A growing online population with evolving buying behaviours will require a dynamic and agile logistics network from UK retailers keen to maximise opportunities in this fast-moving market. Ian Brebner of Aecom looks at the key issues affecting the sector and assesses the costs for an air cargo hub
01 / The Logistics Sector
Logistics is a critical component of many retail operations and can have a huge impact on a retailer’s brand. As a result, the logistics sector continues to experience a period of change driven by consumer demands for greater choice and speed of delivery. Alongside this, a digital revolution is spreading through our day-to-day lives. Technology is enabling us to access vast amounts of information and advertising instantly, which over time can subtly guide our choices. The future of logistics will increasingly become digitally powered and interwoven with how consumers interact with personal technology.
Portable and wearable technology is increasing, which is likely to drive consumer appetite for greater transactional transparency, more responsive and varied delivery modes and precision in delivery timing. An example is the huge growth in smart speakers interfacing with cloud-based intelligent systems.
Our ability to make purchasing choices 24 hours a day and from any location – fuelled by this kind of cloud-based technology – is greatly influencing the future of the logistics market. Amazon and Google are driving growth through their technical innovations around the customer interface, creating more responsive customer experiences.
02 / Supply Chain Evolution
How are these technological changes affecting the supply chain? We have identified three sub-segments of the logistics market where change is most manifest or anticipated.
Continued development of omnichannel initiatives is forecast, particularly in the non-food retail segment – developing delivery options from multiple source locations and delivery methods for the customer. This relies on real-time individual stock keeping unit (SKU) tracking and management. Retailers are still developing these systems, which can provide real economies of operation if the managing systems are fully connected to merchandising data and, ideally, customer transactional history.
For example, if a customer in Swansea orders a pair of shoes online that are in stock in the retailer’s Cardiff shop – the closest shop to the customer – this would be the logical pure logistics solution. If, however, the Bristol shop is about to put the same shoes on a promotional discount, this would be a better business solution.
Retailers are coming to terms with the need to have end-to-end integrated enterprise-wide systems that fully embrace the logistics element of their business. Moving away from big centralised hub facilities to a combination of smaller distributed hubs and retail outlets introduces a more intensive management of inventory and may bring more performance failure modes – particularly around transportation. Implemented well, however, it can significantly drive sales and market share.
This is the most complex logistics segment. Food retail fulfilment systems need to cope with three storage temperature zones, food safety, multiple SKU customer orders, very large inventory variety (commonly 40,000 product lines) and customer collection points. The solutions adopted by the global majors vary in maturity and are continually evolving.
To make web sales economically viable, a number of national and international retail chains are looking at highly automated fulfilment hubs, allied to realistic promise on delivery timing comparable to mixed-mode delivery channels with delivery promises mimicking non-perishable goods.
Even Amazon has been challenged to open up this market, and dealing with food does not sit easily with the successful systems it has for delivering its typical packages. Its route will be a mix, of fulfilment to doorstep from major hubs and order online plus pick-up in store. This latter channel has been enabled through its recent acquisition of the Whole Foods chain in the US.
The counterpoint to this is the recent deal struck between the large US retailer Kroger and Ocado. It enables a network of hubs in the US with the latest and much-advanced evolution of the Ocado automated hardware and software systems, aimed at doorstep fulfilment as we are familiar with in the UK but on a larger scale. The Kroger solution is highly automated, integrated with customer transactional history, merchandising and responsive to customer trends and habit. The aim is that it will outperform competitors Amazon and Walmart to win customer loyalty and sales growth.
The Kroger route is likely to drive growth in the number of larger, highly complex automated hubs. On the other hand, its competitors will rely less on large hubs but instead on a mix of smaller hubs and existing shops. How this translates to Europe and the UK very much depends upon how the Ocado/Kroger model performs.
In this segment, there is a continued drive to digital transformation, to reduce regulatory cross-border paper-based processes. The aims are to increase the rate of adoption of electronic air waybills (e-AWB) and to increase delivery reliability as well as transparency for the customer through dynamic tracking. Growth in this segment has been strong and widely predicted to continue through to 2025 and beyond, as global transactions in high-value goods increase.
