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Why Brands and Retailers are Focused on Distribution in 2019

The retail landscape has changed. Brands that have overly relied on the health of physical retail channels have been swept into the fray of the struggling many. Even Sears, once a cornerstone of American business achievement, was all but laid to rest after decades of irrelevance brought on by a failure to adapt.

Brands that want to extend their lives into the future and compete with Amazon’s iron grip on e-commerce have started looking at solutions that will allow them to compete—namely, expanding their own distribution capabilities to compete with the ease and pervasiveness of Prime two-day shipping.

Now that every brand is expected to have a functioning and easy-to-use e-commerce channel, distribution has become the next great battleground in the supply chain.

“As consumers continue to turn to digital channels to fulfill their needs, warehouse space will continue to be a primary use of capital for growing businesses. I see e-commerce really as still in its early years,” Anthony Johnson, executive VP, shareholder and industrial business unit leader at Clayco—a top industrial construction firm—told Sourcing Journal. “Many companies are still learning how to adapt their business to respond to the changing needs of the consumer. New disruptions to e-commerce, such as same-day delivery, continue to introduce new challenges to companies such as executing last mile delivery. These evolving needs of the consumer will continue to create the need for creative industry solutions in the quest for retail spending for some time to come.”

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The direct-to-consumer era

The rise of direct-to-consumer (DTC) brands has also begun to put even greater pressure on the retail elite to provide the same level of agility most of these online-only pioneers offer. Physical retail has become such an albatross for brands unable to compete with DTC and e-commerce that consultants have gone so far as to suggest that ailing retailers should just turn poorly performing stores into distribution centers to save cash.

Thanks to one of the strongest economies in years, brands have been able to collect the cash necessary to invest in the future and, as it turns out, the supply chain will be first in line.

This pro-distribution environment, Johnson explained, is a result of brands responding to the growth of online business and the relative stability of the economy, and those conditions have also given rise to a glut of available labor and affordable utilities. In return for a one-time investment, Johnson says, brands can see near-immediate increases in cost and operational control. The flexibility of location is especially important, he added, along with the ability to personalize the space to each company’s needs and upgrade for the future.

“The facilities are built with the ability to scale, evolve and change over time. Technology that supports the fulfillment process is constantly changing, so we work to develop facilities that are built with flexibility in mind,” Johnson noted. “The apparel industry can also often have specific requirements and protections in place to ensure products and packaging maintain their original condition. Air conditioning to eliminate humidity for example, is a request we see often in the apparel industry.”

Spending on the supply chain

A recent report found that supply chain investments are set to increase 95 percent in 2019, and evidence suggests many brands and retailers are already using that money to focus on bringing distribution in-house or expanding on existing capabilities.

Zappos announced in early April that it would soon be opening the doors of a brand new distribution center it started building in 2018. Calling the site “experiential,” Zappos attached a new outlet store concept to the facility, where it will hold special sales to drive both physical and online traffic.

For Zappos, the company’s senior director of operations, Justin Brown, told Sourcing Journal, it was all about upgrading the online customer experience.

“The advantage to expanding our distribution capabilities is directly about customer satisfaction and experience,” Brown said. “We want the opening of a Zappos box to be a memorable experience—not a chore that gets you to a goal of retrieving products. We want it to be a personal and special experience for our customers.”

Noting the purpose of the facility was “not necessarily to increase throughput” but rather to test new ideas that could enhance the experience of ordering a product online, Brown said Zappos was more than willing to invest in distribution if it meant differentiating itself to an online customer.

“Don’t think only about the cost to pick, pack, and ship an order. Understand that every item picked and every box packed has the potential to deliver an amazing experience to a person,” Brown explained. “The cost may be high up front, but the return in customer satisfaction and brand loyalty will follow. Everything is about the customer.”

Other brands that have invested in distribution of late include Caleres, which transitioned its system in-house and build a brand new facility for Famous Footwear in 2018. Although the group declined to comment on the matter until it had completed automation of the facility later in the year, Caleres said in its Mar. 21 earnings call that bringing distribution in-house would be a significant boon for future growth.

“The decision to own these fulfillment capabilities positions us with significant agility to meet the rapidly changing needs of our customers,” Diane Sullivan, CEO, president and chairman of Caleres, said at the time. “We moved quickly to accelerate this transition in the fourth quarter to ensure we started 2019 with a third-party facility clearly behind us. And we did just that.”

Clayco was the contractor Caleres selected to build the new facility, and Johnson said it was indeed built to bring efficiency to its distribution capabilities—and, perhaps most importantly, give the brand ownership of a 300,000-square-foot warehouse in driving distance of Los Angeles.

“We built this building specifically for Famous Footwear so that they were able to bring the facility online quickly,” Johnson said. “Like many apparel facilities, this building included sophisticated picking technology to allow product to be shipped efficiently. The facility is very close to Los Angeles, which is a major market given the large population base of the west coast. In addition, the site is very close to a major highway, making it easy to move product quickly from the warehouse to store—efficiency needs to go beyond the four walls for the building.”

Distribution on trend

The examples of a refocus toward distribution don’t end there.

Crocs also recently opened a center in Dayton, Ohio, that will be 40 percent larger and output 50 percent more than its previous facility. Skechers revealed in its most recent earnings report that it is spending millions to build out its distribution in China as it looks to become a major international player. Puma will also join the party in 2021, when it will start construction on a new facility in Geiselwind, Germany this year. And H&M just announced it will be building a 785,000-square-foot omnichannel hub in the United Kingdom over the next year, too.

Walmart, perhaps Amazon’s most realistic competitor, will be expanding its already-formidable distribution capabilities with the opening of a state-of-the-art consolidation center in July.

If that wasn’t enough proof that distribution has become an important area of focus across brands and retailers’ supply chains, consider the amount of time and effort Amazon is investing in its facilities.

Recently, the e-commerce juggernaut opened the doors of a new fulfillment center on Staten Island that can deliver over 1 million packages a day, which it says is 50 percent more than a typical warehouse its size. Amazon has built similar facilities in Baltimore, Dallas and Seattle and is also turning two defunct malls in Ohio into massive fulfillment centers designed to serve the East Coast.

For brands that want to compete, Johnson said companies will need to think smart—and quick.

“Build your site location, development, design, and construction team early, and focus on location and operation,” Johnson said. “Choosing the right site is the most important part of the project.”

Site optimization will be key, he said, provided companies can get it right.

“Site optimization is achieved by a detailed analysis of logistics, transportation, infrastructure, workforce and land costs of multiple sites,” Johnson explained. “Efficient operations are achieved by a focus on an efficient site layout, an efficient warehouse layout, appropriate technology integration such as picking or sortation, and the implementation of technology (BIM and VDC), project scheduling and programming for the design and construction of the facilities. This early collaboration across all the parties will ensure a highly productive environment for employees to work effectively.”