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Inward Investment Guides

E-Tailers and the Secret to A Good Location Decision

A surge in e-tailing has heightened the importance of making the right site selection decision for an e-commerce company's big-box facilities.

Richard H. Thompson, Managing Director and Americas Leader, Supply Chain & Logistics Solutions, Jones Lang Lasalle (November 2011)
The retail industry has endured a rough couple of years. The global recession shook consumer confidence and forced shoppers to tighten their belts. However, this year some encouraging numbers have surfaced.

Second quarter 2011 retail sales were up 8.1 percent compared with 2010. But the real industry headline is the acceleration of e-commerce, which grew at twice the rate of traditional retail, posting a 17.6 percent sales increase and 10 consecutive quarters of gains.

While e-tailing, as it is known, has not been kind to traditional retailers such as Borders and Blockbusters, it has given the industry a much-needed boost. Technology has also pushed the sector forward with the emergence of m-commerce, or mobile commerce, from mobile devices such as smart phones.

Real Estate and E-tail
When we think of e-commerce we think of the current leader and pioneer, Amazon.com; but traditional retail giants such as Target, Kohl's, and Toys R Us have come to the party. Retailers know that online merchandise gives customers what they want, when they want it. But they also know it makes good business sense.

Major retail chains recognize the cost benefits of establishing strong online businesses rather than investing in bricks and mortar stores. After all, the economy is still turbulent, and property is yet another overhead.

In fact, real estate costs are often one of the top expenses for retailers, but are lower in the e-commerce model, which swaps many local, higher-cost retail site locations for fewer, larger, and strategically located distribution centers. An e-tailer's portfolio is comprised of mainly big box warehouses.

When e-commerce was born in the '90s, traditional retailers, unfamiliar with new online distribution challenges, outsourced their fulfillment needs to third-party specialists such as Amazon.com. But as e-tailing evolved and online demand surged, it has become an important part of retailers' operational models and income streams. Retailers are now reclaiming control and bringing e-fulfillment operations in house.

An example of this is big-box retail giant Target, which recently announced that it was taking full control of its e-commerce business from Amazon. The company plans to build a 1.2-million-square-foot distribution center in the Southeast. Meanwhile Amazon, which is riding high, also plans to add six new distribution centers to its current portfolio of 47 worldwide.

The E-tailer's Site Selection Guide
With this part of the retail sector rocketing, site selection must be an essential part of the strategy. E-tailers must take numerous factors into consideration when selecting distribution facilities.

At the top of the list is tax, especially sales tax. Tax levels are currently governed by a 1992 U.S. Supreme Court ruling stating that retailers do not have to collect taxes where they don't have a physical presence.

While top retailers such as Target charge applicable state sales taxes to all online customers, Amazon and others have interpreted the law to mean a physical selling space and, therefore, do not charge sales tax. This interpretation is being contested in many states. But for Amazon and similar e-tailers, avoiding sales taxes is a serious competitive advantage.

For consumers, deciding where to purchase goods gives them some advantages too. Five states give e-tailers a no sales tax rule: Oregon, Montana, New Hampshire, Delaware, and Alaska. Low sales taxes of less than 5 percent can be found in New York, South Dakota, Colorado, Wyoming, Oklahoma, Missouri, Louisiana, Alabama and Georgia.

Some states enforce "cooperative" taxes depending on their priorities toward taxing companies or bringing in new jobs and stimulating the economy.

Location, Location, Location
As with buying a house or starting a business, location for an e-tailer is everything. In the e-commerce world, timing is critical. It's important to choose fulfillment centers in regional hubs that mean fast delivery and minimal shipping costs. Another factor dictating facility location is proximity to air and ground small-parcel shipping hubs for speedy delivery. As competition among e-tailers grows, they will become more dependent on nimble delivery systems that provide quick, reliable shipping at the most competitive prices and will rely less on full truckload shipping.

The location must also account for supply-chain reliability, especially for imported goods. So proximity to seaports, airports, and inland ports is essential for the quick and efficient transfer of stock from ships, trains, and trucks to reach distributions centers.

Building layout is another consideration. Can the site enable the productive flow of goods, the right racking, the best equipment, sorters, and robotics? Does the site's infrastructure support efficient truck and auto traffic? Also, can the site be extended to accommodate rapid growth in product volumes?

Work Force Availability

An e-tailer typically employs 300 or more workers at each site. In this industry, it is essential to employ a solid, motivated work force with a strong work ethic. The industry also peaks during holiday sales so having a seasonal and temporary work force on tap is often critical. Additionally, does the site have the right amenities, parking facilities, and access to transport to support a strong pool of potential employees? Another consideration is the working environment. Does the temperature work for both the employees and the products?

The Incentive for Incentives
Alongside location, state incentives can play a major role for any company deciding on which site to select. Incentives include tax concessions, infrastructure improvements, grants, low or interest-free loans, and cooperative work force training programs. Aggressive pursuit of public sector incentives can lower the cost of a new site by 10 to 30 percent or more.

E-tailers are desirable businesses for states because they bring a significant number of jobs, up to 5-10 times that of store-based or manufacturing distribution operations. They are also more environmentally friendly than other industries. These businesses can take advantage of sales tax incentives, either by locating in an area that has low sales tax rates or by negotiating favorable rates with the state in return for injecting new jobs into the local economy.

Another consideration is property tax. The sheer size and scale of operations, high-tech equipment, and large inventories contribute to high property tax liabilities for e-commerce companies. Other tax liabilities include payroll and corporate income taxes. But smart negotiation to include tax relief as part of the incentive package can lower operating costs in the long run.

In the site selection process, e-tailers should match the financial benefits of their operations with local, state, and federal initiatives. Additionally, e-tailers should remember to search for other types of incentives, such as training and infrastructure grants, as well as other allowances, such as energy discounts or programs.

The Future
While e-tail is growing exponentially, it only makes up 4.6 percent of total retail sales so there is still room for major growth. One area of expansion is international sales. Amazon expects to finish the year with 52 U.S. distribution sites and 28 overseas locations. A 50-50 split between foreign and domestic sites will become the norm for many e-tailers.

Another development has been the growth of the third-party logistics (3PL) e-fulfillment market. These 3PL providers with global capabilities support their clients as they enter new markets across the globe. We are seeing the reverse taking place in Europe. The 3PL providers are supporting their clients in penetrating the U.S. market.

Meanwhile, the sales tax debate rages on. "To tax or not to tax the e-tailer" is a debate gaining some momentum across the country. Recently, Amazon, traditional store-based retailers, and California lawmakers reached a compromise to delay the collection of local sales taxes until fall 2012. Under the deal, Amazon agreed to drop a ballot referendum planned for next year. Meanwhile the e-commerce giant said it would use this extension to work with other e-tailers to lobby Congress for a national standard on sales taxes. Understandably, traditional retailers are watching developments very carefully and are hoping that the final ruling will level the retail playing field.

Another area of growth that could gain some market share is m-commerce, retailing through smart phones or even F-commerce, or Facebook commerce, using social media platforms. Denim giant Levis has already jumped on the bandwagon with a "Friends Store" on its corporate Facebook page. However the industry evolves, site selection will play an essential role in the company's success and how it operates as a business. Following the golden rules of site selection has never been more important in this highly competitive industry.

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