LOGISTICS AND E-COMMERCE

The impact of E-commerce

on logistics real estate May 2013
 Copyright 2013 CBRE. All rights reserved.
Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy,
we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to
independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates
used are for example only and do not represent the current or future performance of the market.
This information is designed exclusively for use by CBRE clients, and cannot be reproduced without prior
written permission of CBRE.
 Introduction
The stormy growth of online retail sales has
received ample attention, but its impact on the
logistics behind it is to a large extent still unclear.
Although e-commerce is recognised as a driver
of demand for distribution space, it cannot be
matched with the fact that retail sales volumes are
not growing. This implies that the functioning of the
logistics property market is not well understood.
Reason for CBREs Dutch Industrial & Logistics
team to conduct in-depth research into the topic
of e-commerce logistics. This report provides
an overview of the research and its conclusions,
explaining the way logistics property functions and
how e-commerce is changing the requirements
for warehousing. The results provide essential
information for all parties involved in logistics
warehousing, with a focus on investors and
developers.
Why logistics property?
To be able to explain the impact of e-commerce,
the nature and purpose of logistics property need
to be understood first. In contrast to general
belief, logistics property is not a clearly marked
category that ticks boxes in terms of building
specifications, such as loading docks, free height
and floor load capacity. Logistics property, in fact,
Classification logistics real estate
PARCEL HUB
X-DOCK DISTRIBUTION
YES CENTRE
1ST LINE
BUILDING
Basic function
Distribution
PRODUCTION COMMIDITY
STOCK
NO DATA
CENTRES
NO YES
Basic function
Storage
4 Logistics and E-commerce
is the physical result of the functioning of supply
chains. More specifically: imperfections in supply
chains lead to the creation of logistics property.
The demand and supply of goods need to be
coordinated and geared towards each other in
terms of location, time, and quantity. Imperfections
in these factors result in the need for storage and
distribution processes. Storage and distribution are
the two basic functions of logistics property and to
accommodate these processes, logistics property is
developed and used.
In a traditional supply chain, the physical and
commercial channels are equal. The end of
the chain is formed by the retail store, where
consumers can make their choice out of the
available products. Consumer behaviour is,
therefore, partly determined by the available
product range. These traditional supply chains
have a hierarchical structure in which one or more
central distribution centres supply the stores with
products. These distribution centres, in turn, receive
the products from wholesalers, who also have their
own distribution centres. A final step back in the
chain is the distribution centre of the producer.
Following the chain downstream both stock size
and shipment size are reduced.
The interaction of the two basic functions of
storage and distribution determine the role of the
logistics property that results from it. If we display
the two basic functions on an X and Y axis, we
get a simplified matrix that allows us to determine
basic types of logistics property.
The different combinations of distribution
and storage provide us with different types
of property. Cross docks or cargo terminals
are, for example, sites where no storage takes
place. Goods enter the site, are rearranged and
repacked in different shipments, and leave again,
often in a short period of time. The other side
of the spectrum offers facilities which are only
meant for storage. Goods only occasionally enter
or leave these sites, and little staff is needed.
In a distribution centre, both the storage and
distribution function are combined on a high-
grade level. This requires a high degree of
organisation and an efficient building lay-out.
 E-commerce logistics
The growth of e-commerce has a profound
impact on traditional supply chains, where the
commercial and physical channels are combined
in the retail stores. In the case of e-commerce
operations, the commercial and physical channels
are split and operate independently. An important
consequence is that consumer behaviour is not
restricted by the physically available range of
goods anymore. Consumers can order virtually
any product they require, in every quantity and at
any time. This changes the supply chain from a
push (to the store) to a pull process (by the final
consumer). The physical spot where this change is
implemented is the distribution centre. Previously
structured to arrange large shipments (fully loaded
trucks) at fixed times to fixed delivery addresses,
the key factor now becomes the direct delivery to
consumers (B2C) and, as such, the fulfilment of
consumer requirements.
Consumers, who before convened in a store to
make their purchase, are now separately placing
their orders which have to be processed directly
by the distribution centre. Due to this change,
the number of orders in the distribution centre
increases substantially. Moreover, each order only
has a few products (order lines) - usually between
one and five, and the number of units per order
line is limited to one or two pieces.
This process change is the driver of new demand
for logistics space. In an e-commerce operation,
E-fulfilment
6 Logistics and E-commerce
we will find a large range of products and low
stock levels per product. The products can no
longer be stored on pallets, but are mostly kept in
crates or boxes, or on shelves. The products must
be readily accessible for order picking, so a floor
location is preferred above storage in racks. The
result is a strong reduction in the stock density (the
amount of products per square metre), compared
to traditional storage solutions.
E-fulfilment
It may be argued that the handling of e-commerce
orders is not only about logistics, but also about
marketing. In e-commerce, the distribution process
is no longer just an efficient logistics operation, but
also, and perhaps especially, a means to live up to
the expectations of the customer. If the service of
a web shop is not reliable, consumers can switch
to the competition by just one click. E-commerce,
therefore, is moving the commercial channel into
the distribution centre. This is why reliable logistics
services are more important than ever. Errors in the
logistics process will have a direct impact on the
consumer and hence on any (follow-up) purchase.
In order to meet consumer expectations, many
supporting activities have to be implemented.
These include services that add value to the
products, control shipments or fulfil administrative
duties. These services, generally referred to as
Value Added Logistics (VAL) and Value Added
Services (VAS) have already increasingly been
implemented in traditional distribution centres,
Consumer
particularly when it concerns international
operations. Such a distribution centre with a high
level of VAL/VAS activities has been coined a
Logistics Service Centre. In e-commerce, however,
the scope and intensity with which VAL and VAS
are needed are of a different magnitude. The
direct impact on customer satisfaction and sales
performance is the main reason. The result is the
emergence of an enhanced type of logistics service
operation, called e-fulfilment. Below figure shows
to what extent the e-fulfilment center distinguishes
such additional processes in comparison to a basic
distribution centre and the traditional logistics
service centre, where VAL and VAS have already
been implemented.
The table shows that the e-fulfilment centre in
fact hardly distinguishes any new activities
compared to traditional solutions. The intensity
with which the processes occur, however, makes
it necessary to structure the operation differently
and, therefore, adjust the lay-out of the warehouse.
Most importantly, the handling of returns can be
appointed as a new, e-commerce specific activity,
due to the nature and size of this process in an
e-fulfilment center. The taking of product photos,
in order to be able to market them on the website
within the shortest possible time, can also be seen
as a new activity.

