It's a deal that would quicken the pulse of even the most jaded real estate broker. To get Todd A. Noethen and Hal Wilson to sign on the dotted line—thus committing their company, Big Lots, to build its fifth distribution center in Durant, Okla.—economic development officials offered them the sun, the moon and the stars—or at least their site selection equivalents. In exchange for locating their new $70 million distribution center on Durant's fertile soil, Big Lots was promised free land—137 acres' worth, to be exact—and a host of infrastructure improvements. What's more, the county would throw in some needed road work and foot the bill for the construction of a one-million gallon water tower.
And that was not all. The city of Durant and Bryan County sweetened the pot with tax incentives. For example, Big Lots gets a five-year property tax abatement, sales tax exemptions on construction materials used at the site, a land tax credit that allows Big Lots to accelerate the depreciation on its investment by 40 percent, and a sales tax exemption on utilities. There's also an annual inventory tax exemption, meaning Big Lots won't be taxed on the products stored in the DC at the end of each year.
But wait, there's more: Big Lots' new employees will be trained at no cost to the company. Its new hosts will pick up the tab. In addition, the city of Durant took the highly unusual step of agreeing to a "quality jobs cash payment." Under the rare agreement, the city will reimburse Big Lots for 5 percent of the DC's total payroll on a quarterly basis for 10 years.
All told, the incentive package from Bryan County and the city of Durant totaled $13.3 million for the sprawling 1.2 million-square-foot DC that opened three months ago. And the tab's still running. Durant officials expect the total incentive package to reach $20 million when the costs for all of the infrastructure improvements are tallied.
Welcome to the world of economic development incentives. In what amounts to a war between the states, counties, cities and even rural hamlets, local economic development authorities are vying with one another to create the most lavish incentive packages. And the breaks aren't just offered to small players and startups, which might actually need the assistance. They're going to the big players, like Big Lots and Wal-Mart, as well. In fact, a recent study estimates that Wal-Mart—the king of retailers—has received more than $624 million in economic development subsidies to build 91 distribution centers, including a whopping $48 million for one facility. The study, conducted by non-profit research center Good Jobs First, states that 90 percent of Wal-Mart's DCs have received government funding of some kind.
Competition is particularly intense for DCs. Unlike retail stores, distribution centers require highly skilled workers, which means the jobs they bring to a community pay higher wages. Big Lots, for example, guaranteed the Durant community a starting wage of $10 an hour, including benefits.
Get the big picture
It's easy to see the appeal of all those handouts to Big Lots, purveyor of everything from cut-price fruit cocktail and tortilla chips to living room furniture. To compete in the white-hot deep-discounter market, the Columbus, Ohio based retailer, which operates 1,400 stores in 46 states and reports annual revenues that exceed $4 billion, has to land not only the best deals on the products it sells—everything from packaged food to sofas to row boats—but the best deals on building new distribution centers as well.
That's not to say that Big Lots made its decision based solely on incentives. Before selecting the Durant location, Noethen, who is vice president of distribution support services, and Wilson, who is senior vice president of logistics, conducted a rigorous search, investigating dozens of sites in several states and analyzing a detailed transportation model. In the end, "Durant met our strategic plan for our existing store base and future growth," says Noethen.
In fact, Noethen cautions that as enticing as they may be, incentives are only part of the site selection picture. "People tend to focus on the multi-million dollar incentive package but overlook the bad news—you need to spend $3 million to make the site usable," he says. "The incentive package can't be the single deciding factor. You need to understand the entire site development impact, and consider how much site work will be involved." A $15 million incentive package might not be such a great deal if excessive infrastructure work is required on the site, resulting in increased construction costs and delays in completing the facility.
For example, almost all sites require soil grading, and it's imperative to rule out sub-soil issues. Noethen suggests hiring geotechnical professionals to assure the site is DC-worthy, with no hidden rock ledges that could require costly blasting. In addition, you need to make sure there are no drainage issues or even protected wildlife in the area that could lead to a costly battle with environmentalists.
Another potential hitch is the availability of labor. In the end, no matter how highly automated the facility, it takes people to make a DC run. And unlike the Field of Dreams, you can't assume that if you build it, they will come. Therefore, it's important to research the potential labor pool before deciding on a location for your next DC.
Big Lots, for example, wasn't content to simply accept verbal assurances concerning the Durant area's labor pool. Because it's so dependent on labor availability (as the chain continues its expansion, the workforce in Durant is expected to double from its current 250 associates to nearly 500), the company contracted with Kurt Salmon Associates to conduct a thorough examination of the employee base in Durant and the surrounding communities. The company contacted 15 other employers and inquired about average wages, the presence of unions, insurance claims, how long it takes to fill job openings, and the overall work ethic of employees. "A dependable labor pool is one of the top issues," says Noethen. "You need a good employee base; it's one of the top decision factors."
A well-educated workforce is essential for operating some of the state-of-the-art material handling equipment installed at the Big Lots facility. Big Lots expects the Durant facility to become the most efficient of the company's five DCs, based largely on the sortation conveyor system from Intelligrated Inc. The system operates at a rate of 630 feet per minute, which Noethen claims is the fastest of its kind when it comes to a carton sortation operation. With 40 shipping lanes, the facility can process 235 cases per minute, or 14,000 cartons per hour. "Nobody is running that fast," says Noethen. "Others will be soon, but nobody is right now."
Despite the rapid throughput that many DCs achieve, site selection experts emphasize that it's important to choose a site that will allow you to expand. Quite often, it's economically advantageous to add on to an existing facility, as opposed to opening a satellite operation. All too often, however, companies purchase sites with existing requirements in mind, only to find they've become land-locked when it comes time to expand a few years later.
Stuart Rosenfeld may not own a crystal ball, but he does have an unusually clear vision of the future. Even though automotive parts retailer Pep Boys just broke ground for its fifth distribution center in San Bernardino, Calif., Rosenfeld, the company's vice president of distribution, is already at work determining when another DC will be needed and where that facility should be located.
"When it comes to building a new distribution center, you need to be two to two and a half years ahead of the curve, including construction time," says Rosenfeld. "I'm already looking out as far as 2010."
Rosenfeld is in the process of analyzing Pep Boys' current distribution network, which also includes sites in Atlanta, Dallas, Indianapolis and Chester, N.Y. Aside from factoring in future store expansions, Rosenfeld runs several models to predict how growth at existing stores will affect square footage at distribution centers.
In doing so, Rosenfeld will need to take into account the efficiency gains expected from the DC now under construction in San Bernardino. The 600,240-square-foot leased facility will consolidate three separate sites in the Los Angeles area and provide nearly 175,000 square feet of additional warehouse space. The additional height of the new DC (30 feet versus 24) will equate to a 63-percent increase in cubic capacity. The facility will also have 25 additional loading docks, allowing for a substantial increase in throughput—meaning the facility will service 165 stores, 151 in its existing service area and 14 additional stores in the Phoenix market.
"I factor all of that into my forecast," says Rosenfeld. "You've got to have a clear understanding of where and when you need to expand. To me that's critical."