Steve Jobs was right when he held up the first iPhone in 2007 and said: “This will change everything.” It did. It changed the way we work, the way we live, the way we socialise and the way we communicate. And it has changed the way we shop.
The shop window is now omnipresent. We have access to anything we want, wherever we want, whenever we want. And demand is heading in only one direction.
Retail analyst Verdict Retail expects UK online shopping spend to rise from to £43.3bn in 2015 to £62.8bn in 2020. By this point, online retail is expected to account for 17.1% of total retail sales. And much of this will be spent in London.
The population of the UK capital is expected to hit 10m by 2030. And if the government meets its target to build 400,000 homes in the city by 2020, that means more customers and more delivery addresses.
So how will online retailers cope? The pressure is not only on as a result of increased consumer numbers, but as a result of higher expectations – particularly around delivery times. Constantly connected consumers, expanding mobile networks, frictionless payments and the option to select shorter and shorter delivery slots mean that many online companies are already feeling the strain.
Even giant Amazon is suffering as a result of its ambitious Amazon Prime delivery service. What it spends on getting products to people in an hour is roughly twice as much as it makes, according to Patrick O’Brien, content director at Verdict Retail. “They are taking a long-term view about ensuring they are investing in the tech of the future,” he says.
But how likely is it that these futuristic strategies, which include the use of mobile warehouses, drones, robots and Uber delivery cars, will come to fruition? Or does keeping online retailers afloat rely less on technology and more on improving logistics on the real estate side?
Anticipatory shipping
Amazon’s mobile warehouse concept is the latest in a long line of innovative ideas around how online retailers can keep up with demand and ever-shortening delivery times.
In 2014 the company released a patent for mobile warehouses. The idea was that it would use online purchasing analysis to stack trucks with products most likely to be ordered in a certain area or postcode before the customer has even decided to buy them. They called it “anticipatory shipping”.
The basis of the concept – analysing buying patterns in a certain postcode or geographical area – is already happening. Speaking at the How to Change the World conference at the Royal Institute in London in December last year, Sophie Hackford, director of WIRED Consulting, said: “Preloading trucks and sending them out into areas of London postcode by postcode is something that Amazon is seriously looking into. And in terms of the technology to make that a reality? That already exists. The analysis of the way we purchase and consume based on where we live is already happening.”
So the technology is in place and the idea has been patented. But is it actually happening in practice? Amazon declined to comment on whether the company has started using moving warehouses in London and is keeping future plans close to its chest. “They have talked about mobile warehouses with the most popular products, which would just turn up if you ordered them,” says Kevin Mofid, distribution specialist at Savills, “but we just don’t know what they are doing over here yet.”
While the online retail sector waits with bated breath to see whether Amazon’s anticipatory shipping will be openly introduced to the market, the online giant has been at the forefront of discussions around other futuristic strategies. These include using drones and robots to make deliveries – ideas that come with the added advantage of reducing congestion on the roads. Particularly useful in a city that is already as overcrowded as London.
And Amazon is not the only one coming up with innovative ideas. Online supermarket Ocado revealed at the WIRED Retail conference in November that it wanted to build delivery pipes to homes. It would comprise an automated system that would predict orders, and pick up and deliver food, keeping vehicles off the road as much as possible. Ocado chief technology officer Paul Clarke called this idea a “smart grocery pipe”. He added: “The right groceries arrive at the right time as if by magic, without having to order.”
But anything that requires drones – or taking to the air – comes with complications, especially in London, where many warehouses are located in the Heathrow area. In December 2014 there was an incident at the airport in which a passenger aircraft nearly collided with a drone. There would be competition in London’s airspace too. Once you consider local news helicopters and power and phone lines, adding delivery drones to sky traffic begins to make things quite complicated. “Amazon is very serious about it,” says Andy Gulliford, chief operating officer at SEGRO. “But the bigger issue is safety and security, and there have been scares around Heathrow.”
River routes?
Elsewhere in Europe, Paris is trialling a sustainable city logistics pilot called LaMiLo project. It uses the river Seine to deliver freight into central Paris. Specially developed software maps then track the best road and cycle routes from the delivery port, with the goods delivered at the last mile by electric cargo bikes. And there has been talk of using the Thames for similar purposes. “We should consider the use of the river more,” says Gulliford. “It is interesting to see Paris’s inland ports serving central Paris with goods. It is a clear route which extends on the idea of the river and its use.”
In reality, the likelihood is that we will always have to rely on the roads to an extent. But that does not mean there is no room for innovation. Tech taxi firm Uber has clocked that it might be able to help. It plans to have at least 42,000 cars on London’s roads by March this year, and wants to use empty ones for deliveries. They launched this in the US with UberEATS in April 2015. So a similar system in the UK could be hot on its heels.
Hannah McNamara, partner in retail at Cushman & Wakefield, says: “If I looked at my phone now and could easily get an Uber car for delivery purposes, using other people’s spare capacity and space, I think that would be brilliant.”
How can property help?
