How the Surge in Online Grocery Delivery Could Impact Industrial Real Estate
Grocery stores are a key player within the retail industry due to their staying power driven by sustainability, convenience, and the provision of a cheaper alternative to eating out. However, today’s technological disruption has caused grocers to experience a shift in how they operate and what consumers expect from them. While the majority of grocery shopping still takes place in-store, technological advancements coupled with the need for multitasking and getting tasks done as efficiently and quickly as possible has created a greater demand for online grocery shopping. In 2018 alone, online grocery sales in the United States totaled approximately $17.5 billion, a figure that is expected to increase to nearly $30 billion by 2021.
Today, 71% of consumers say on-demand services have increased their expectations of how all of their online purchases should be delivered, and approximately 84% of consumers say that they would not continue to shop with a brand after just one poor experience. With these high expectations, suppliers are being challenged to consistently fulfill online orders in an efficient and timely manner. As this demand grows and consumers’ expectations shift, grocery retailers are facing new challenges such as how and where to store temperature-sensitive goods waiting to be picked-up and delivered and how to quickly fulfill online orders.
Read ahead to learn how these new challenges created by today’s delivery economy are impacting the industrial real estate sector.
Heightened Demand for Cold Storage Capacity
Several factors have combined to fuel demand for cold-storage space, from consumers’ increasing use of online ordering for groceries to grocers’ investment in new delivery strategies and warehouse technologies. More recently, there has been an upward trend in the consumption of food that requires temperature-controlled spaces, like frozen meats and process poultry. Given the increase in online grocery shopping, particularly for cold or frozen items, demand for cold storage spaces is on the rise. According to a new report from CBRE, the growth of online grocery sales has the U.S. market for cold-storage warehouses poised for strong growth, potentially creating demand for up to 100 million sq. ft. of new industrial cold-storage space over the next five years.
Increased Inclusion of Fulfillment Space in Retail Footprints
As the number of consumers participating in online grocery shopping increases, it is inevitable that a greater percentage of fulfillment will have to come from warehouses to keep up with demand. CBRE predicts that more grocers will need to shift cold-storage operations from their stores to free-standing, refrigerated facilities to save time and money while staying on top of order fulfillment.
The majority of new fulfillment space will likely take the form of last-mile cold storage in infill areas and gateway markets like Los Angeles and the New York area, as well as in top food-producing states such as California, Texas, Wisconsin, Florida and Washington state. With the addition of off-site fulfillment centers, grocery stores can more effectively manage and maximize in-store space by stacking goods strategically and taking advantage of free vertical space.
Automated Cold Storage Facilities
Automated storage and retrieval systems have emerged as highly desirable solutions for refrigerated and deep-freeze warehouses. With the need for improved productivity to ensure that customer demands for faster, more accurate orders are met, the business case for automating temperature-controlled warehouses is stronger than ever. Additionally, the escalating demand for on-demand chilled and frozen food products worldwide has made refrigerated warehousing a continually expanding sector for distribution.
Because most cold storage warehouses are manually operated, there is already a much higher chance of product damage and wrong item fulfillment. As an influx of online orders come in, the likelihood of mistakes becomes even higher. Ultimately, automation will be needed in cold storage facilities to efficiently fulfill orders and make up for a shortage of workers willing to work in the extreme conditions of these spaces. This will prompt higher-density, greater-height and smaller-footprint buildouts that will be required for around-the-clock operations.
Although there is currently less than 5 million square feet of cold storage under construction across the country, few sectors of commercial real estate will undergo as much transformation in the coming years as the industrial real estate industry. By 2023, online grocery penetration is expected to increase from 2% to about 15% to 20%. In preparation for this increasing demand, the development of fulfillment centers is becoming a viable solution to ensure that the surge in online grocery delivery does not negatively impact productivity.
You may also be interested in Why Grocery Retailers Are Embracing Micro-Fulfillment Centers.