Why Stores Are Being Reborn As Warehouses

Retail traffic has been declining for almost a decade. And ecommerce is picking up the slack.

But online merchants need space closer to their customers, often in congested urban locations, which makes the behavioral economics of converting former stores, whether in shopping centers, big boxes or on main street, a cost-efficient solution to the repurposing of wasted space. And this conversion process appears to be creating more jobs than bricks-and-mortar retail is losing. JL

Christopher Mims reports in the Wall Street Journal:

94 new retail-to-industrial conversion projects have (been) completed or are in progress, transforming 14 million square feet of former retail space into 15.2 million square feet for e-commerce distribution. Chains across the globe are using automated micro-fulfillment warehouses within existing stores or adjacent spaces. Welcome to the next phase of the “retail apocalypse.” Retail spaces of all sizes are being converted into e-commerce fulfillment centers. The rate of conversion of retail into industrial spaces has been accelerating. (And) e-commerce has created more jobs between 2007 and January 2020 than bricks-and-mortar retailers lost.

When Litisha Thomas heard through the gossip mill that the shuttered Sam’s Club where she’d worked for 11 years might be reopening in her rural North Carolina hamlet, she immediately jumped on an internet job board to see if it was hiring. It was, but this wasn’t a conventional reopening.

Sam’s Club, the discount shopping club named for the founder of Walmart Inc., WMT -0.35% was changing how it does business. The retail giant’s subsidiary converted the entire building, which reopened in April 2019, into an e-commerce fulfillment center, where orders from samsclub.com shoppers throughout the southeast are picked, packed and placed on trucks that take them to other shipping hubs.

Ms. Thomas—who’d previously driven a forklift as an overnight receiving associate at the Sam’s Club in Lumberton, N.C., population 20,000—is back behind the wheel of a forklift, though now she’s a manager overseeing eight other employees.

The building in which she works looks about the same on the outside, but inside, instead of wide aisles filled with shoppers pushing carts, its floor-to-ceiling shelves are packed more densely than ever with goods being picked by employees and shuttled to conveyor belts.

Despite the lack of shoppers and cash registers, total employment is actually up: Previously the store employed 164 workers, about a quarter of them part time, says Ms. Thomas. Now there are nearly 300 full-time employees across three shifts.

Welcome to the next phase of the “retail apocalypse.” This conversion—which Sam’s Club has also completed for five other big-box stores throughout the country—is part of a burgeoning trend in which retail spaces of all sizes are being converted into e-commerce fulfillment centers. The global pandemic may have turbocharged the shift from bricks-and-mortar retail to online shopping, but the rate of conversion of retail into industrial spaces has been accelerating for years, says Matthew Walaszek, associate director of industrial and logistics research at CBRE Group Inc., the world’s largest commercial real-estate services firm by revenue.

A just-completed CBRE analysis found that since 2017, 60 new retail-to-industrial conversion projects have entered at least the preplanning stage, out of a total of 94 such projects completed or in progress in the past decade. Projects begun or completed since 2017 transformed 14 million square feet of former retail space into 15.2 million square feet of industrial space, most of it for e-commerce distribution. That’s still a relatively small proportion of the 14.5 billion square feet of industrial real estate in the U.S.

“We wouldn’t say [these conversions] are moving the needle quite yet, but it’s a trend that has legs and we’re going to see this expand into the foreseeable future,” says Mr. Walaszek.

Warehousing startup Ohi is certainly counting on it. The company operates, or provides operational software for, micro-warehouses for e-commerce fulfillment ranging in size from a few hundred to a few thousand square feet in 80 cities across the U.S.

One of its locations is in former office space on West 38th Street in Manhattan’s Garment District. That’s unusual—e-commerce fulfillment hubs are typically in suburbia, occupying up to a million square feet. Ohi’s warehouses are used by both well-established brands and small direct-to-consumer ones aiming to reach relatively well-off consumers in cities. These startups use Ohi’s fulfillment centers to store their goods close to consumers, allowing for same-day delivery, says the company’s founder and chief executive, Ben Jones.

