Reno poised for growth with Internet fulfillment centers

Sept. 9, 2012 - Reno Gazette-Journal:

In the middle of the winter season’s slow march through Northern Nevada last year, two familiar names in the region’s real estate sector found themselves finalizing a deal with a major retailer by shaking hands.

A year and a half later, Dermody Properties and United Construction celebrated the fruits of the deal — and a reason for hope for the area’s embattled real estate and construction sector — as Urban Outfitters opened its new Internet fulfillment center in Stead.

The latest of at least a dozen Internet distribution centers to set shop in the area, Urban Outfitters’ new facility symbolizes an area of opportunity for the region.

Already a major player in bulk distribution in the West, the explosive growth of e-commerce in recent years has some in the area hopeful that Northern Nevada would see more companies locate or expand their Internet fulfillment centers here as well.

“Once you’ve got the distribution centers, the next step involves the Internet fulfillment centers,” said Michael Dermody, chairman and CEO of Dermody Properties. “We have 70 million feet of industrial (space) here, and that — per capita — is the highest concentration in America. The fact that Urban Outfitters chose our area ... validates our whole economic base, as well as the whole distribution industry in the state.”

A fulfilling target?

When it comes to the U.S. retail space, e-commerce is the new $200 billion gorilla. That’s the amount that the sector eclipsed in 2011, according to Forrester Research’s online retail forecast released earlier this year.

Sucharita Mulpuru, retail analyst for Cambridge, Mass.-based Forrester, estimates that the number will grow to about $300 billion within five years.

“There’s definitely more investment in Web and mobile (services), in large part, because that’s the channel that is growing,” Mulpuru said. “E-commerce also allows you to fulfill orders pretty efficiently. You don’t have as much inventory in stores, and you can ship things pretty quickly.”

The tradeoff over time is that retail likely will not see as much rapid growth with physical stores, Mulpuru said. Such trends already are being seen in stores like Kohl’s, which recently reported revenue declines in brick-and-mortar store sales but a 20 percent jump in online retail revenue for the second quarter.
Even Urban Outfitters said it plans to ease up on expanding its number of physical stores.

“If you look at a map of our operations, it won’t change much from the 250 stores that we have now,” said Ken McKinney, executive director of logistics for Urban Outfitters. “With the growth we want to have as a company, stores alone aren’t going to get us where we need to be. We need more of an international presence, but the thing is Internet volume, quite honestly.”

Internet sales already account for 20 percent of Urban Outfitters’ retail volume, and the gap between online and retail is expected to decrease substantially, McKinney added.

“There’s no doubt that Amazon is the Walmart of this decade,” Mulpuru said. “It’s a big story and a threat to every retailer because Amazon competes in just about every category.”

Poised for growth

Amazon’s success is especially meaningful for Northern Nevada. The company helped get the ball rolling for the area when it built its Internet fulfillment center in Fernley in 1999.

Strong growth in the e-commerce sector should mean growth for Amazon, which likely bodes well for the area as well.

Amazon is definitely always looking at opportunities for growth, said Kelly Cheeseman, a spokeswoman for the company.

“As of December 2011, our total global fulfillment center count was 69,” Cheeseman said. “Ultimately, our goal is to make sure that we have enough fulfillment centers to meet demand.”

The arrival of more Internet fulfillment centers would be good news for Northern Nevada’s construction industry, which was hit hardest by the recession. The sector has shed an estimated 100,000 jobs since it reached its peak during the housing bubble, according to the Nevada Department of Employment, Training and Rehabilitation.

The Urban Outfitters job alone employed more than 200 construction workers.
“It’s very important for our economy to attract these types of facilities,” said Michael Russell, chief operating officer of United Construction. “Just adding to the industrial base gets more jobs created — not just in construction but long-term positions for running the facilities as well.”

Internet fulfillment centers tend to employ more people than traditional distribution facilities . For Urban Outfitters, for example, its traditional bulk distribution centers handle 200 to 250 units per man hour while its Internet fulfillment centers handle about 20 units per man hour.

“For us, the fulfillment centers typically require more labor and more space,” McKinney said. “It’s more labor-intensive to pack orders of two units for an online customer than shipping 30 units in bulk to a store. When you factor in that 10 to 15 percent of the items shipped from a fulfillment center will be returned, you’re going to need additional handling.”

A question of jobs

Just like the concentration of several technologies can lead to the creation of a technology hub, Northern Nevada’s concentration of distribution centers can have benefits in attracting similar facilities to the area.

A large reason involves both infrastructure and available manpower. Urban Outfitters, for example, hired the top four guys for its new fulfillment center from Amazon. A couple of the employees actually were former Fernley workers who moved to Amazon’s Kansas facility and wanted to return to Northern Nevada, McKinney said.

One concern about targeting fulfillment centers is the type of jobs they usually provide outside of management.

“They’re blue-collar jobs, so these are not computer scientists,” Mulpuru said. “These are not going to be the most lucrative jobs, but when you’re situated in places (like Northern Nevada), where the economy is really challenged, some jobs are better than no jobs.”

Additional employment is not the only benefit that Internet fulfillment centers bring, particularly if the company decides to build a new facility, Dermody said.

“All new construction means a new tax base,” Dermody said. “In addition to new payroll taxes, it also generates millions for the community in other taxes, which is a godsend to a local community.”

Add the increased trend in onshoring, which involves moving operations from overseas to the United States, and Northern Nevada could be poised to reap the benefits of an Internet fulfillment center boom, Russell said. Even Chinese companies are considering setting up manufacturing and distribution facilities in the U.S. due to higher tariff, shipping and fuel costs.

“With the cost of goods going up, China’s becoming less competitive in the world market,” Russell said. “We already have a few Chinese companies looking into Reno-Sparks. I think that’s a big trend you’re going to see in the next three to five years, perhaps even sooner, because they have a lot of money to invest.”

Read the full article from the Reno-Gazette Journal.