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Although each retailer has unique expectations, site-selection specialists agree that transportation and labor are more critical factors than the actual real estate. Bristol Farms, a grocery retailer of specialty and gourmet foods with 11 stores in Southern California, recently moved its corporate headquarters and DC to Carson, Calif. There were a number of site-selection requirements that had to be met, but proximity to the produce market in central Los Angeles as well as convenient access to its stores topped Bristol Farms' list. A second imperative for Bristol Farms was to identify a site that would be within a reasonable commute of its existing work force. The company did not want to lose the inherent corporate knowledge of our employees, and it wanted the move to a new DC to appear totally seamless to stores and customers, notes Sam Masterson, vice president of store operations and logistics. The location in Carson has accomplished all of this.

Copyright Lebhar-Friedman, Inc. May 2003

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Where a retailer locates its distribution center is a decision that impacts earnings and profitability every day.

Although each retailer has unique expectations, site-selection specialists agree that transportation and labor are more critical factors than the actual real estate.

Gil Mayfield, VP of real estate services of Carter & Burgess, says the most important factor in site selection is finding the right labor market. Carter & Burgess of Fort Worth, Texas, one of the most active site-selection consultants in the retail industry, opened between 10 and 12 new DCs last year.

"If you don't have the right people, it's all for naught," declares Mayfield. "The transportation system is just about as important, but there's more flexibility with transportation. Usually, you can operate within a 30- to 40mile radius and find the same transportation, but labor can change drastically within that same area."

Gerry Shear, president of GENCO Realty Investments, the real estate consuiting division of Pittsburgh-based GENCO Distribution Systems, counters by saying, "Transportation is the biggest cost associated with distribution. The cost of outbound distribution to stores is entirely the retailer's responsibility and the placement of the DC is a very important factor in managing these costs."

Inbound freight also has to be weighed into the equation. The cost of bringing product into the DC may be shared between the retailer and its vendors, or it may be absorbed into the purchase price of the goods. One way or the other, the cost of shipping product into the DC becomes an expense for the retailer.

Bristol Farms, a grocery retailer of specialty and gourmet foods with 11 stores in Southern California, recently moved its corporate headquarters and DC to Carson, Calif. There were a number of site-selection requirements that had to be met, but proximity to the produce market in central Los Angeles as well as convenient access to its stores topped Bristol Farms' list.

"Since we moved into our new DC in February, we are only 18 miles from the market where we buy our fresh produce, and the farthest store is only an hour's drive, not accounting for traffic," says Sam Masterson, Bristol Farms' VP of store operations and logistics.

Bristol Farms' stores, which average 25,000 sq. ft., carry an assortment of standard grocery merchandise as well as unique specialty items, freshmarket produce and gourmet dishes that are prepared in Bristol Farms' centralized kitchen. Standard-pack grocery items such as cereals or bathroom tissue ship direct to stores from manufacturers or wholesalers. However, approximately 8,000 of the 28,000 SKUs carried in a Bristol Farms store are processed through the retailer's DC.

Retaining labor: A second imperative for Bristol Farms was to identify a site that would be within a reasonable commute of its existing work force. This challenge was magnified by the fact that the work force was being consolidated from more than one location. The new DC combines not only the company's warehouse and distribution operations with its corporate headquarters, but also houses the company's "prepared-foods kitchen."

"We didn't want to lose the inherent corporate knowledge of our employees, and we wanted the move to a new DC to appear totally seamless to our stores and customers," notes Masterson. "Our location in Carson has accomplished all of this."

Unlike Bristol Farms, not all retailers open new DCs with an existing work force. Recruiting, training and retaining employees is the biggest challenge in operating a DC. When it comes to supporting new development, Shear describes Georgia as the state that is "head and shoulders" above others. Within a 60mile radius of Atlanta, GENCO has opened six distribution centers including facilities for Kmart and Sears as well as a Levi Strauss DC that serves its retail outlet stores.

"Georgia has a program called Quick Start that helps train employees for new facilities," explains Shear. "They'll send representatives all over the country to make videotapes and create manuals of how a company operates its existing DCs. Then they go back to Georgia and train people to work in that company's new DC."

