automation.

“As this area of business continues to accelerate in growth, the ability to operate in a single pick, single return model will be needed to protect future margins and remain competitive in the market,” he says.

“The ability to buy automation on subscription, as and when needed, to install for peak and remove afterwards, is real and here today, as is the ability to integrate existing automation into more sophisticated software management tools. Big, fixed capital investments in automation will move to far more flexible operating cost models.”

One example of this can be seen in Estée Lauder’s strategy. The beauty conglomerate is closing unproductive stores, increasing manufacturing capabilities, expanding the fulfilment capabilities of its online business, and investing in what it sees as the growing Asia-Pacific region as part of a shift in long-term strategic initiatives.

Estée Lauder said in February that it was “quickly reallocating resources from certain unproductive bricks-and-mortar stores, primarily in Europe and North America, to investments in consumer-facing, high-touch online services, consumer data, information technology and other new brand-building distribution opportunities”.

It said this had been accelerated by the pandemic and changes in consumer behaviour.

Micro-fulfilment under the microscope

Online grocery is booming and lead times are shrinking rapidly, with grocers in particular having to reassess their fulfilment methods. 

A number of grocers have invested heavily in huge automated warehouses, a few are making use of the strength of partnerships or using dark stores, while most retailers are relying on their existing store footprint.

The huge benefit of in-store fulfilment is being close to the customer, which minimises delivery costs, but the downsides are congestion in the aisles, competing for product availability with in-store customers and a shop layout that hinders efficient order-picking, impacting costs.

Louisa Hosegood, digital and strategy director at supply chain consultancy Bis Henderson Consulting, believes there is an emerging solution that can alleviate the speed and profitability pressures: “Retailers should look to the model of micro-fulfilment combined with in-store fulfilment that is attracting the attention of retailers in the UK.”

The concept of micro-fulfilment leverages the advantages of localised delivery, or pick-up, and combines them with the efficiency of a large, automated warehouse.

These small-footprint, low investment, highly automated systems – typically occupying 3,000-10,000 sq ft – can be built into the back room or on the perimeter of existing stores, or may be deployed as a standalone facility to serve a cluster of local geographies or housing several different retailers.

The technology makes picking much faster, more accurate, cost-efficient and at a distance from browsing customers. The automation maximises storage, enhancing product choice, availability and customer service. Micro-fulfilment centres are less capital-intensive and fast to implement, reducing risk, smoothing investment against volume growth, and allowing test and learn.

It’s an ideal choice for excess space in retail shops and avoiding additional warehouse space in a time of scarcity and increasing costs. Hosegood notes that Ocado has developed an urban micro-fulfilment centre “designed to serve more immediate missions in dense catchment areas with a narrower but still extensive range, with sites between 5,000 and 25,000 sq ft”.

And Tesco is also rolling out 25 in-store micro-fulfilment centres over the next three years in conjunction with Take-Off Technologies/Knapp, with its first in West Bromwich. Of course, micro-fulfilment is not limited to the grocery sector. The efficiency and cost-effectiveness of deploying such technology makes it appealing to many other sectors, from consumer goods to healthcare.

Other ways to win the warehouse space race

Keeping products closer to ports is a tactic several retailers with an international distribution network are now using to get ahead. Not only do businesses benefit from close proximity to cargo ships, but the “bonded” status can bring cost advantages.

Indeed, at a time of new taxes, duties and bureaucracy following prime minister Boris Johnson's Brexit deal, retailers are turning to bonded warehousing to aid cash flow. For example, these sites ensure deferred payment for duty and VAT until goods are released for sale in the UK, and – for those items imported for re-export – no duty is payable in the UK. 

The location of retail warehouses is also relevant for where products are made or grown in the first place, as highlighted in the Retail Week Supply Chain 2021 report, which said retailers would stop importing deflation by shortening supply chains and moving sourcing closer to demand. One year on and the ‘onshoring’ trend appears to be accelerating.

A study by professional services firm Alvarez & Marsal and research group Retail Economics released in the first quarter of 2021 found 70% of Europe’s largest 30 retailers have conducted a review of their supply chains because of Covid-19. Some 69% said they were also ‘nearshoring’ – bringing products closer to home – if not returning their production to domestic markets completely.

In grocery, the rise of vertical farming, where salad crops are grown in tech-supported urban racks, is another area to watch.

Infarm, a tech start-up that specialises in in-store vertical farms, is reducing supply chain costs for retailers such as Marks & Spencer and Whole Foods. Its larger facilities on the outskirts of cities – where weather does not impact production as it does on traditional farmland – are also speeding up the product cycle from farm to fork.

