Macy’s Converts Store Space to Create 1M-SF of Mini-Distribution Centers

Just like that, Macy’s has added 1 million additional square feet to its supply chain, announced its CEO Jeff Gennette during the company’s recent Q3 earnings call.

As part of its efforts to increase the productivity of its physical assets, Macy’s converted space in 35 stores to serve as mini-distribution centers.

These semi-automated mini distribution centers totaling nearly 1 million square feet allow the retailer to reduce shipping costs and split shipments, better utilize inventory in specific markets and regions and improved delivery speed, which will be an advantage this holiday season, according to CFO Adrian Mitchell, who also spoke during the call.

Mitchell said the distribution centers are “relatively low-cost complements to our existing fulfillment network.”

He added that Macy’s has made the appropriate process and technology investments to streamline fulfillment activities in all remaining stores.

Gennette said further the company is looking at all its ship-alone categories “to get those closer to the customer to increase speed of delivery and also mitigate shipping costs.”

Finding Creative Ways to Solve Last-Mile Distribution

Jim Brooks, President of BH Properties in Los Angeles, tells GlobeSt.com that the continued push to locate last mile distribution hubs closer to roof tops has become one of the most critical segments of the supply chain.

“Given restraints on in-fill land supply, political challenges to development, along with rising construction costs and permitting time frames, investors are looking for creative solutions to meet this demand more quickly,” Brooks said.

“Re-purposing vacant big box former department stores, typically found in densely populated neighborhood centers, provides a cost effective and creative solution to meet the demand.”

Christopher E. Maling, principal-retail capital markets, Avison Young, tells GlobeSt.com that the amount of excess space that retailers have in their portfolio has grown considerably over the last few years.

“These companies have been looking for solutions to back-fill this space with either other retail concepts, ‘pop-up’ stores based on demand and holiday-oriented peak shopping, and finally, last-mile distribution hubs to address the needs of at-home delivery from their on-line platform.

“Macy’s strategy addresses its immediate and future needs for last-mile distribution and positions the company for even greater market share.”

Rethinking the Mall Business Model

According to a recent report by Moody’s Analytics about the future of retailing, a rethinking of the fundamental mall business model is occurring.

“With the disruption of the traditional anchors and the shifts in retail strategy and consumer expectations of physical retail spaces, the mall economics have become more complex,” according to the research firm.

“Mall operators need to help provide the tech infrastructure for omnichannel selling and marketing and support for distribution center-like usage of space for more dynamic logistics.”

Another alternative use of space would be logistics, Moody’s Analytics’ report said.

“Fulfillment centers do not attract customers and would do little to attract other retail uses in the mall,” according to the firm.

“However, they would relieve pressure on mall owners by filling large retail spaces that are eyesores. Additionally, it opens the possibility of a fulfillment tenant using the retailers’ inventory at the mall to complete online orders — creating the highly effective omnichannel experience for shoppers, retailers, and mall owners.

Store Within a Store an Easier Endeavor

Henry Finkelstein, a real estate partner with Los Angeles-based law firm Greenberg Glusker, tells GlobeSt.com that while many department store operators have concluded that they would be better served to downsize their typical store size, “this often amounts to little more than mothballing.”

He said that some category specialists, most notably Staples, have succeeded in reducing their prototypical store sizes and finding other users for the remainder of their original space.

“This has proven extremely difficult for larger stores,” Finkelstein said. “While store-within-a-store concepts, such as Sephora in Penney or Toys at Macy’s are a possibility, creating a truly separate use is very difficult.

“We have observed that the value of last-mile distribution space has skyrocketed in recent years,” he said. “Meanwhile, the incremental sales associated with extra sales floor space may have little or no imputed rental value and may even be a drain on capital budgets.”

As department stores have reduced their store count, freshening the remaining stores has become crucial, Finkelstein said.

“Those renovation costs are closely tied to the square footage being refurbished and an over-size store in needlessly costly to update,” he said. “The fact that some of the merchandising in the extra space is showrooming for Amazon is a further disincentive to excess square footage.”

Loading Docks Amplify the Back Space

Fulfillment uses in the back of a department store with existing loading docks are often the highest and best use of the surplus space, according to Finkelstein.

Due to the depth of their building footprints and REA limitations on site plan changes, “there are few other productive uses for the surplus space created by downsizing a department store building,” he said.

“Better yet, the department stores’ own use of the space presents fewer covenant problems and little capital cost. Alternatives, such as Amazon’s purchase of Whole Foods or renting in-fill location buildings would be a major expense.

“Moreover, since the parking demand for distribution use is significantly less than for traditional retail, repositioning the rear space can result in surplus parking. That extra parking property can be used for pad developments, for which there remains strong demand as the demand for large floorplan interior space continues to diminish.”

Click-and-Collect a Workable Strategy

Rick Redpath, managing director of Nadel Architects, tells GlobeSt.com, “Due in part to the rise of e-commerce that was further accelerated and intensified by COVID-19, many retailers are increasingly opting to repurpose space in this way.

For example, Redpath said he recently designed the interior of a Sprouts grocery store to facilitate “click and collect,” whereby shoppers purchase groceries online and pick them up in store themselves or utilize a delivery service.

The designated room for this service is equipped with refrigerators for perishable food and heaters for prepared food, where shoppers and delivery services can collect orders quickly and easily.

“Although many shoppers are returning to stores for in-person shopping, they are still prioritizing, and have become used to the convenience offered by e-commerce,” Redpath said.

“We anticipate that retailers will feel increased pressure to take the necessary steps to incorporate the design of these spaces into their stores to accommodate consumers and keep up with the competition.

“Many retailers are finding it is less expensive to ship items from their stores, because these are located closer to where people live. Having this distribution space can also enable smaller or more specialized retailers to compete with the bigger companies by offering increased shipping options and quicker delivery.”

Repurposing More Ideal than New Construction

Doug Ressler, business manager, Yardi, tells GlobeSt.com that building new assets is a mosaic of constraint complexities and cost.

“Legal and social constraints involve building codes, height limits, neighborhood opposition, zoning, NIMBYism, and other regulations which could stop a project which chooses to change the use and density of a property in a large metropolitan area,” Ressler said.

“Economic constraints may involve redevelopment which is more expensive than the status quo because it requires demolition or land assembly or both to combine parcels for projects of sufficient scale.

“Adaptive reuse presents a growing niche market to address these concerns. Certain existing asset buildings, already built and underutilized, present the possibility of conversion to alternative assets?

“Larger office buildings in abandoned central business districts are better suited to conversion than the often-smaller office complexes distributed around the suburbs.