Article Highlights:
- Walmart, Target, Best Buy and others are beefing up their e-commerce operations.
- One e-commerce industry has raised prices between 15% and 20% annually over the last five years.
- There’s a company that’s perfectly positioned to take advantage of this exciting trend.
One of my favorite ways to assess a company is to see how it does at delivering online orders to my house.
Company A offers same-day delivery. It has a massive warehouse in Chattanooga, Tennessee, about two hours from where I live in Atlanta, Georgia.
If the product I want is in stock there, Company A gets it to a smaller warehouse just outside of Atlanta by midmorning, and to my doorstep by late afternoon or early evening.
Company B is a different story.
On three separate occasions, I’ve ordered building materials online — all about the size of a standard shipping pallet.
In each case, the minimum quoted delivery time was three to five days, even though the materials were in stock in Atlanta itself.
And on all three occasions, Company B has failed to deliver.
Company B’s logistics provider only operates full-size tractor-trailer rigs. As soon as the dispatcher or driver realizes I live on a dead-end street, they call to say the best they can do is a cross street about 100 yards from my house. It’s up to me to collect it there.
Those are three sales that Company B failed to close. I canceled them in transit.
I’m sure that was expensive for Company B.
I would certainly not invest in Company B. A company whose systems are so unsophisticated that it continually makes the same basic mistake is obviously not well run.
Company A is already operating in the modern e-commerce economy, and its ever-rising stock price shows it.
Company B has done little more than set up a website to accept online orders. It’s neglected everything else … especially the all-important “last mile” in its logistics operations.
With the next stage in e-commerce competition coalescing around one-day delivery, the last mile is becoming the most important mile of all … one that can generate serious profits for you.
Warehouses: Invisible Gold
The hottest investment in modern e-commerce isn’t Amazon. It’s real estate.
Real estate is like invisible gold hidden inside the e-commerce economy.
Commercial logistics experts divide the world into two parts: the first mile and the last mile.
The first mile isn’t actually a mile.
It’s code for everything involved in getting a product from its manufacturer to the last mile. It spans the globe.
The last mile contains the elements of the logistics process located within 30 minutes of the average end customer.
The warehouses of the first mile are enormous — hundreds of thousands or even millions of square feet. They hold tens of thousands of products ready to ship to customers within a multistate radius.
Because they’re so big, they’re located where land is cheap … rural areas adjacent to interstate highways.
The warehouses of the last mile, on the other hand, are typically 200,000 square feet or smaller.
They’re located on the edge of urban areas, such as Company A’s depot in Atlanta … or even inside them, on “infill” land or in repurposed buildings such as shopping malls.
First-mile warehouses are built to accommodate big tractor-trailers.
So are last-mile warehouses … but only for receiving.
For onward shipping, they’re designed to accommodate smaller delivery vehicles … the kind that could have delivered Company B’s products to my doorstep.
The Next Frontier in E-Commerce Competition
Only a few years ago, the primary purpose of warehousing was to store product at low cost.
But in today’s need-it-now economy, warehousing plays a critical role in reducing delivery lead time — the time from the receipt of the customer’s order to delivery of the product.
All else being equal, most consumers will buy from a company that can deliver quicker than its competitors.
As companies such as Walmart, Target, Best Buy and others beef up their e-commerce operations to compete with Amazon, the latter has upped the ante.
Amazon recently announced that it was going to make one-day delivery standard for its Prime subscribers.
To achieve that, Amazon needs to eliminate the gap between steps 6 and 12 in the graphic above. It needs to stock popular products in urban warehouses located in the last mile.
That means last-mile warehousing is the hottest thing in commercial real estate … so hot that the share prices of companies specializing in it are burning through the current market turmoil.
Supply and Demand Is Your Friend
The most important fact about last-mile warehousing is supply … specifically, the extremely limited availability of suitable urban land.
Some industry experts compare the value of last-mile warehousing to that of beachfront property.
For example, occupancy of last-mile warehousing facilities within three to five miles of downtown Seattle currently averages 99%. There’s little infill land available to build new warehouses, and zoning regulations make it difficult to convert existing buildings.
Consequently, rents at such facilities have risen between 15% and 20% annually over the past five years. Costs per square foot for last-mile facilities in Seattle are double those at first-mile warehouses 10 to 15 miles from downtown.
The pattern is similar in other major urban areas, especially the denser older cities of the Northeast and upper Midwest, and the heavily regulated land markets of California.
You Can Be an E-Commerce Landlord
Fortunately, much of the existing industrial warehouse real estate in the United States is owned by real estate investment trusts (REITs).
REITs are publicly traded companies that are required by law to distribute the bulk of their annual income as dividends.
But REITs that are well-positioned to take advantage of the red-hot market for last-mile warehousing are going to benefit with skyrocketing share prices as well.
I’ve been researching these companies intensively for the past few months.
I found one that has everything a REIT needs … an excellent real estate portfolio, strong financials, smart management and above all, a track record of being able to snatch up desirable land before its competitors can.
I’ll be revealing my discovery in the July issue of The Bauman Letter. So, if you want to grab a piece of the hottest real estate action in the United States today, here’s your chance!
Kind regards,
Ted Bauman
Editor, The Bauman Letter