The pandemic’s impact on returns

With the continued headache of product returns, the actual last mile of fulfilment is often in the form of reverse logistics.

The issue has long plagued retailers, to the extent that some experts say it is simply part and parcel of online shopping and needs to be an accepted cost.

Throughout the pandemic, rising online sales have meant that return rates have soared further, according to research group Mintel. In March 2021, it released a study showing that 38% of all UK online shoppers say the Covid-19 outbreak has made them more confident in returning online purchases.

Consumers’ growing experience of online shopping will have helped contribute to this trend, as will shop closures during national lockdowns preventing people from viewing items first hand prior to purchase. 

Extend returns deadlines during the health crisis in light of operational uncertainty and reduced headcount in warehouses may also have contributed to increased returns activity.

Mintel's study found that 49% of UK online shoppers had sent items back in the previous 12-month period, rising to 60% for those aged 16 to 34 years old. 

The various challenges facing retailers during the pandemic will have naturally meant returns would have also dropped down their list of priorities; the primary focus getting goods to consumers and returns secondary.

However, some retailers have been taking steps to innovate their returns process over the past 18 months and technical innovations are set to come to fruition in 2022.

So, is there a solution?

Here are a few ways retailers are coming at the returns problem – with some not taking returns at all.

AI-driven returns logic

In the US this year, retailers including Walmart and Target have been allowing customers to keep unwanted items; refunding the purchase price instead.

These retailers are using AI engines to understand the cost associated with a return and then deciding whether it makes financial and logistical sense. For instance, if an item is large or inexpensive, they’re making a call as to whether the cost associated with shipping the item back is too expensive.

Evidently, this solution doesn’t work for luxury items, high-value goods or retailers that rely on low-value products in bulk – such as pureplay fashion retailers – but it’s one way of minimising the scale of returns.

Adding incentives

Another way in which retailers can look to take control is to offer extra discounts to customers who are on the verge of returning an item.

A 2021 study conducted by global payments news platform Pymnts.com found that extra discounts offered to customers are more likely to convince them to keep their item; the higher the discount, the more likely they are to keep it.

The study found that offering future discounts of 30% would be enough to entice 51% of consumers surveyed to keep their purchases.

Preventing returns by remedying CX

Retailers are taking steps earlier in the path to purchase to prevent returns. Conventional ways to do this include improving the accuracy of product descriptions so consumers know exactly what to expect and by picking and packing items securely so they arrive as described.

However, retailers such as Asos and Walmart have been experimenting with augmented reality (AR) to enable shoppers to try on products before they buy, working with virtual fitting-room service Zeekit to improve CX and ultimately drive down returns.

Zeekit has worked with department store chain Macy’s and sportswear brand Adidas in the past, and says its virtual fitting rooms cut return rates by 36%. Likewise DFS has implemented its Salmon AR tool, which enables users to more accurately visualise what an item of furniture would look like in their home before purchasing.

The rise of store drop-offs

We’ve already seen successful partnerships with retailers allowing customers to return items to stores other than their own, making it cheaper and more efficient to collect returned goods.

Amazon and Kohl’s for instance have had a long-standing partnership where Amazon customers can return items to hundreds of its stores across the US.

However, there is talk of the potential for retailers to enter into partnerships with other non-competing brands to maximise store drop-offs. In 2022 retailers could look to work with the likes of gyms, cafes, restaurants and garages to make it easier for customers to bring back goods and decrease the legwork needed for retailers to process the return.

Offering free returns

This might seem at odds with solutions to maintain profitability, however, research shows that free returns drive sales and increase loyalty, and can therefore help balance the bottom line. Offering customers free returns is perceived as a statement of confidence in the brand.

From HGV driver shortages and unexpected tax charges on goods delivered across borders to lack of cargo ship availability and gaps on store shelves, the impact of Brexit and the pandemic on retail supply chains has been very real and is still likely to be felt in 2022.

A study from data management software provider InterSystems published in the final quarter of 2020 argues that the pandemic brought to the forefront many of the pressing technology-related supply chain issues retail, CPG and manufacturing organisations have been battling for years.

The study found that data silos and a lack of visibility and flexibility in processes may have been troublesome in the past, but during the pandemic they were a major cause of organisations being unable to scale and meet changing demand. 

Driver shortages

The RHA wrote to the UK prime minister in June, stressing the need for action on what it called the “crippling effects” of the HGV driver shortage. There are many reasons for the shortfall in driver numbers, but Brexit looms large among them.

