The (ware)house hunt

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

Katie Evans

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.

Renting in a multi-tenant building is one way to gain flexibility, Butterfield says. Often, if a retailer runs out of room in such a building, there is a vacant spot it can rent without out having to relocate.

"I'd encourage retailers to consider the space they might need for their peak season, such as the holidays," Butterfield says.

Department store chain Von Maur Inc., which only started selling online in 2006, also experienced e-commerce growing pains that led it to seek additional fulfillment center space.

"We started out selling just a handful of items online and fulfilling online orders in a little spot we carved out of our store distribution center," says Von Maur president Jim Von Maur. "Then [sales] just exploded."

Von Maur now sells 65% of its 50,000 to 75,000 store SKUs online. In 2010 it built an e-commerce fulfillment facility on land it owned across the street from its Davenport, Iowa, headquarters. In June 2012 it broke ground on an addition, adding 73,000 square feet to its 46,000-square-foot facility for a total of 120,000 square feet.

The facility, which not only ships online orders but also houses its e-commerce employees, is just blocks away from Von Maur's distribution center. Having the headquarters, e-commerce fulfillment center and distribution center within a few minutes of each other makes logistics easier, Von Maur says. For example, if a product intended for a store is in high demand online, Von Maur can send it from the distribution center to the e-commerce fulfillment center to ship to a web shopper instead, Von Maur says.

It's not just cartons that move in and out of distribution centers, but also executives. And executives' schedules have to be taken into account, as well.

For Spreadshirt, having a facility less than 10 minutes from the Las Vegas airport saves executives travel time. Spreadshirt's parent company is Spreadshirt Manufacturing Deutschland GmbH, and top executives from company headquarters in Leipzig, Germany, visit the Henderson facility at least once a quarter. Venezia, meanwhile, makes the trek from the retailer's U.S. headquarters in Boston every few months.

The e-retailer also sought a location near a highway for commuting employees, and with nearby restaurants where staff could quickly grab lunch.

In Nevada, Spreadshirt could be picky about such details. The retailer, which worked with commercial realtor Transwestern to find space, says Nevada had more than 100 buildings for Spreadshirt to choose from in Reno, Las Vegas and Henderson.

The facility is also just a few miles away from a UPS Inc. shipping hub. "Having the hub nearby saves us time, and time is money," Venezia says. Spreadshirt now ships all West Coast orders UPS from the new warehouse, and that has cut delivery time in the region from five days to one or two days. The warm climate of Nevada also poses fewer risks of inclement weather than Pittsburgh, Venezia says. Spreadshirt has had to shut its Pittsburgh facility for as many as three days due to winter weather.

As important as location is, it's not the only consideration. Spreadshirt, for example, provided a 12-page document to Transwestern detailing its exact requirements, down to the number of parking spots.

AccessoryGeeks meanwhile sought a landlord that would allow it to tailor the space to fit its needs.

"We made sure things could be adjusted and reconstructed as we needed," Kang says. To ensure it could make changes as it saw fit, AccessoryGeeks wrote a clause in its lease stating it could make any adjustments it wanted as long as long as the changes met building codes.

Seeking to provide a warm and friendly environment, AccessoryGeeks added natural wood throughout out the space, two meeting rooms and a large lunchroom for employees. "The building gives our employees a sense of pride in where they work," Kang says.

She says it's a smart idea to also get a sense of the type of landlord that comes with a building. One of its previous warehouse landlords refused to pay for any landscaping and tried to increase the rent when the lease was up to what Kang says was far above fair market value.

Kang says her current landlord is a different breed, resurfacing the parking lot when Kang mentioned that it had a few cracks and redoing the roofing before AccessoryGeeks moved in.

Finding a good fit for a fulfillment home requires retailers to look into such details that may seem minute. But those that do their homework will be more likely to find a spot where they can sit back and stay awhile. Kang says the extra work is worth it. With five moves under her belt, she speaks with authority.




AccessoryGeeks.com, David Byun, Fanatics, Jim von Maur, Overstock.com, Spreadshirt.com, Ulta Salon, Von Maur