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Logistics: a logical investment choice

When was the last time you purchased a product or service online? It’s likely to have been very recently - British shoppers spent £114 billion online in 2015 according to Capgemini and IMRG while the British Retail Consortium and KPMG have calculated that one in every £5 is spent online in the UK.

The rising popularity of online shopping is inexorably linked to that of logistics warehouses – known colloquially as ‘big boxes’ or ‘sheds’. Without these unglamorous buildings, online shopping simply would not function, which is why they have become a lynchpin in many retailers’ property portfolios.

Logistics networks are now just as important to a retailer’s prospects as their store networks. They are the back end of the shop front; the way products get to market. And as the share of retail sales transacted online grows, logistics networks will only become more important. But reliable, rapid logistics aren’t just instrumental to the operations of pure online retailers like Amazon.

Investment in logistics is paramount for any retailer that sells its goods online.

Almost half the sales of some of the biggest store-based UK retailers like Next and John Lewis originate from online transactions. Investment in logistics is thus paramount for any retailer that sells its goods online.

The trend towards greater online shopping will result in more demand for warehouse space for two reasons.

Warehouses used to replenish bricks-and-mortar stores like Debenhams fit more into the same space than a warehouse used by an online-only retailer, like Amazon, with products packaged in bulk and racked to the ceiling. There are relatively fewer vehicle movements in and out and more space dedicated to storage.

On average, a warehouse that fulfils online orders has sales per square foot that is only a third that of a traditional warehouses. The reason is that goods are broken up into individual units and more space is needed for packaging, circulation and loading areas for delivery.

As the online share of retail sales grows, there will be new demand for warehousing and reduced demand for retail space. That demand will come from all retailers but those with online only businesses will need more space.

The second reason relates to the journey each product makes from retailer to consumer. The traditional model would simply involve replacing stock with a journey from a warehouse to a network of stores.

With online sales, products must reach a vast array of destinations, including individual homes, workplaces, collection points and, stores chosen by customers for click and collect. To do this efficiently and cost-effectively requires aggregating orders from different retailers through third party logistics and parcel operators. These operators have regional and local facilities of their own. The rapid expansion of these networks is creating further new demand for warehouse space.

Logistics assets are a relatively defensive investment – online retailing will continue to grow even if retail sales start to fall.

So in the medium term, warehouses will be in strong demand. But what about the risks?

The principle challenge is choosing the types of warehouses that will be in demand in the future. There is a growing use of automation in logistics with a consequent reduction in the importance of labour. This could have important implications. If robots can replace people, it will be less important to locate warehouses near areas with plentiful, affordable labour.

Instead, retailers will place more emphasis on locating closer to consumers. Retailers may increasingly opt to position their warehouses in the most densely populated areas, like the South East and North West of England. Some other locations, favoured for cheap and plentiful labour today but not always best positioned for distribution to the bulk of consumers, could be less attractive to tenants.

But this is a longer-term concern. The medium-term outlook for demand for logistics remains very robust. Logistics assets are a relatively defensive investment – online retailing will continue to grow even if retail sales start to fall. Returns are thus likely to withstand political and economic uncertainty.

Next time you visit Amazon, or any other online retailer, it’s worth remembering how the goods you ordered get to your door. Chances are that they have gone through one of these unglamorous but critical ‘sheds’.

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