Prior to the pandemic, the RHA estimated a driver shortfall of 60,000, but that has now risen to more than 100,000. Covid regulations forced many drivers back to their country of origin and they are yet to return, but the uncertainty of Brexit and future rights to live and work in the UK mean other drivers have left the UK and have not returned.

In the letter to the government, which was signed by prominent figures in the logistics sector, the RHA argued for a temporary worker visa for HGV drivers and for this occupation to be added to the Home Office Shortage Occupation List.

According to the association, such a move would allow UK-registered transport operators to “access a workforce that can live and work in the UK more easily and encourage those who have left to return – even if this is a short-term measure”.

The result is gaps on shelves and retailers feeling the brunt of this – including Tesco, Aldi and Marks & Spencer – have taken action by offering large sign-up bonuses when advertising for HGV driver jobs. 

Morrisons has even said the driver issue is impacting its profitability. In September, the grocer recorded a 37.1% drop in pre-tax profit to £105m in the half-year to August 1, 2021, and said part of the reason for this was because it had absorbed costs related to "rising commodity prices and freight inflation, plus a shortage of HGV drivers across the UK".

Northern Ireland trade disruption on retail

Chairman of JD Sports Peter Cowgill told the BBC Radio 4 World at One programme in February that Brexit had turned out to be "considerably worse" than he initially feared.

He cited “double-digit millions” in extra costs as a result of the red tape and delays in shipping goods to mainland Europe following the end of the Brexit transition period at the turn of the year. He mooted opening a European Union (EU) distribution centre to ease the burden, with some JD UK jobs potentially needing to transfer across.

Although the government says it is providing organisations with support as they get used to new systems and regulations, trade problems persist. These include delays and obstacles with Scottish seafood exporting and UK meat exports to food suppliers shipping into Northern Ireland.

Concerns about double taxation when delivering across the Irish Sea due to new regulations meant some large UK retailers, including John Lewis Partnership, halted deliveries to Northern Ireland in the early days following the end of the Brexit transition period. Although JLP’s deliveries have started again, the Northern Ireland trade route challenges are still far from resolved.

In July, six of the UK’s leading retailers, which represent more than75% of the Northern Ireland grocery market, wrote to Brexit minister Lord Frost and vice-president of the European Commission for Interinstitutional Relations Maroš Šefčovič calling for urgent action to address the future of trade between Great Britain and Northern Ireland.

The Northern Ireland–Britain trade grace period ends this month, after which retailers will face increased cost and complexity when moving goods – essentially adding layers of complexity to an already complicated situation.

Increased checks at Northern Ireland ports, additional paperwork requirements and the need for export health certificates on products of animal origin will come into effect. The subsequent sourcing challenges could force companies to move supply chains from Great Britain to the EU, according to the grocers putting their names to the letter.

Although an extension to the grace period on the movement of chilled meats has recently been agreed, the letter – which was signed by leaders at Asda, Sainsbury’s, Tesco, M&S, Iceland, the BRC and Co-op Food – said “much more needs to be done … if there is not to be significant disruption to supply and an increase in cost for Northern Ireland consumers”.

How to future proof supply chains against the global backdrop

• Diversify your supplier base
• Consider using more UK suppliers and non-EU suppliers
• Look to onshore production and manufacturing where possible
• Regularly track tariff and duty legislation

In May, consumer data specialist Statista found 48% of UK businesses that have made supply chain changes since Brexit are using more UK suppliers, while 35% have increased the diversity of their suppliers. 

A further 12% said they were now using more EU suppliers, while 16% said they were using non-EU suppliers. This all paints a picture of new strategies and supplier relationships being forged and established.

In Northern Ireland specifically, the letter from the aforementioned grocers urges the UK and EU governments to enter discussions with British retailers, visit their distribution centres, and host joint talks between government technical officials and retail supply chain experts to find a working solution for trade rules. 

“Without swift, decisive and cooperative movement on this issue there will be disruption”, it states, adding that possible solutions include a veterinary agreement, a wider Sanitary and Phytosanitary agreement, a facilitated movement scheme or a “Trusted Trader” scheme. 

BRC chief executive Helen Dickinson says: “Already, new red tape is causing delays, there are surging additional costs, and we are seeing challenges to ‘just-in-time’ supply chains.”

But it’s not just Brexit making retailers change their supply chain planning.

Factoring in political tension from the East

Card Factory said in its annual financial report in June that it relies on a wide range of products supplied from the Far East, particularly China, and increasing political tension between the East and West and potential for increasing tariffs on imports could cause disruptions going into 2022.

