How the Race for Faster Delivery Speeds Drives the Value of Infill Space
Pulse ReportDecember 2024
The evolution of e-commerce has proven that consumers prefer faster delivery speeds. Amazon unlocked this demand-driver first, and other retailers are following fast. The value of faster distribution extends beyond e-commerce, too: Retailers are replenishing stores more frequently than in the past, which allows for lower backroom inventory levels. This report from Link Logistics' Research & Analytics department examines how Amazon built a distribution network that delivers goods to end consumers quicker, how other firms are trying to compete— and the spatial economics underlying it all.
*Source: MWPVL, Company documents, Link Logistics Research & Analytics
Regional fulfillment clusters allow for shorter distances and fewer stops in getting items to customers—which means lower cost to serve as consumers receive their shipments faster. In April 2023, Amazon adapted its outbound fulfillment network to form eight regions that operate self-sufficiently or can shift to national distribution when needed.
Carrying the same inventory across all eight regions might have been considered duplicative in the past. Today, it is essential to meeting consumers' delivery-time expectations. When you click “buy” on a bottle of shampoo, that bottle is already in your region. Regionalization reduced Amazon's number of package touches (that is, times a parcel is handled during its journey) by 20 percent and miles traveled by 19 percent. Having inventory in the right places across all eight regions also allows Amazon to limit its use of expensive air freight. As of July 2023, 76 percent of Amazon packages were fulfilled in-region. This percentage is “expected to continue to climb,” the company says.
According to reporting in The Wall Street Journal, Amazon is expanding its one- to two-day delivery offerings to more rural parts of the U.S. by opening smaller distribution centers in those regions and increasing automation across its network.
Looking to boost sales, competitors such as Walmart and Target refuse to be left behind in the race for speed. In March, Target launched a paid membership program featuring free same-day delivery. The same month, Walmart introduced an early-morning delivery service. As of November 2023, Walmart had more than 4,000 brick-and-mortar stores doubling as fulfillment centers and delivery hubs for e-commerce orders. Target is employing a similar strategy, with proximity to consumers making shipping from stores 40 percent cheaper than doing so from dedicated fulfillment centers. Meanwhile, adding “flow centers” used to restock stores more frequently and with smaller shipments helped Target cut store-replenishment lead times by 20 percent, according to The Wall Street Journal.
On an earnings call in May, Walmart president and CEO Doug McMillon said his company completed same- or next-day delivery of 4.4 billion items over the preceding 12 months, with about 20 percent of those goods arriving in under three hours. But Amazon still dominates market share, with analysts projecting it to surpass 40 percent of all e-commerce retail sales this year.
The modern emphasis on delivery speed—whether to e-commerce consumers or the backrooms of brick-and-mortar stores—is driving organizations to seek more warehouses that are smaller in size. Demand for smaller buildings continues to grow relative to supply. The availability of industrial space below 160,000 square feet has grown tighter for the past several years. As of the third quarter of 2024, availability plus under-construction space for such units was 1.4 percent lower than it was during the pre-COVID decade; by comparison, availability plus under-construction space for units exceeding 400,000 square feet was 5.6 percent higher.
*Source: CBRE-EA, Link Logistics Research & Analytics
In the graphic below, we estimate hypothetical truck transportation costs for a 100,000-square-foot warehouse in the New Jersey Meadowlands region compared to neighboring markets like southern New Jersey or Pennsylvania's Lehigh Valley.
Inventory turns are speeding up over time.
Inventory turns nationally have increased 1x since 2019 and more than 2x since the advent of e-commerce over 20 years ago.
*Source: Link Logistics Research & Analytics, DAT National Dry Van Rates
Achieving greater speed requires more delivery network nodes, and the number of required network nodes increases rapidly as faster speed is achieved. Factors that drive higher network density include a less concentrated customer base, more diversified sourcing to reduce inbound transportation miles, lower average order value (which warehouse users will hope to make up for with volume) and higher service-level requirements.
Still, the number of warehouse nodes required by service level varies based on the operation. More concentrated delivery points could result in a lower number of nodes, for example, and warehouse users can operate with fewer delivery nodes if willing to pay more for premium parcel service. Customers of a tractor parts retailer or distributor will demand expedited shipping of heavy parts anywhere at any time; the tractor parts seller, in turn, will want more network density or higher average order value.
For all the variables, however, the net result is that consumers and warehouse users alike continue to prioritize speed. At the same time, spatial economics make last-mile warehouses in infill locations a uniquely cost-effective way to connect goods with consumers quickly. Given these factors and the firm's own proprietary data, Link Logistics' Research & Analytics department sees companies seeking to store goods closer to customers as a trend that will endure long-term.
Link Logistics' previous Pulse Report explored the demand for spillover industrial space driven by the clean energy transition. In a November 2023 Q&A, managing director Matthew I. Rand discussed how the unique work of the firm's Research & Analytics department distinguishes Link Logistics from its competitors.