Basic distribution Traditional distribution center E-fulfilment

Core activities: Core activities: Core activities:

Storage Storage Storage
Distribution Distribution Distribution

+ VAL-activities: + VAL-activities:
packing & `labelling packing & `labelling
customising customising
assembly assembly
quality control quality control

+ VAS-activities: + VAS-activities:
order management order management
inventory management inventory management
customer service customer service
financial services financial services

+ e-commerce activities
return handling
photography

Logistics and E-commerce 7

 Returns
Returns of purchased products are often mentioned
as one of the key processes of an e-commerce
operation, and rightfully so. The scope of returns
in an e-fulfilment center is such that it can be
considered a new, e-commerce-specific activity.
A wide array of return types can be distinguished
in e-commerce: items that could not be delivered,
defective or damaged products, incorrectly
delivered products, products that do not fit the
purchasers requirements and products that were
deliberately ordered in excess to allow a product
comparison at home.
The purchasing behaviour of consumers and the
service of web shops, therefore, cause substantial
additional return flows. As explained, the
consumers choice is traditionally limited to the
stock in the physical store and the amount of items
that can, or may, be carried into the fitting room.
Nowadays, customers of mail order companies
or web stores can order much more items than
they need, to try them extensively at home and to
subsequently send the products back that they do
not require.
Research has shown that the percentage of
products that is returned differs by product type
and web store. A percentage between 10% and
20%, however, can be considered standard. As
studies show, rates of even 40% to 50% can be
seen for womens fashion. The pan-European
retailer Zalando, for example, has reported
comparable figures. Returns are therefore an
extensive and costly process. Besides double
transport costs, most companies have to set up a
separate process for the return flows.
Photography
Making pictures of the products immediately
after arrival in the e-fulfilment center is essential
for marketing. In-house photography has a
positive effect on the time-to-market: this way
new products received by the e-fulfilment center
can be made available for online purchase
within 48 hours. A second important aspect is
the accurate visualisation of the products. This
is decisive for site visits and successful sales. In
this way e-fulfillment and marketing have close
links with each other, whereas the amount of
space required for separate photo studios in the
e-fulfilment center is limited.
8 Logistics and E-commerce
Peak traffic
E-commerce operations experience strong
fluctuations in the amount of orders that
consumers place. There are seasonal effects
and differences within a day. In general, the
seasonal effects are similar to what is common
in the traditional retail market. The daily pattern
shows low volumes in the morning and a sharp
increase in the afternoon and evening, when
consumers return from work or school.
Both effects have a different pattern frequency
and different peaks and troughs in volume. The
general trend is a deviation of -50% to +100%
compared to the average order volumes. Both
effects can strengthen each other, for example
in the month of December, leading to even
greater peak traffic.
E-fulfilment requirements
It is now clear that the roles of the two basic
functions of logistics proper ty (storage and
distribution) are changing profoundly by
e-commerce handling. This requires a different
physical solution and, therefore, different
requirements to the lay-out of the warehouse.
The impact is visualised in the following table.
The changing nature of the storage and
distribution functions are drivers of the specific
requirements regarding location and building
specifications. These requirements can be
captured under Location, Quantity of space
and Quality of space. The effects, and their
comparison to traditional distribution, are
displayed in the following table.
 What does this mean for the real estate
market?
The most important aspect for the real estate
markets is the extra demand for space. In order
to facilitate the wide product range and the large
flow of returns, significantly more space is needed
than in a traditional operation with a comparable
volume of goods. Mezzanine floors are very well
equipped to satisfy this extra need for space, as
the requirements in terms of free height and floor
load capacity are much lower than in case for
traditional distribution. Immediate access to a
sufficiently large pool of labour is also essential, as
are the facilities required to provide efficient and
comfortable working conditions for the warehouse
staff.
As can be seen from the table, the requirements
for an e-fulfilment (Multichannel/ Single channel)
centre are more complex than for a traditional
solution. In order to place the e-fulfilment centre in
a similar scheme as our basic storage/ distribution
matrix, a different and more elaborate definition
of the axes is necessary. This can be seen in below
figure where the classification of logistics property
is based on the complexity of the processes and
the stocking functions, rather than on a binary
yes/no division.
Pick-up points
Pick-up points are not a new phenomenon as
such, but the business-to-consumer character
of e-commerce is changing their nature.
Initially, existing industrial property will be used
to establish Pick-up Points (PUP) or Pick-Up
Drop-Off (PUDO) sites. Consumers can collect
their products here, and in order to cater for
them, the property needs to have retail-like
features. Above all, the strength of the location
is determined by the number of operators
using the PUP or PUDO, as this determines the
amount of customers.
Mechanisation
Another difference with traditional distribution
is the extent to which e-fulfilment processes are,
or can be, mechanised. Virtually no e-fulfilment
process can operate efficiently without a degree
of mechanisation. For combining orders and
packaging shipments, conveyors and sorting
systems are frequently used installations.
This requires changes to the accommodation
in terms of fire safety and climate control. This
means that for e-fulfillment solutions a high level
of investment is necessary. It is relevant to note
that investments have to be recovered through
high volumes (many orders) and a
long-term use.