As a result, the greetings card retailer is accelerating its onshoring process and strengthening its integrated supply chain.

“In the medium term the business is proposing to onshore a larger proportion of card production to its Printcraft business in the UK, with investment in technology to facilitate this,” the retailer said.

“Buyers are also actively reviewing alternative supply sources and reviewing the applicable tariffs and duties to seek to maintain value and quality of supply to maintain our competitive range proposition.”

In the aftermath of Brexit and in light of continuing international relations uncertainty, such proactive supply chain management is encouraged across wider retail.

One in two UK consumers now possess a preference for ethical and sustainable brands, according to YouGov data published in May 2021.

Growing evidence of the climate crisis’ negative impact on communities around the world and changing weather patterns globally – alongside government-led targets for reducing carbon emissions – mean retailers are waking up to the green agenda.

Retailers must now adopt sustainability in all aspects of their operations, as well as create more purpose-led goals, alongside their traditional quest for commercial growth.

Much of this enlightenment is reflected in the “people, planet, profit” mantra retailers are espousing in trading updates and annual reports. Retailers such as Pets at Home have started producing “social value” reports, while companies including Seasalt now regularly publish sustainability reports.

The environment and changing behaviour

Such a focus has serious implications for retailers’ existing supply chains. By their very nature, retailers’ operations are not sustainable – with Richard Walker, Iceland’s managing director, one industry figure to acknowledge everything leaves a footprint.

Walker has written a book on corporate activism – The Green Grocer – which launched this year and aims to guide business thinking in this space. Walker told Retail Week “everyone has a role to play and can play their part” in improving commerce’s impact on the environment.

Talking about the importance of addressing this throughout the supply chain, and explaining why Iceland has joined the Climate Pledge, a multi-party commitment for carbon net zero by 2040, he added: “We’ve got to look end to end at carbon.”

With sustainability a difficult word to define in such a competitive business environment, it falls upon retailers to ensure they forge the most environmentally friendly practices and processes.

There is also a need to lobby government and decision-makers for systemic change that disrupts the status quo and helps build a greener future for UK business and society. 

Lobbying for change

Evidence of this in action includes leaders behind Ikea, Inditex and H&M adding their names in June to a global CEO letter calling for bold action on climate matters from world leaders. The letter urges G7 member states to “help supercharge the net-zero and climate resilience transition with bold and courageous commitments, policies and actions”.

Elsewhere, in June, Currys, Halfords and Ikea added their names to a list of businesses urging the government to show leadership on issues impacting electric vehicle (EV) adoption.

As part of the UK Electric Fleets Coalition, run by the international non-profit organisation Climate Group, the retailers and other organisations involved want a clear roadmap for EV rollout in commercial fleets to ensure businesses can play their part in the UK’s net-zero by 2050 ambitions.

It is the systemic change that will make the biggest difference, but the increasing number of individual supply chain actions from retailers are also very welcome.

Setting targets

Retailers Kingfisher and Joules, for example, have agreed new credit deals linked to achieving sustainability benchmarks – and there is a growing list of businesses following suit.

To illustrate the type of work this entails, Joules will receive a lower interest rate loan margin from its provider if the retailer reduces its carbon emission intensity, delivers 100% more sustainable materials in the manufacturing of its products, and increases its employee engagement score.

Elsewhere, Asda has committed to using electric company cars by 2025, five years ahead of the nationwide ban on sales of new diesel and petrol cars coming into effect.

Different business models entirely are being created, too, with Moss Bros and LK Bennett among the fashion retailers launching rental subscription services, which charge consumers a flat monthly fee for access to new lines, while permitting unlimited swaps.

This circular thinking is expected to keep clothing items in use for longer and help move consumers away from a throwaway fashion culture.

The continued success of fast fashion suggests consumer habits are not going to change overnight, but the wheels are in motion for an evolution of the sector, thanks to interest and implementation of these new types of business models.

Away from fashion, retailers such as Lush, The Body Shop and The Hut Group are offering consumers the chance to return empty beauty product containers to stores and online respectively, where they are collected, processed and made into new packaging or other products for industry.

Such thinking is resulting in a new type of supply chain, with Lush, for example, creating a dedicated facility for processing and remanufacturing old packaging.

Electricals retailers AO and Currys operate large recycling and repair sites, respectively, showing the sector is waking up to the benefits of more circular supply chains for products and packaging.

