Virtual change

Poland is by no means a leader in this field: in Germany, Spain and the UK the proportion is even higher at around 20-40 pct. In Holland the percentage of e-commerce tenants is even in the 40-60 pct bracket. And leading the way on the CEE market is Russia, where internet traders are responsible for 20-40 pct of all the warehouse space leases. The data (from the 'Online Retailing: Impacts, Challenges and Opportunities for European Logistic Market' report by CBRE) are in line with developers' observations. "Last year app. 20 pct of Prologis' activities in terms of built-to-suit facilities were connected with the e-commerce market," says Bartosz Mierzwiak, the vice-president and market officer of Prologis in Poland. However, the most impressive of these transactions for Prologis took place outside Central and Eastern Europe: in the UK Tesco.com has leased a facility with an area of 80,000 sqm, in the US Amazon has occupied 90,000 sqm, while 100,000 sqm was leased by Start Today in Tokyo. In Poland DHL has taken up 44,600 sqm in Prologis Park Dąbrowa Górnicza to service an international internet sales company, while Neonet has moved into 17,800 sqm in Prologis Park Wrocław. Another large transaction involved the lease of 20,000 sqm in Skalski Logistic Park by Dirks Logistic, which provides services for the Zoo Plus pet shop.

Getting things moving
Analysts are in no doubt that this market is only just getting going. "Retail chains in Europe expect the share of online sales to double within the next two years from the current 5 pct to 10 pct of all sales," says Patrick Kurowski, the head of the industrial and logistics department at CBRE. "Even though 70 pct of chains consider themselves to be traditional sellers, the majority have already started the process of moving towards omni-channel selling. As many as 63 pct of chains believe they will successfully launch an internet sales channel within the next two years," says Patrick Kurowski.
However, the main driving force behind the changes is the fight over custom. Consumers can instantly choose the cheapest product on offer from hundreds of shops thanks to the popularity of price comparison sites. With such intense competition between stores and the slimmer possibilities for further price reductions, the costs for transportation and the delivery time promised by the store are ultimately determining where customers spend their money. Research carried out in the UK shows that 61 pct of retail chains now offer next day deliveries. The number of such stores grew by 50 pct last year. A study carried out by the Royal Mail has also showed that 66 pct of online order cancellations were due to dissatisfaction with the delivery conditions (including the price and time). In countries where Amazon is present, retail chains need to follow the same route as the e-commerce giant in order not to go out of business, and so they are being forced to speed up their deliveries, which involves the automatic completion of the orders in the warehouses. To save more time, the product labelling also takes place in the warehouse, while low-rise storage provides easier and quicker access to the products, as does locating the distribution centres near the terminals of the delivery companies. As many as 20 pct of operators in the United States use the method of trans-shipping goods directly from one vehicle to another without any storage. Cross-docking, where goods are not stored for more than a day, is another step in a similar direction. On the one hand this allows companies to minimise the storage time, and on the other it reduces the space required.
Parcel delivery centres have started to play an increasingly important role in speeding up the distribution process. These are mostly used by logistics operators and delivery companies, such as DHL, Hermes, DPD (Geo Post), TNT, GLS (Royal Mail), UPS and FedEx, but are also used by retail chains. Such centres feature buildings with several dozen docks (from 50 to 150) for delivery vehicles. The storage area ranges from 3,000 sqm to 15,000 sqm (132 sqm per dock on average). CBRE is predicting a major expansion in the number of such complexes across Europe over the next few years. They will be mainly located near cities in order to reduce the delivery time to the end-client. "We are already hearing from the market that there is a shortage of such small handling terminals," claims Patrick Kurowski. However, developers are rather reserved when it comes to such projects. These facilities are less flexible when it comes to usage - when a contract expires, it might be more difficult to lease out the space again than for a safe class 'A' warehouse. CBRE's specialists also estimate that the rents for such facilities will need to be 40-50 pct higher for the project to be profitable.