Brands using Ohi’s warehouses include Olipop, which advertises its “prebiotic sparkling tonics” as healthy alternatives to soda.

“We ship nationally from Montana, but at the mercy of FedEx and UPS, ” says Steven Vigilante, Olipop’s growth marketing manager. Moving New York City customer delivery to Ohi’s Manhattan fulfillment center cut average shipping costs in half and delivery times from 1 to 2 weeks to as little as two hours, he adds.

Between these two extremes are medium-size retailers catering to middle-income Americans, many of which are looking to add e-commerce fulfillment to their existing stores. A number of big grocery chains across the globe, including Albertsons Cos., Wakefern Food Corp. and France’s Carrefour SA, fall into this category. They are using or planning to use almost fully automated micro-fulfillment warehouses either within existing stores or in adjacent retail spaces, says Max Pedró, co-founder and president of Takeoff Technologies, which provides them with automated systems.

Takeoff’s 10,000-square-foot micro-fulfillment centers hold the portion of a typical grocery store that represents most of its sales, or around 15,000 different item types. They make extensive use of robotics and automation to retrieve groceries from shelves, and so require little in the way of human labor to operate until the final stages of each order.

These automated systems are meant to assemble and pack orders more efficiently than employees roaming aisles or visiting stockrooms, and keeping the fulfillment center next to the store has additional benefits, notes Mr. Pedró. Both can be resupplied from the same trucks, staff can move between the two as demand shifts between them, and their proximity to customers can save retailers some delivery costs.

Many big retailers, including Walmart, Target Corp. and, in its forthcoming grocery stores, Amazon. com Inc., are taking a related but distinct approach: shipping directly from stores. Even stores that have begun offering curbside pickup amid the pandemic are, in a way, becoming part of the trend.

Each business that decides retail space might be better used for filling e-commerce orders does so for its own reasons, but two intersecting trends play a big role. Retail stores and shopping centers were closing on account of declining foot traffic even before the pandemic, as e-commerce continued gobbling bricks-and-mortar retail market share like Pac-Man chomping ghosts. Since March and the beginning of stay-at-home orders in the U.S., the trend has only accelerated.

Meanwhile, rents for e-commerce fulfillment and other industrial spaces are climbing due to that surging demand. The gap between higher retail rent and lower warehousing rent is closing, says CBRE’s Mr. Walaszek.

Office space can also be converted into micro-fulfillment centers, and Ohi has set up at least one of its small fulfillment warehouses in what was once office space. As companies reconsider whether they ever want their employees to return to offices, more of this kind of real estate could also be available.

As Americans shift from buying things in-store to buying them online, all of those goods have to be shipped from somewhere. The faster we demand they get to us, the closer they have to be stored, which necessitates more e-commerce warehouses than ever, and in places they’ve rarely been seen before, such as city centers.

One economist who has looked at these trends has concluded something surprising: When you include all the jobs in fulfillment, delivery, and related roles, e-commerce has created more jobs between 2007 and January 2020 than bricks-and-mortar retailers lost, says Michael Mandel, chief economic strategist at the Progressive Policy Institute, a think tank. Since January, employment in this sector has fallen, but Dr. Mandel believes that as consumer spending recovers, so will employment in this area.

While it’s easy to see these trends as broad abstractions, they’re also why Ms. Thomas—a mother of two living in a small southern town—has a job, and a pay raise.

Every day, she goes to the same building she worked in for over a decade before it closed in January 2018. There are some differences. The sign says Samsclub.com instead of Sam’s Club, she says, and the parking lot is full of tractor-trailer trucks. Inside, things have changed more. There’s more merchandise, new conveyor belts, a shipping area. “Sometimes I’ll catch myself walking the floor and picturing what it used to be,” she adds.

Sam’s Club customers are still shopping with the company—it’s just that, like so many of us, they’re now doing it from home. If trends continue, then in terms of jobs, real estate, consumption patterns, supply chains and land use, as Lumberton, N.C. goes, so goes the nation.