Distributing More From Less: How Mini-Distribution Centers can Revolutionize Existing Brick-and-Mortar Facilities

By James A. Schnur, CCIM
President and Designated Managing Broker
Integrated Real Estate Solutions

Adapting to the evolving consumer demands presented through the adoption and refinement of the e-commerce experience has been a perilous journey for many retailers. Near the beginning of the online shopping revolution, the established model for fulfillment revolved around stand-alone distribution hubs operating regionally, but as the percentage of online shopping sharply ascended, customer demand shifted toward procuring items at the lowest possible shipping costs, delivered in the least amount of time, making the old guard model unsustainable by all but the very largest of retailers, as the overhead price for large warehouse space on top of demanding material handling considerations was too much for mid- to small-sized retailers to shoulder. As such, survival within this new e-commerce retail landscape means finding more creative logistic solutions to maintain competitive pricing and shipping deadlines to, in turn, retain customer business and bolster brand loyalty against larger competitors.

One such solution is to repurpose existing back-of-house space within brick-and-mortar locations as mini-distribution spaces or micro-fulfillment centers, creating hyper-localized hubs for distribution and in-store pick-up options. By taking inventory out of remote warehouse distribution centers and placing it directly into retail locations, the products are not only more easily accessible to consumers, but it cuts down on the cost to provide those items, as they no longer require the same wait time and ground transportation costs. By bringing the items closer to consumers, retailers are able to tailor the distribution of those items more broadly to work with consumer habits, providing faster ship-from-store times, adding in-store pick-up options, and cutting down on the wait for in-store restocking of fast-selling items. Additionally, it expands a retail location’s revenue opportunities, as evidenced by the shift in returned item sales at Best Buy locations using a ship-from-store model, where gently used or open-box returned items no longer need to be re-shelved, marked down, and held until they’re sold in-store; instead, those same items can be immediately and more-efficiently re-sold online.

While this opportunity creates additional value for the traditional retail location, and spurs renewed interest in vacant retail spaces over industrial areas, establishing a mini-distribution center within a retail space requires weighing the unique considerations of such a proposal. For instance, operating a distribution center means reporting part of the area of the store as being used for something other than direct gross sales, which can potentially violate retail lease agreements containing “all-retail” selling clauses. If neighboring tenants within the same complex find one retailer operating outside of the “all-retail” clause, they can potentially accuse a landlord of failing to maintain the clause, thus providing the neighboring tenants’ grounds for demanding reduced rent or termination of their lease.

Furthermore, updating a retail location to include a mini-distribution center means shouldering the full ask of what it takes to maintain a distribution center. Additional staffing and staff training will be required to adapt to online order fulfillment in both the front and back of house. The layout of the store itself will need to be re-evaluated to determine if the space is optimized for both in-store shopping and online ordering, as well as maintaining the balance of stocked inventory on the floor versus what is being held back for online ordering. If an item is constantly being pulled from the shelf to fulfill an online order, it can appear as out of stock, and negatively impact in-store sales.

Adopting a solution already implemented by several big-box retail competitors – namely Target, Wal-Mart, and Kohls – may seem counter-intuitive for a smaller retailer, but there is a lot to learn from the models they have adopted to stay on the competitive edge of retail sales. Primarily, it shows that mini-distribution centers and micro-fulfillment centers are a feasible alternative distribution opportunity and one that is not restricted to only stores and brands on a massive scale. Rather, this is a potential adaptable solution for many retailers of all sizes, so long as the idea is approached intelligently from all angles, considering space, staffing, lease clauses, and zoning before implementation. If this a model that seems sound for your business, and you would like to explore potential retail spaces to establish a mini-distribution center, consult with Integrated Real Estate Solutions, Inc. to help find the best retail property and lease terms to suit your growing business needs.

Integrated Real Estate Solutions, Inc. provides clients with the in-depth knowledge and experience that is critical to determine the right path to your next move, lease renewal, or strategic repositioning of your real estate portfolio. Contact us or call 847.550.0160 today about your needs, and put our success to work for you.

Author: Jim Schnur

Jim Schnur is the President and Designated Managing Broker of Integrated Real Estate Solutions, Inc. Jim started the firm in 2003 after almost 20 years negotiating and overseeing real estate transactions at Hewlett Packard Co. and Agilent Technologies, Inc.