Amazon forced to overhaul its practices: A lesson in sustainable business

In June, an investigation by ITV News reported that Amazon was destroying new and unused stock at one of its fulfilment centres in Scotland. Electronics, books and face masks were among the items placed into boxes that were marked ‘destroy’ with the goods then left at recycling centres or landfill sites.

The report found that, in one week, 124,000 items within the Dunfermline warehouse were singled out to be destroyed – leading to questions around the sheer volume of waste the tech giant was responsible for.

At the time of the news, critics linked the destruction of products to the overall unsustainability of Amazon’s business model. For instance, it is often cheaper for third-party vendors storing their stock in Amazon's warehouses to destroy unsold goods rather than continue to pay storage fees once they hit long-term rates.

However, in August Amazon announced a new policy to address this issue. The policy included two new Fulfilment by Amazon (FBA) programmes to make it easier for businesses selling on the marketplace to resell customer-returned items or overstocked inventory.

The first programme – “FBA Grade and Resell” – allows sellers to resell returned items as “used”, as well as set the price for items based on the condition and manage pricing, advertising and sales using their existing processes, just as they would for new items.

The second programme – “FBA Liquidations” – allows sellers to recover part of their inventory cost from their returned or overstock inventory by reselling the items through Amazon’s bulk resale partners. Previously sellers would need to have returned or overstock inventory sent back to them or allow Amazon to take control of the product.

The tech behemoth said the policy would ensure “products don’t become waste” and would reduce Amazon’s “impact on our planet”. 

Making the S in ESG count

ESG (environmental, social and governance) is increasingly being used by organisations as a form of corporate social credit score alongside the traditional metrics, such as financial performance, to assess the success of a business.

The S in ESG – social – covers multiple areas of operations, including how organisations treat staff, the role the enterprise plays in wider society and general ethics. 

In retail supply chains the subject of ethics is a hot topic. 

Online fashion house Boohoo came under the spotlight in 2020, with allegations of modern slavery in Leicester factories supplying the retailer, which prompted an internal investigation and major changes.

Following pressure from the Environmental Audit Committee and MPs, Boohoo has linked its bonus scheme for directors to making changes to its supply chain following the scandal. It will connect its £150m long-term bonus pot to supply chain improvements.

Boohoo also adopted an ‘Agenda for Change’, aimed at ensuring full ethical compliance across its supply chain, which includes more transparency around its UK supplier list and negating the need for sub-contracting, which a review identified as problematic.

While Boohoo’s changes highlight the focus for the industry, retailers should learn from proactive players that have long been advocating good supply chain ethics. 

Fashion Revolution is an activist group founded following the Rana Plaza disaster in 2013 when a garment factory and global retail supplier in Dhaka, Bangladesh, collapsed killing 1,134 people. The group maintains a Fashion Transparency Index monitoring fashion supply chains.

Analysing trends and comparing transparency on human rights and environmental issues across 250 of the world’s largest and most influential fashion brands and retailers, the 2021 index – correct up to April – ranks Italian brand OVS number one.

OVS is followed by H&M, Timberland and The North Face (66%), but there were 20 major brands that scored a 0% rating, denoting completely non-transparent supply chains.

“Although the Fashion Transparency Index has pushed many major brands to disclose vital supply chain data information since it was first published in 2016, progress is too slow on key issues such as purchasing practices, living wages, overproduction, water use, and carbon emissions in the supply chain – even among the highest-scoring brands,” said Fashion Revolution’s report. 

Transparency is important if change and improvement are ever going to occur. In the grocery sector, for example, Iceland released its plastic footprint in 2020, showing in 2019 it generated more than 1.8 billion items using primary plastic, and over 100 million items of secondary and tertiary plastic.

Although high, managing director Walker said “the first step towards overcoming any addiction is to recognise that you really do have a serious problem”, hence why Iceland will continue to make its plastic footprint public knowledge.

Positive signs for more sustainable supply chains

Encouragingly, the appetite for better retail supply chain management is there. 

From an environmental improvement perspective, the BRC has around 100 retailers signed up to its Climate Action Roadmap, where businesses will share best practice and work together to reduce their environmental impact.

And in June the Department for Business, Energy and Industrial Strategy created a single workers’ rights watchdog aimed at stamping out modern slavery scandals in British factories. It promises to enforce minimum wage laws, protect agency workers and eradicate modern slavery, and any factories flouting laws will have their products banned from sale.

Compliance and ethical trading are surely the only routes for retailers to take. Consumers demand it and the regulatory net is closing on those that are failing to keep up.