Historically, the level of automation development has been moderated by the number of processes through which individual packages pass. Broadly, this is determined by border controls, load balancing in transportation aircraft and security screening. To achieve higher reliability and service efficiency, there will need to be an increase in the level of automation in these areas. This includes improvements around security screening, sorting of the cargo and load picking – and from unit load device freight containers (ULD) combined with automated guided vehicle (AGV) movement of the ULDs.
Growth in the air cargo sector will see larger airside hubs being developed globally and existing ones expanded. The impacts of automation and the drive by the larger airports to be “global villages” is putting increasing pressure on available land adjacent to airports and could create the potential for multi-storey facilities to evolve in response to this need.
03/ Evolving Real Estate Requirements
Traditionally, each segment in the logistics market has had different functional needs in terms of building and site infrastructure, which is reflected in a relatively broad bandwidth of whole-project costs.
At the major hub end of the spectrum, factoring in the future development of logistics systems based on increasing levels of automation, there could be a convergence in the shape and format of basic logistics shell buildings and site infrastructure.
The primary variance will be the scale and detail of the interfaces with the automated systems. This factor is heavily influenced by the increasing dominance of major retail platforms, which have little need for the traditional general-purpose warehouse format that conforms to institutional standards.
At the opposite end of the scale are the customer-facing omnichannel facilities, which may develop in a multifaceted, divergent way to maximise accessibility and convenience to the customer. The customer-facing omnichannel facilities may be the catalyst for the next radical change in the nature of the high street.
The evidence for this is already apparent with the continued success of outlets such as Argos, which is a very literal translation of the warehouse in the high street. More subtly, some clothing chains are rebranding their stores as lifestyle shopping experiences totally integrated with their websites.
The boundaries between web-based retail and bricks-and-mortar retail are rebalancing. However, an equilibrium state is yet to be reached, and this is likely to continue into the medium term.
The future needs of medium to large hubs are more predictable than for omnichannel facilities. They will be driven by the nature of the automation systems and their interaction with inbound and outbound lanes. The nature of these systems also determines the external vehicle flows and site layout. Fast-moving redistribution fulfilment will have a different solution from a system featuring multiple-item ordering, which requires order picking and sequencing from stock.
In the latter example, most activity would be undertaken at floor level with little or no inventory storage, and it is easy to envisage how this could become a relatively unmanned “black box”. In building terms this is simple, relatively inexpensive and easy to expand or contract, ideally suited to a modular design and construction system.
For fast-moving redistribution fulfilment, fast-access, dense storage solutions, coupled with autonomous retrieval and potential robotic picking creates a more complex system in which the logistics shell building has to interact with the internal components. The complexities of breaking inbound stock down to move into dense storage and picking and marshalling of batches of orders will be the target of the next level of automation. But for now, even the most sophisticated systems still rely on humans for dexterity and flexibility with responsive intelligence to deal with the unexpected. They are not going to be “black boxes” quite yet.
The buildings will be bespoke to the extent that their format and specification will often be driven by standard spatial planning issues which relate to the dimensions of pallets, their racking systems or stillages rather the needs of the automation hardware.
This is evident in the latest generation of automated cold stores, where the racking is the building’s structural frame, fire systems are based on oxygen depletion to further increase storage density and automated truck unloading and loading greatly reduce the numbers of human operators required. This results in a bespoke facility that could be considered a machine rather than a building.
Categories of facility going in this direction are operated by the dominant or growing web-based retail platforms, international self-performing delivery operators and the largest real estate-based retailers on a transformational route to a balanced business, capturing or defending market share. There is also a specific logistics building type where increased automation could have a big impact – air-side parcels hubs that are continuing on a significant growth trajectory.
04/ Future Cost Drivers
In the more mature markets – which include China, Singapore and Brazil – the most significant future factor that could influence costs of the logistics shell and external vehicle access will be space constraints related to location. This factor is specifically driven by the need to locate close to the customer base in dense population centres or where land is scarce due to competition for high-value creation development.
At the most extreme, logistics facilities in Singapore are already commonly multi-storey, and with multi-level vehicle access. The government there is considering creating underground logistics routes in urban areas to enable more efficient movement of goods. These would serve high value-added industrial clusters, which are themselves multi-storey. We are already seeing debate around multi-storey solutions in London, based on the last-mile delivery, as well as in Europe and the US. China has already built multi-storey logistics as a result of the scarcity of land in its economic development zones.