The turnover rate among DC workers is notoriously high, however Shear says GENCO has learned that being first to market engenders a loyal employee base that is more reluctant to jump ship.

"We were pioneers into a new market when we opened a DC for IKEA in Lebec, Calif.," notes Shear. "The real estate is considerably less than traditional California prices and there are [accessible] transportation lanes. By the time other companies discover the area and open DCs, we will have established a core labor force that is loyal to IKEA so we can retain the level of service in this DC."

Build or buy: Masterson describes the quest for Bristol Farms' new DC in glowing terms, joking that the sun, moon and stars were aligned in the retailer's favor, although he admits the entire site-selection search, evaluation and decision had to occur within a tight window of time.

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"We're accustomed to finding the best retail sites for our stores, but we weren't experienced in hunting for industrial facilities," says Masterson. "The property group at APL Logistics [Oakland, Calif.] was experienced in that field and we used their local resources to find the facility that met all of our unique requirements. APL also manages our DC operations and operates our dedicated fleet of five tractors and eight trailers."

"The lease on our warehouse facility was coming to the end of its life, and we were also in a position to be able to exit the lease for our corporate offices," continues Masterson. "At first, it looked like we would be forced into a buildto-suit situation, but APL was able to locate a few existing facilities. From the time we made the strategic decision to find a facility until we negotiated the deal, was only about four months."

Speed to market is often an issue, though many deals may require extended months of negotiation and construction. Peter Quinn, principal, and Brian Zurawski, associate principal, both of Indianapolis-based Summit Realty Group, specialize in identifying the best DC sites for big-box retailers.

"In some parts of the country, a 400,000-sq.-ft. DC can be built in four months, and in other parts of the country it would take 12 to 18 months to build," notes Quinn. "For example, California takes more time because of the permitting required and Florida has rules regarding water rights that may slow down the process. The important thing is to understand what drives deals in different parts of the country."

"Brian and I try to create a competitive environment for our clients," continues Quinn. "If build-to-suit is an option, then it drives down the price of existing real estate. If the retailer has to move into an existing facility and the landlord knows there are only one or two facilities available, it's harder to be competitive."

Recently, Summit Realty worked with GENCO to assist J.C. Penney with locations for two regional DCs, originally targeted for Jacksonville, Fla., and Detroit.

"The earlier we can get involved in the site-selection process the better," says Summit Realty's Zurawski, explaining that retailers often decide the region, and in some cases the city, before turning to Summit for help with identifying the best site in the designated market.

"There was very low availability of real estate in Detroit and there were no [adequate] facilities available in Jacksonville," explains Zurawski. "Indianapolis and Lakeland, Fla., had several options, so the plans shifted to those markets."

To a large extent, the decision to buy an existing facility depends on the functional viability of the structure. Bristol Farms' Masterson pointed out that many industrial sites did not offer enough parking to accommodate a DC's employees and transportation fleet. Height clearance, loading docks, outside trailer storage and access driveways to support inbound and outbound trucks are some of the features to consider.

"Due to the soft industrial real estate market coupled with the availability of big boxes in the majority of areas, an existing facility that meets the building specifications and operational [requirements] is the faster, more economical [choice]," says Kris Bjorson, director, logistics practice group, The Staubach Co. of Dallas.

Although he agrees that transportation and labor are the key drivers in the site-selection process, Bjorson stresses the importance of considering both initial and ongoing real estate costs, including tax structures and incentives.

The amount of support varies significantly from one state to another and ranges from real dollars to recruiting labor and developing custom training programs.

"Often, the state pushes decisions for allocation of support to a local level," says May field, acknowledging that Carter & Burgess works closely with the economic-development agencies in every community it enters. "State laws may allow for tax abatement and, occasionally, the governments have funded improvements to infrastructure such as roadways or sewer systems. There have even been some cases where the state will help fund the development, but that's pretty rare."

"Excluding Florida, which is really tough to work in, the Southern states work hard to provide incentives," continues Mayfield. "Oklahoma is probably the most aggressive in inducing opportunities to select sites in its state, and they also offer a strong training program."

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