Pandemic rush to online shopping sparks interest in 'Airbnb' warehouses

Published Thu, Oct 1 202010:30 AM EDT

Key Points

The coronavirus pandemic has accelerated the shift to online shopping, as housebound consumers ordered everything from hand sanitizer and groceries to office supplies and exercise equipment.
Retailers have rushed to secure more space to fulfill online orders, driving demand for on-demand warehouse services provided by the likes of UPS and XPO Logistics.

The coronavirus pandemic has forced retailers to get creative when it comes to how they sell, ship and, increasingly, store their goods. Facing a surge in e-commerce activity, big retailers are turning to a relatively new storage method, known as on-demand warehouses. The idea has been compared to Airbnb, since it allows retailers to browse and rent unused warehouse space, without having to lease or build an entire facility. Retailers rent the space on a pay-as-you-go basis, letting them scale up or down on space depending on their needs. Certain companies could stand to benefit from the trend. It's unclear whether the e-commerce boom will last beyond the pandemic, but there's good reason to think that some of the surge will remain. A recent McKinsey survey of over 2,000 consumers found that more people expect to shop online regularly after the Covid-19 crisis than before. With e-commerce growing more and more popular, retailers have been searching for ways to get their goods to consumers faster without committing to long-term leasing contracts, which are especially risky at a time when consumer demand is hard to predict. Flexible warehousing is one solution to that problem. Over the past few years, a host of companies have stepped up to connect retailers with temporary storage space, from start-ups Flexe and Flowspace to major players like FedEx , UPS and XPO Logistics . So far, Walmart and Staples are among several major retailers that have turned to on-demand warehousing for a portion of their fulfillment operations. On-demand warehouse space gives retailers more ammunition to compete against the likes of e-commerce giant Amazon , which has built out its own sprawling fulfillment and logistics network. The company operates more than 150 fulfillment centers, sortation centers and delivery stations across the U.S., in addition to its fleet of airplanes, vans and delivery robots. Amazon is expected to claim 38.7% of the e-commerce market this year, up from 37.3% in 2019, according to eMarketer. One way it has carved out such a large piece of the market is by investing in two- and, increasingly, one-day delivery. It has also scattered its last-mile distribution centers across the U.S., bringing it closer to the customer and cutting down on delivery times. "The physics of getting products to consumers quickly really starts with putting the inventory close to where they live, rather than in one warehouse in the middle of the country," said Karl Siebrecht, CEO of Flexe, in an interview. "The ability to put up many different nodes in the network or add new nodes so that you can put inventory closer to where people live is the key to speed." But not all retailers have the cash needed to match Amazon's rapidly growing fulfillment network. On-demand warehousing has been one helpful solution to that problem, since it lets retailers secure space that's closer to consumers, without getting locked into a long-term lease. On-demand warehouse models allow retailers to "add capacity very quickly," whereas building out a new warehouse or finding space to lease can take several months, Siebrecht said. UPS launched its on-demand warehousing platform, Ware2Go, in 2018. It operates a network of 46 warehouses across the country, "but we don't own those warehouses, just like Airbnb doesn't own rooms or homes or condos," said Steve Denton, Ware2Go's CEO. During the pandemic, Ware2Go has seen a spike in demand for flexible warehouse space from companies that sell consumer packaged goods, vitamins, pet supplies and exercise equipment, as well as food, which requires temperature-controlled facilities that are located near customers. "We've been operating at 20% above peak levels since May and we're expecting an early peak this year with Amazon Prime Day being pulled forward," Denton said. "We're expecting another 20-25% on top of that, so huge growth." Ware2Go also helps retailers turn existing stores into distribution centers. It's a trend that has been accelerated by the pandemic, but is expected to continue long into 2020 and beyond, according to data from real estate firm CBRE . The holiday shopping season, which is expected to largely migrate online, could spur additional adoption. Logistics giant XPO is betting on increased demand for its flexible warehouse service, XPO Direct, during the holidays. XPO currently operates about 100 facilities in 11 key markets and it's adding about 3 million square feet of fulfillment space for the holiday season in anticipation of a "very large peak for e-commerce," said Ashfaque Chowdhury, president of supply chain for XPO's Americas and Asia Pacific region. "Those initiatives started many months ago and most of them are coming live right about now to be fully available in the peak time frame," Chowdhury said, adding that XPO expects demand to continue into at least early 2021, when many consumers return their Christmas gifts, which takes up space in warehouses. Stifel analyst Bruce Chan said he doesn't think XPO Direct will become a meaningful part of the company's operations, but it could help the company capture new retail customers that deepen their reliance on XPO over time. Chan said XPO is a particularly attractive company for retailers to partner with for services like flexible warehousing, given its history and reliability. "Ultimately, I think what they'd like to do is drive e-commerce fulfillment into their full boar logistics offering," Chan said. "They're going to sign a long-term contract with a customer where they're actually, on a long-term basis, making use of XPO's full suite of logistics offerings." "A la carte" e-commerce services like flexible warehousing may not be material to UPS or FedEx, but they tap into a market with consistent demand, as retailers of all sizes look to compete with the likes of Amazon. "I think that it's a growth opportunity and a margin opportunity to provide some of these services to some of the small and medium size retailers who don't have the same leverage that large e-commerce providers have," said Todd Fowler, managing director of transportation and logistics research at KeyBanc Capital Markets. The potential for a "winter wave" of the coronavirus has also driven additional demand for flexible warehouse space, Siebrecht said. Retailers are preparing for the possibility that there will be another run on essential items like canned goods and disinfectant wipes and will need extra space to store them. In the past, these kinds of unexpected spikes might cripple a retailer without Amazon's fulfillment network, but with on-demand warehouse space, retailers have been able to "capitalize on this market demand without being a bottleneck," Siebrecht said. While the surge in e-commerce activity may not last beyond the coronavirus crisis, it's likely to make some consumers more accustomed to ordering online that wouldn't have done so before. That will create lasting demand among retailers for more space to support their e-commerce operations and they might turn to providers like XPO or UPS' Ware2Go for those capabilities.

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The coronavirus pandemic has forced retailers to get creative when it comes to how they sell, ship and, increasingly, store their goods.

Facing a surge in e-commerce activity, big retailers are turning to a relatively new storage method, known as on-demand warehouses. The idea has been compared to Airbnb, since it allows retailers to browse and rent unused warehouse space, without having to lease or build an entire facility. Retailers rent the space on a pay-as-you-go basis, letting them scale up or down on space depending on their needs.

Certain companies could stand to benefit from the trend.