Not in a hurry just yet
It would seem that retail chains in Poland, where Amazon is still not present despite its announced intentions, are somewhat less than eager to implement changes. "In the US or China we already have some examples of same day delivery services, but we need more time for this as well as a larger e-commerce market. Only higher turnover will justify investment in warehouse chains near cities," claims Bartosz Majewski, the new business developer of Divante, a company that helps businesses to set up and develop e-commerce services.
Because online sales in Poland only add up to a fraction of traditional forms of trade, adapting to e-commerce models is not a priority. Chains are currently coping by singling out sections that service this additional sales channel within their warehouse areas or through outsourcing the warehousing. "Large retail chains that have launched online sales do not at the moment require any significant changes to storage space management. An increase in these sales might lead to the need for a larger area in the future. However, retail chains will try to avoid such a necessity by implementing even more modern and efficient storage and distribution systems first," insists Andrzej Czarnecki, the development director of Euro-net (the owner of the RTV Euro AGD chain).
Tesco provides one example of a retailer that has not felt the need to adapt its distribution model for the e-commerce revolution. The British chain will have 22 near-shop warehouses by the end of this year, which together with its central warehouses will be enough to service both traditional and online sales. "Retail chains with developed and well-functioning distribution processes generally do not have to change much to adapt their sales for the internet," explains Bartosz Majewski.
Media Markt and Saturn also use near-shop warehouses, but with the difference that they do not have any central warehouses. "New product models are constantly being introduced and replacing older ones. It is not worth building up large reserves that could age quickly. Actually, all the products sold on the internet are also available in the sales halls. Each store offers thousands of products," explains Media Saturn Holding Polska's spokesperson Wioletta Batóg. Empik uses a central warehouse in Prologis Park Sochaczew (currently 24,000 sqm), which is serviced by DHL. The complex has undergone some radical changes. It can now be used for a broader range of products, including the bulky items stored on top of the products sold in Empik stores. "A separate section in the warehouse is earmarked for servicing the Empik.com online shop, as well as a separate team and warehouse system. We use such solutions as a conveyor belt system to make the moving of products easier in the completion area," says Katarzyna Łuckiewicz, the operations director at Empik.com. For the last few years the area has been enlarged several times and the number of shelves and pallet racks has also increased.

Latest changes only cosmetic
The adaptation of existing warehouses to the needs of e-commerce mainly involves introducing suitable equipment to make the order completion and dispatch easier. "You can install multi-level mechanisms, conveyors, as well as automatic completion lines for small items and the parcel dispatch to individual customers. The logistics area should first of all reduce the completion routes and make it possible to manage small orders, as well as make the flow of small goods easier," says Robert Dobrzycki, the CEE managing partner of Panattoni Europe.
More advanced changes can result from employing more staff to service the orders. In a traditional distribution centre there is an average of one member of staff per 500 sqm, whereas in a distribution centre that fulfils e-commerce requirements (with an electronic ordering service) there is one member of staff per 100 sqm in peak periods - e.g. during the pre-Christmas shopping rush. This means that employment levels have to be five times higher, resulting in the need to create additional staffrooms, toilets, canteens and extra parking spaces. In high-ceilinged halls the additional space is usually created by building mezzanines, because e-commerce does not normally use the high-storage system. "Such minor interference in the structure of a building from the point of view of a warehouse developer means that a standard class 'A' warehouse can satisfy the requirements of companies from the e-commerce sector," says Robert Dobrzycki. Experts also insist that not every chain will have to adapt its warehousing for the new conditions. This depends on a number of factors, including: the type of goods, the size of the current infrastructure, the online vs. traditional sales ratio, order service methods, as well as the size and frequency of deliveries. What works for one vendor is not necessarily good for another.
There is no single answer to the question of how much the volume of available space is increasing due to e-commerce. This is mostly to do with the fact that it depends on total sales (in which the share of the online sales is still small) and this in turn is dependent on fluctuations in the economy. "There are no credible studies that could serve as a basis for predicting the volume growth of warehouses due to e-commerce," says the head of logistics at CBRE. "However, we believe that an increase in warehouse space is likely, particularly when it comes to retail space. It is possible that some retailers will reduce their sales areas in favour of warehouses that are cheaper to maintain due to the popularity of internet shopping."
Given that CBRE estimates that over the next two years the new sector will grow to the twice its current size in Poland in terms of sales, entering the 20-40 pct bracket, it would seem that we really are on the threshold of a revolution when it comes to e-commerce and warehouses - but one in which the outcome will be hard to predict.