News / Sign of the times as the retail transformation spawns mini distribution centres

© Alexey Novikov

Are shopping malls set to make way for distribution centres?

The surge in online shopping the Covid-19 pandemic has caused is putting tremendous pressure on the retail sector, further undermining the strength of the bricks-and-mortar channel.

Physical retail outlets do remain important, but the trend is away from large shopping malls towards smaller venues, often in urban neighbourhoods.

Together with the rise of e-commerce, these new retail outlets are ushering in smaller distribution centres in their wake.

Retail space keeps shrinking. According to CBRE, the world’s largest commercial real estate services and investment firm, since 2017, 13.8 million sq ft of retail space in the US has been converted to industrial areas.

“Underperforming retail sites have become an ideal location for last-mile warehouse developers,” CBRE noted in a report published this month with the headline Retail-to-industrial property conversions accelerate.

Often located in population centres with good road access and large parking lots, many are well suited for conversion to warehousing and distribution purposes, CBRE found.

With major retail chains like J Crew and JC Penney filing for bankruptcy and others shrinking their footprint, shopping malls are facing losing anchor tenants whose demise will likely have a knock-on effect on other retailers onsite, as consumers see less cause to visit the mall. This comes on top of consumers’ current reluctance to shop in crowded places to avoid the risk of getting infected with Covid-19.

As with the rise of e-commerce, this trend started before the advent of Covid-19, but has been accelerated by its repercussions. Already, before the outbreak, large retailers were looking to move away from malls. Footlocker has been developing standalone concept stores that emphasise retail experience and a connection to their neighbourhood.

And since last year, Target has aggressively pursued a strategy of setting up small-format stores and pop-up retail locations, which allows it to target urban neighbourhoods where large stores would not be viable. With their relatively low-cost structure, such venues offer an avenue to introduce new products and brands with low investment.

These outlets carry a smaller selection of products that are geared towards the demographic of the neighbourhood, such as a college campus, which also allows for more targeted marketing and branding campaigns.

From a logistics perspective, the explosion of online shopping and the proliferation of small-format retail venues in urban neighbourhoods converge in the mutual need for distribution centres located nearby to guarantee a ready flow of goods to retail locations and short distances for final-mile delivery. This has given rise to the development of micro-fulfilment centres, a recent report by Reuters Events: Supply Chain pointed out. These venues store the most popular or currently promoted goods and are replenished on a regular basis from large, centralised warehouses.

A logical next step in this evolution would be the use of predictive analytics to optimise inventory levels and reduce delivery times, the report points out.

CBRE predicts more transformation of malls and large stores into distribution centres.

“The disruption to the retail sector and the growth of e-commerce will continue to increase the viability and payback of retail-to-industrial property conversions,” its report concludes.