Dive Brief:
- As demand for online shopping grows, the price of large land parcels where retailers often site fulfillment centers has skyrocketed, according to a report from real estate firm CBRE cited by CNBC. The firm, which examined data in 10 U.S. markets, found that the average cost of "large industrial parcels," or land between 50 and 100 acres, had doubled over the past year, from $50,000 per acre to more than $100,000. Five- to 10-acre plots, meanwhile — those often located in busy metropolitan areas, and used for last-mile delivery, CNBC notes — saw average prices rise from $200,000 per acre to $250,000.
- Steep land prices are a major reason internet retailers aren't keeping up with consumer demand, and CBRE predicts this problem will only deepen. "This situation won't go away any time soon, because the markets where distribution centers are most in demand — typically near or in densely populated city centers — have scant available land for industrial uses," David Egan, the global head of CBRE's Industrial & Logistics Research division, said in a statement.
- Some of the markets with the highest increases include California's Inland Empire, which saw industrial land prices rise 35% over the past year, followed by Las Vegas and northern New Jersey, which both saw prices grow 16%.
Dive Insight:
Most grocers won't be alarmed by this news, since many currently use their stores rather than bulky offsite warehouses for online order fulfillment. Click-and-collect services let shoppers park and pick up their orders, while home delivery companies like Shipt and Instacart crowd-source workers who shop store aisles and deliver goods to consumers’ homes.
As grocery e-commerce grows, however, analysts predict this store-focused model will be increasingly strained. As online orders increase and more designated shoppers crowd the aisles, the store experience will erode, they say. Sources interviewed by Food Dive say that as grocery e-commerce approaches 10% of a store’s sales, it could begin to have a detrimental effect.
Grocery stores also aren't optimized for picking and packing of online orders. With efficiency and speed of service becoming increasingly important, this could become another knock against this model. Some startup companies, like Farmstead, now offer delivery in as little as thirty minutes.
Online grocery is poised to expand rapidly in the coming years. Packaged Facts predicts online grocery sales gains will accelerate in the coming years, with annual growth increasing from 19.4% between 2013 and 2017 to 27.1% between 2017 and 2022. The firm predicts online grocery sales will be worth nearly $42 billion in 2022 — more than triple the market’s current value.
Click and collect will continue to be a leading format in rural and suburban markets, but in dense metropolitan markets, delivery will be the preferred choice for shoppers. Grocers that see a bright future in these highly competitive — and highly lucrative — markets may want to invest in online fulfillment centers now. Hy-Vee, for instance, currently operates a fulfillment center in Urbandale, Iowa and plans to build three more — in Omaha, Kansas City and the Twin Cities.
Retailers should also keep their eyes on alternative fulfillment methods, particularly those used by retailers in Europe, where the e-commerce market is much more mature. In England, retailers utilize so-called “dark stores” that are engineered to pick and fill orders. In France, meanwhile, the Drive e-commerce model uses small fulfillment centers and pickup points to meet demand.
Grocers may not feel the same impact here as other online retailers. But they will still incur other costs. This is a reminder that even though e-commerce remains a major opportunity, it is still very costly and hard to profit off right now.