E-fulfilment center
Multichannel

High
PARCEL HUB

X-DOCK DISTRIBUTION E-fulfilment center E-fulfilment center

CENTER Multichannel Multichannel
1ST LINE
BUILDING
PARCEL HUB
PARCEL HUB E-fulfilment center
X-DOCK DISTRIBUTION Single channel
CENTER
X-DOCK DISTRIBUTION
1ST LINE CENTER
BUILDINGPRODUCTION
1ST LINE COMMIDITY
Complexity of
DATA BUILDING STOCK
the processes CENTRES E-fulfilment center
Single channel
E-fulfilment center
PRODUCTION
Single channel
COMMIDITY
DATA STOCK
PRODUCTION
CENTRES COMMIDITY
DATA STOCK
CENTRES

Low
New Classification
Distribution
logistics real estate Bulk stock center

Essentially, a multichannel No Pick-stock

e-fulfilment centre is the Stock Virtual/ return
most complex form of the keeping Storage
Distribution
center
storage/distribution matrix.

Distribution
center

10 Logistics and E-commerce

Logistics and E-commerce 11
12 Logistics and E-commerce
New development
The requirements of e-fulfilment are creating a
challenge for the property market. On the one
hand, end users desire modern, high-grade
facilities that are customised to their own specific
e-commerce processes. On the other hand, they
are very sensitive for occupation costs and are
generally only willing to commit to short-term
lease contracts. Most existing properties are not
able to bridge this gap, leading to opportunities
for developers. The limited availability of finance,
however, poses a severe threat.
Conceptual development might prove to be a
solution. Conceptual development involves the
creation of a concept, or a vision on future market
developments. Conceptual development means the
realisation of this vision in a spatial context. The
developer will have to take the initiative to work out
the e-fulfilment concept in close cooperation with
his partners, the end user and the investor. They
will have to be involved in the early stages of the
development process.
Investment opportunity
Although there is no one size fits all when it
comes to the real estate solution for e-commerce,
e-fulfilment is a property segment that in terms
of location, quantity and quality has to meet a
number of basic requirements.
This has implications for the marketability of the
object. Property that was previously regarded as
obsolete, for example because the free height
was too low or the mezzanine floors were too
large, might again come into favour because
of its location. On the other hand, built-to-suit
e-commerce warehouses might prove to be only
workable for one specific user and can become
obsolete very rapidly. One should bear in mind
that e-fulfilment centers are not user-specific, but
use-specific.
Investors should understand that a new standard
for logistics property is created. E-commerce
is a separate process, with a growing need for
space in the middle and long term. There is also
a strong need for higher property quality, which
requires a higher investment, but also provides
the opportunity to engage into long-term lease
contracts with the end user. The risks are limited as
the fundamental change in consumer behaviour
means that demand for this type of space will
remain. This provides the opportunity to create a
long-term investment product with a committed
end user and an attractive direct return.
Other real estate effects
Besides the emergence of e-fulfilment centres and
the consequences this will have for investors and
developers, e-commerce is expected to have a
number of other effects on real estate markets. The
emergence of pick-up points is one of them.
The impact on the retail real estate market itself
is much discussed and not the subject of this
paper. The general conclusion is that the impact
differs by type of retailer or product. Some shops
will definitely disappear from the streets, as their
products are easier purchased online. For products
where the look and feel are important features
in attracting consumers, the online and physical
retail channels appear to strengthen each other.
This is also displayed by the fact that e-commerce
retailers are opening physical shops. Such
multichannel retailing is becoming a new standard,
but the demands on the location and type of retail
unit are becoming more strict.