Whether retailers decide to have their products delivered last mile by carrier pigeon, drone or robot, they are still going to have to find space as close to the city centre as possible to make this happen faster and more efficiently. And this is where the property sector comes in.
Retailers and delivery companies already account for more than 30% of the logistics market, according to Savills, and this is only set to increase alongside online shopping predictions. Last year Savills data showed that Amazon took up 26% of all logistics space in the UK as it raced to get enough fulfilment centres to service delivery hubs for Amazon Prime.
In an ideal world, these hubs would be as close to city centres as possible to help not only with delivery times and consumer demand but to limit the amount of time the trucks would need to be on the roads. But with land values in the capital soaring, and increased competition from other sectors for city space, this poses yet another expensive hurdle. The online retailers now have to battle it out with residential developers to secure land.
Industrial and residential mixed-use schemes may sound like a juxtaposition, but SEGRO has already started collaborating. The industrial REIT agreed a deal with Boris Johnson and the Greater London Authority to redevelop 86 acres of land at London Riverside, E6. It will create 6,500 jobs in east London, providing employment opportunities for people living at Barking Riverside, where the mayor is planning around 26,500 homes.
“We want politicians to think about the reservation of combined uses rather than just a residential push,” says Gulliford.
Either way, in such a fierce space race, retailers are going to have to cough up more than ever before to secure the right spots. “Being in certain locations is going to be business critical,” says Savills’ Mofid. “Retailers will pay higher rents because they will have to.” Rents at SEGRO’s Park Royal in Acton, W3 – which is home to logistics hubs for major retailers such as John Lewis – are some of the most expensive in the country. They currently stand at around £14 per sq ft, and Savills forecasts that this could rise to more than £16 per sq ft in 2019. These compare with average rents of £6 per sq ft in the North and the Midlands.
Another solution in the shed space dilemma would be the possibility of building up, rather than out. Multi-storey warehousing is already working in Paris and Hong Kong. It may not look pretty, but it could become a necessity. “I think we are going to need it in the next five years to make up for the acceleration of demand,” says Gulliford. And if you can’t build up, build down. The logistics world has been fantasising about Hyde Park’s underground car park and its potential to be central London’s largest, and most convenient, fulfilment centre for some time now. “It would be a great site,” says Gulliford.
Realistic expectations
Whatever the method, getting stock as close to the consumer as possible is now intrinsic to online retailers’ survival. In such a competitive marketplace, angry customers and delayed or incorrect orders result in hefty blows to the business.
“The biggest challenge for retailers is to be able to offer this increased speed and convenience while maintaining profit,” says Verdict Retail’s O’Brien.
And when Amazon posted a third-quarter loss of $437m (£290m) in Q3 2014, doubt was cast as to whether online retailers could ever be as profitable as bricks-and-mortar chains. While the former often argue that they do not have to pay lease and business rates on physical shops, the millions of pounds that they have to pile into fulfilment hubs and delivery methods can actually end up costing them more.
What is more, the consumer is more than happy to push retailers to their physical limits with regards to delivery times. But they are not prepared to pay for delivery costs.
“Consumers have shown that they don’t like to pay for delivery,” says O’Brien. “And so online retailers are trying to find ways around that, such as Amazon Prime and the subscription services in that model. The cost is a real conundrum for online retailers, because it is very difficult for them to charge the true cost of delivery. Being able to run an efficient logistics operation is going to be key, and they will have to make sure that they have engaged in multi-channel delivery, whether online or
in store.”
One way to cut costs and keep customers happy is by combining warehouse and retail footprints to bolster the customer experience through a multi-channel model – something John Lewis is well known for doing successfully.
The store’s click-and-collect service eliminates the need for home delivery. But where it has been most clever is by merging its retail and logistics portfolio into one model. Its department stores effectively double as warehouses, making good use of all the surplus space in its property portfolio.
This technique has paid clear dividends. Over what was a choppy Christmas time for most retailers, John Lewis’s like-for-like sales rose by 5.1%, boosted by a 21.4% rise in online sales, which now represent two-fifths of the retailer’s total transactions.
Argos has also been successful at this model. As a result, it can now offer delivery the same evening for items ordered before 6pm in London. All these orders are processed through its retail footprint, which was one of the main attractions behind Sainsbury’s £1.3bn bid for the business.
“Shops are going to become hubs in the network,” says C&W’s McNamara. “Space needs to be shared and swapped around, a bit like Airbnb.”
Instant gratification
In this fast paced, technology-fuelled world where talk of robots has become the norm, the purpose of futuristic tech in online retail remains unclear.
While John Lewis and Argos have managed to find a way to serve the ever-needy customer in a city as busy as London within such intense time pressures, not everyone else has the facilities or resources to follow suit.
But that does not mean they won’t find a way. Steve Jobs was right: the iPhone did change everything. But that was nine years ago and other industries have shown that they too are capable of change on a mass scale. The hope is that such strong consumer demand for instant gratification will not be the death of the online retailers but will rather prompt them to evolve. And, ultimately, survive.
To send feedback, email amber.rolt@estatesgazette.com or tweet @amberrolt or @estatesgazette
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