In a supersized world where the sandwich of choice is the Big Mac and the drink the Big Gulp, it probably shouldn't come as a surprise that DCs, too, are living extra large. It's too early to call it a trend, but some of the biggest names in the business are trimming back their distribution networks, consolidating their operations into a few mega facilities that like the Great Wall of China, are probably visible from the moon.
One after another, giant retailers and consumer goods businesses are commissioning giant facilities: Home furnishings company IKEA recently moved into a 1.8 million-square-foot DC in Bakersfield, Calif. Office supply giant Staples recently opened an 815,000-square-foot facility in Hagerstown, Md. Wal-Mart now runs a 1 million-square-foot DC in Hurricane, Utah; a 1.2 million-square- foot facility in Raymond, N.H.; and another 1.2 million-square-foot DC in Hope Mills, N.C.
But it's not just a retail thing. Following its acquisition of Lever Brothers, Cheseborough Ponds and Helene Curtis, consumer goods heavyweight Unilever Home and Personal Care consolidated 15 DCs into five. Once the project is completed, Unilever HPC will operate 4.8 million square feet of distribution space in Georgia, Pennsylvania, Texas, Illinois and California. Operating out of these large—or perhaps we should say, economy size—DCs could save the company serious money. ProLogis, a distribution facilities and services provider that oversaw the project, estimates the move will cut costs by about $20 million annually.
Even investors have not been immune to the supersizing bug. NAI Logistics Group, a Chicago-area company specializing in building and land acquisition and financing for logistics, represents a number of investors that are now building colossal distribution centers on speculation, particularly a long the Intersta te 55 corridor around Chicago. "Four years ago, the largest spec building was about 350,000 to 400,000 square feet," says Daniel P. Leahy, executive vice president of the company, whose clients include Sears Logistics Group, The Home Depot , Motorola, Caterpillar and IKEA. "Now, we have 650,000- and 700,000-square-foot [DCs] coming up out of the ground within two miles of each other."
That speculation's probably not as risky as it sounds. The explosive growth of third-party logistics (3PL) services has created a large pool of prospective tenants. Once a 3PL lands a contract, it usually has to get up and running quickly. "A lot of them don't have the luxury of waiting for a built-to-suit," Leahy explains.
Like the big retailers and manufacturers, 3PLs are drawn to the mega-facilities by the prospect of labor savings and inventory benefits. "If you've got three or four facilities that have been around, you can combine them and get more operating efficiencies out of a new facility," says Gil Mayfield, national director of distribution and real estate services for Carter & Burgess, a Fort Worth, Texas-based civil engineering consultancy whose clients include Wal-Mart, Staples and Toys R Us. "You're just able to handle things more quickly and more efficiently."
Location, location and location
Where are these mega-facilities going? Though economic development agencies from every corner of the country will make a pitch for the business, it's generally the familiar names—and typically, large urban hubs—that prevail: New Jersey, Atlanta, Dallas, Chicago and the Southern California Inland Empire. "Why are those the winners? A lot of it has to do with transportation infrastructure," says Leahy.
Leahy notes, however, that although metropolitan areas may be the most attractive locations, that doesn't necessarily mean downtown. Breaking ground even 50 miles from the city center gives DCs access to labor and transportation and other infrast ructure. And in that range, there's land to be had. "You can still find vacant farmland with utilities at or near the site," adds Leahy.
That infrastructural advantage creates something of a marketing hurdle for economic development agencies in areas outside the main hubs. These agencies, to borrow a phrase from Uncle Sam, want you. To be precise, they want you to locate your distribution center in their town or county, bringing jobs and investment to the region. And they 'll offer all kinds of inducements to make that happen. For example, Mayfield reports that Carter & Burgess has been able to negotiate tax, real estate and other incentives worth $10 million on average on behalf of clients planning large projects. What the communities get in return are as many as a thousand new jobs, he explains. "These are projects that most communities are anxious to have."
One of those incentives may be cheap land. But Leahy, for one, cautions managers about what he calls "the free land paradox." When you look at real estate, he warns, don't focus on what it's worth right now, but rather, what it will be worth in the future. You don't want to be saddled with a white elephant when changing distribution patterns make it necessary to revise your network. "If you build in the boonies," he says, "it [makes things] tougher from an exit strategy point of view."
Time to dig in?
Wherever the site, it would be hard to find a better time to build than the present. Interest rates are at historic lows and commercial construction's hit a lull. "You can build a new building in some markets for less than you can buy a building for," says Leahy. "With developers and contractors very hungry for work, they're being very aggressive on the construction numbers. It's the best time we've seen in the last 15 years to purchase or lease."
The flip side is that the soft economy that makes investment attractive now is also what makes it unattractive. In the case of these construction projects, timing is everything: Invest too late and the network won't be ready when the turnaround comes (DC construction projects take 24 to 30 months from inception to completion); invest too early and you tie up valuable capital.
"It's a mixed picture," Mayfield says. "We're seeing some companies begin to make commitments. Some are in the early design stages. They're at least willing to spend design dollars." But though construction may not exactly be roaring along like a hurricane, he says that he's still more optimistic than he's been in some time. "We're seeing some pretty decent activity right now."