June 26, 2013, 2:55 PM

The (ware)house hunt

Location, size and price are key factors for growing web retailers seeking more space for fulfilling orders.

104 and 17. Those two figures loomed large in Spreadshirt Inc.'s decision on when and where to open a second fulfillment center.

"Our year-over-year sales growth from 2010 to 2011 was 104%," says Mark Venezia, vice president of global sales for the customized T-shirt e-retailer. "Suddenly we were at capacity in our fulfillment center. There was no room to grow."

As it began hunting for a second facility, the 17% figure came into play. That's the percentage of the e-retailer's sales from the West Coast. Many of Spreadshirt's orders were traveling across much of the United States from Spreadshirt's sole production and distribution center just outside Pittsburgh before they arrived in consumers' hands—some 2,500 miles if an order was headed to Los Angeles, for example. And so began Spreadshirt's West Coast search for center number two.

Many e-retailers today are confronting a similar problem—albeit a good one. They are growing quickly, and since most web orders are fulfilled from dedicated fulfillment centers—even orders on the sites of retailers with stores—e-commerce directors are often looking for new warehouse space. In recent months several retailers, including sports apparel merchant Fanatics Inc., mass merchant Overstock.com Inc. and beauty goods retailer Ulta Salon, Cosmetics & Fragrance Inc., have announced plans to expand fulfillment. Executives who have searched for e-commerce distribution space say that on any warehouse hunt it is important to focus on location, cost and having more than enough room, so that there's room to grow. But, they add, there are plenty of less-obvious details to consider that can significantly impact costs.

"We wanted to be on the West Coast, but not pay California taxes or real estate prices," Venezia says. That led Spreadshirt to explore other options in the region.

In May 2012, Spreadshirt signed a five-year lease for a 36,000-square-foot building in Henderson, Nev., just outside Las Vegas. The facility opened in September and Venezia estimates Spreadshirt spends about half what it would have cost to rent the same space in California when factoring in price per square foot, taxes and labor costs. Nevada is one of six states without a corporate income tax, along with Ohio, South Dakota, Texas, Washington and Wyoming. That means setting up shop in Nevada saves Spreadshirt a chunk of change in taxes over California, which charges a flat corporate income tax of 8.84%, according to The Tax Foundation, an organization that monitors fiscal policy. And, he says, there are plenty of Nevadans eager for work. As of February, the unemployment rate in the Las Vegas metropolitan area was 9.8%, according to the U.S. Department of Labor.

States often lure employers with tax breaks and other subsidies that can cut costs, says Tamy Butterfield, an e-commerce consultant who has worked with several retailers, including apparel e-retailer Roots Canada Ltd. and printer and ink cartridge manufacturer Lexmark, to find space. For example, a Mississippi economic development program offers several tax exemptions, including jobs tax credits for warehouses that can be applied to a company's state income tax bill, and loan programs for small businesses with less than $7 million in annual revenue.

Another benefit of Spreadshirt's new facility, which now ships about 25% of the retailer's orders, is that it offers ample space for the retailer to grow.

"We looked at our five-year growth forecast and decided we needed between 36,000 and 40,000 square feet," Venezia says. "Now we've got a good four years before we might need to look for somewhere new."

Web retailers that don't plan for growth can find themselves moving—a lot. A case in point is cell phone accessory retailer AccessoryGeeks.com, which is in its fifth distribution center in 10 years, says vice president Karen Kang.

David Byun, president of AccessoryGeeks, founded the business in 2003, shipping orders from a 150-square-foot space in his parents' house. He quickly outgrew the patience and room available from his parents and signed a two-year lease on a 1,000-square-foot office that doubled as a fulfillment center in Southern California.

That kicked off a nomadic phase for the e-retailer as it moved around the Los Angeles area. Running out of space nine months into the first lease, it signed another lease for a facility with three times the space. A year later it was cramped again. In 2005 AccessoryGeeks dialed up to 10,000 square feet. Finally, in June of 2011, it upgraded to a 17,000-square-foot building, with 4,000 square feet of office space and 13,000 square feet of warehouse. "We've gone from shipping out 12 packages a day to 400,000 packages last year."

In hopes of staying put for awhile, AccessoryGeeks made a structural move with its most recent relocation, adding a second story that provides an additional 7,500 square feet of space. The second-level construction, along with the implementation of a homegrown computerized inventory management system that enables employees to quickly identify items' precise locations, cost around $150,000, Kang says, and the move alone cost about $15,000 to $20,000 plus a week of the retailer not fulfilling orders. Given the project's costs, AccessoryGeeks anticipates it will stay put awhile, and so it signed a seven-year lease.

"Each time we moved, there was a bigger cost," Byun says. "At the beginning it was hard to see how much I would grow and determine what I could afford. But I would encourage companies to try and look ahead at their possible growth."

Commercial real estate agency Jones Lang LaSalle notes in a February report the trend of more e-commerce companies building out mezzanine areas as AccessoryGeeks has done. Such areas require ceilings with clearances up to 40 feet. "New buildings can typically accommodate two or even three levels of mezzanine for picking, packaging, gift wrapping, returns and other back-office tasks," the report notes.

For retailers hesitant to consider renting larger spaces, Kang advises to keep in mind that the cost per square foot is often significantly lower for larger spaces. For example, AccessoryGeeks' rent dropped from $1.20 to 70 cents per square foot when it moved from a 3,000-square-foot warehouse to a location covering 10,000 square feet. That means AccessoryGeeks paid 91% more for rent but got more than three times the space.

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