Labour market
The availability of labour is an essential factor for the location
of an e-fulfilment centre. The immediate availability of flexible
workers is necessary due to the typical peak traffic in e-fulfilment
processes. An additional requirement is good access by public
transport, also in the evenings. Such locations are to be found
directly near cities and in the western Randstad conurbation.
Established logistics hubs that are more access to labour, such
as for example Maasvlakte or Moerdijk, are therefore less
suitable for an e-fulfillment center.
Type of distribution centre Staff per sq m floor space
Low volume distribution centre ~ 1 per 1,000 sq m
Traditional distribution centre ~ 1 per 500 sq m
High volume retail distribution centre ~ 1 per 300 sq m
E-fulfilment (peak) ~ 1 per 100 sq m
Logistics and E-commerce 13
 Conclusion
E-commerce logistics is a growth market which
only stands at the beginning of its development
cycle. Most likely, there will be a long-term
and increasing need for real estate solutions
that handle the processing of consumer orders
in distribution centres. This does not mean
that traditional distribution solutions are set to
disappear. Rather, e-commerce has created a
new segment that will exist next to traditional
operations, albeit with an increasing market share.
E-commerce involves more and, particularly, more
complex processes than traditional distribution, as
the split of the commercial and physical channels is
leading to profound challenges in the supply chain.
These have to be matched by the e-fulfilment
centre, which is essentially the most complex form
of warehousing available.
This means that building specifications are no
longer a sufficient tool for identifying logistics
property. It is firstly necessary to understand and
measure the interaction of the basic functions of
storage and distribution. Although there is no one
size fits all when it comes to e-fulfilment, it is a
property segment that in terms of location, quantity
and quality of space has to meet a number of basic
requirements. E-fulfilment centres are, therefore,
use-specific but not user-specific. The extra
demand for space is a very important requirement,
which to a large extent can be met by mezzanine
floors. The access to a sufficiently large pool of
flexible labour is also essential.
As e-commerce has changed the traditional
standard for logistics processes, in-depth
specialist knowledge is required to determine the
appropriate logistics solution for a specific product
or user group. The realisation of e-fulfilment
centres depends on this knowledge, both from
the side of the logistics and e-commerce parties
as from real estate parties such as investors,
developers and lenders.
There is a long-term interest which brings these
parties together. High-grade sites and e-fulfilment
solutions with a mechanised lay-out require a high
level of investment. This commits the end-user
to the project for the longer term. Although the
project is use-specific the risk is limited, as on the
one hand the end user is known and involved in
an early stage, and on the other hand the need
for e-fulfilment solutions will increase due to the
further growth in e-commerce. This long-term
perspective makes it possible to achieve a solid
return on investment. For real estate investors,
this provides an opportunity and a valuable
diversification of the portfolio.

Research findings e-fulfilment centers

Location factors

1. In the consumer market.

2. Proximity network hubs and/ or depots.
3. Proximity workforce that is sufficient, flexible and employable.

Quantitative space

1. Larger space requirements in floor area of warehouse space.

2. Larger office space requirements.

Qualitative space

1. Lower requirements regarding the constructive object specifications.

2. Higher requirements regarding the quality of the space, installations and facilities.

14 Logistics and E-commerce

Logistics and E-commerce 15
For more information about this publication please contact:

CBRE B.V.
+31 (0)20 626 26 91
netherlands@cbre.com
www.cbre.nl

Dries Castelein
Senior Director Industrial & Logistics

Machiel Wolters
Director Research & Consultancy