Less radical cost drivers will crystallise around the need to consider a more sustainable approach to larger land-hungry logistics facilities – for example, development on brownfield sites, and buildings that consume less energy or are more space optimised or operationally efficient. This will demand a closer relationship between the logistics shell designers, constructors and the process and automation systems designers, who will define what the specific building requirements are.
05 /Tax Relief Opportunities
Logistics developments can generate significant opportunities to mitigate much of the capital expenditure incurred via a variety of tax reliefs and incentives. This is likely to be primarily via capital allowances, which can offer relief of up to 100% for qualifying installations.
Based on our cost model, relief of between £10m and £12m could be available, which would equate over time to a cash value of between £1.9m and £2.28m to a UK corporation tax payer.
The benefit will accrue at a number of rates, dependent on the nature of each particular qualifying asset. Installations qualifying as integral features – for example, much of the mechanical and electrical installations – will be relieved at a rate of 8% a year on a reducing balance basis. Expenditure incurred on those installations of a more specialist nature, such as fire detection and alarm systems, sprinkler installations, dock levellers and much of the cost of fitting out the office elements, will be written off at the more beneficial rate of 18% a year. Finally, any expenditure incurred on qualifying energy or water-efficient technologies could accelerate the relief to 100% in the year of expenditure, or generate a 12.67% payable credit for loss-making UK companies.
The end-user fit-out is likely to attract considerably higher levels of allowances, with between 60% and 75% of the cost incurred potentially attracting relief, as this would focus on the occupier’s bespoke services installations, fixtures and trade-related equipment. It is also important to note that contributions made to an occupier’s costs can yield relief to the contributor and it is therefore important to ensure that development and lease agreements are appropriately structured to ensure that all available relief is secured.
In addition, where elements of the design or construction involve innovative solutions to overcome specific site challenges or use improved material technologies, the relevant staffing costs may generate an R&D expenditure credit (RDEC). Qualifying expenditure is relieved at either 230% or a 12% “above the line” credit. Capital projects can also benefit from 100% relief for research and development allowances where the expenditure is trade-related.
Finally, for brownfield sites, UK companies carrying out site remediation works may be able to benefit from land remediation relief, which provides a 150% super-deduction against corporation tax (provided the taxpayer is not the polluter). Again, for loss-making UK companies, this can be surrendered for a 16% payable credit.
There are therefore a variety of avenues by which the capital cost of logistics developments can be offset by the various reliefs and incentives available, many of which can be optimised by consideration at the design stage of a project and in the drafting of development and lease agreements.
06 / About the cost model
This cost model is based on a single-storey, rectangular-shaped hub facility (12m height to haunch) with a gross internal floor area of 28,000m2. In addition, it includes ancilliary buildings that adjoin the hub, housing operational activities, and a standalone, single-storey office for administrative operations, with gross internal floor areas of 3,800m2 and 4,000m2 respectively. The area of external works (including car parking, lorry yard and landscaping) is 80,000m2.
The development is on a brownfield site that has previously been cleared. Any land remediation has been undertaken as part of a separate contract.
The building has a reinforced in-situ concrete ground-bearing slab, a steel portal frame with reinforced concrete pads, and an aluminium built-up cladding system to roof and walls. External works consist of access and circulation road, car parking, service yard, pedestrian areas, landscaping areas and gatehouse.
Prices are based on a competitive traditional procurement route and are current at the second quarter of 2018, and assuming a location in the north-west of England.
The costs exclude the warehouse fit-out, the Category B office fit-out, non-fixed fittings, tenants’ specified work, enabling works and demolitions. The costs of professional fees and VAT are omitted. Prices should also be adjusted for location, site conditions, programme and procurement route.
07 / Cost breakdown for an air cargo handling facility
To see the full cost model, click on the pdf below.
With thanks to Tim Jackson and Simon Deakin of Aecom for their help in writing this article
The authors would like to acknowledge the contribution of Aecom colleagues to the development of this article and cost model, including Ben Agyekum, Patrick McNamara, Jonny Hill and Phil Mackintosh