Will the Dark Store’s distribution strategy survive the pandemic?

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With many retailers closing during the pandemic, e-commerce sellers have taken the opportunity to reposition dark stores in urban areas into mini warehouses. But now that the U.S. retail sector appears to have gained a position of relative strength and many people have eagerly returned to in-person shopping, will this strategy continue to hold?

According to Benjamin Conwell, Senior Managing Director and Practice Leader for the Americas E-Commerce and E-Execution Practice Group for real estate services firm Cushman & Wakefield, the demand for “dark stores” in urban neighborhoods is not a temporary fad, but a trend that is not going away. Indeed, e-commerce and omnichannel operators see them as a cost-effective way to get close enough to their customers to provide 30-minute to 60-minute delivery, he notes.

High fuel prices and extraordinary growth in industrial rents are helping to keep that demand going, as transportation costs now account for a larger share of logistics company spending than ever before, notes Brandon Isner, head of commerce research at retail for the Americas within a real estate services company. CBRE. He estimates that transportation expenses now represent between 45 and 70 percent of their total costs. Conversely, the fixed costs of installations, which include real estate, represent only 3 to 6% of the overall figure.

Additionally, industrial rent growth in recent years has far outpaced retail rent growth, so it makes sense that e-commerce and multi-channel operators have a large network of dark store distribution sites. , even though they only offer curbside services. pickup, Isner notes. During the past year, growth in industrial rents across the country averaged 12.5%, according to real estate services firm Savills, and it was seen as a downturn. Over the same period, retail rent growth was just 2.5%, according to Isner, and that’s the highest level since the first quarter of 2017.

At the same time, there are also benefits to using outlets in urban areas as distribution space that go beyond operational efficiency, Isner notes. For example, such locations allow retailers to maintain a one-to-one relationship with their customers, rather than relying exclusively on third-party representatives. “And the beauty of using a retail [location] for this type of use is that they are already well positioned to handle high levels of traffic,” he says.

Who occupies the dark stores?

Tenants using dark store space as distribution facilities are typically retailers who either already have a large e-commerce platform or have partnered with a third-party e-commerce operator, according to Jacob Ryan, a stockbroker. property investment. Northmarq service company. The pandemic has accelerated demand for direct-to-consumer delivery at a record pace, forcing retailers to quickly find ways to cut costs and get products into the hands of customers as quickly as possible.

“The most logical place to turn was to start leveraging assets already under their control and converting underutilized retail space into distribution and logistics support square feet,” Ryan notes.

Many of those tenants are grocers, including Whole Foods and regional grocery chains, according to Conwell, though he adds that clothing and soft-goods retailers were early adopters of the dark store concept.

Fast delivery start-ups including Gorillas, Jokr, Fridge No More and Gopuff, which promise door-to-door delivery of everything from eggs to pizza in as little as 10 minutes, are also occupying dark stores. But such concepts initially racked up a lot of investment capital, with some, including Gopuff, opening hundreds of locations nationwide and growing faster than demand for their services and existing infrastructure could. justified, notes Conwell. Now some of them are backing down.

In the depths of the pandemic, this alternative use has helped boost retail occupancy, which has faced a myriad of challenges in recent years, ranging from weak consumer sentiment to competition from e-commerce to by supply chain disruptions. That lull in retail activity ended quickly, however, according to Isner.

“In-person retail is back,” confirms Ryan. “Consumers are largely out of the pandemic, and the discretionary spending data confirms that. The in-store experience gives us the touch and feel we all desire. »

In the third trimester, the national retail vacancy rate averaged 5.0%, one of the lowest levels on record, according to CBRE research. And in the first half of 2022, U.S. store openings exceeded store closings by 2,517, Isner notes.

Under these conditions, and given the growth in retail rents, using the black store distribution strategy becomes more difficult, he says. But an even bigger challenge is overcoming community opposition to the use of dark stores as distribution facilities, with the corner grocery store becoming a mysterious space with paper taped to the windows.

“These are not well received by city councils as they do not create vibrant streetscapes,” notes Conwell. So while he expects demand for these types of spaces to continue to be strong, “it doesn’t come without hair.”

In New York, for example, community complaints about dark stores being used as fast-delivery sites prompted the city to implement new regulations making paper on store windows illegal and requiring tenants to open storefronts. functional, according to a Insider report. In order to comply, some of the tenants have set up indoor kiosks for online shoppers to pick up their items in person.

With in-person shopping back in full force, those tensions could go away on their own, according to Ryan. He notes that he does not expect a large increase in new leases executed for the specific purpose of using dark stores as distribution facilities. On the contrary, during lease renegotiations, tenants can request to use part of their existing in-store space to be converted and used for e-commerce purposes.

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