Amazon’s ambition

July 28, 2014 by Kirsty Adams
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In choosing a name with a multiplicity of connotations, Amazon set out its ambition early in its life. But just where that ambition puts it on the UK logistics map is anyone’s guess. David Thame does his best to see through the fog.

Amazon was a brilliant choice of name. Just like the Brazilian river, it promised to be the widest, broadest channel in retail. But also like the river, it is a big, terrifying mystery to its rivals, to some suppliers and to many observers. Travel back upstream in an attempt to work out Amazon’s logistics strategy and everything gets tangled in tropical confusion.

 

Despite UK turnover of £4.3bn – much larger than most big high street names – the firm’s corporate property strategy remains opaque to many observers on this side of the Atlantic. Like the distant tribes at the source of the Amazon, many commentators say they simply don’t speak the same language. A certain amount of trans-Atlantic confusion may be to blame, with UK professionals struggling with the uptight formality of corporate America. But there is also genuine bafflement.

The latest well-publicised corporate spat – which involves Amazon refusing to stock books from Hachette, the Harry Potter publisher - comes as the online department store prepares to expand its UK distribution network.

Amazon has added nearly 1m sq ft in the Midlands, is rumoured to be close to finding a location for as many as two north-west depots totalling 1m sq ft or more, and could have a second large Midlands requirement.

“WE DON’T KNOW”
Yet talk to most UK surveyors and developers - the people tasked with providing Amazon with its new logisitics floorspace - and you discover that almost nobody knows what is going on.
“We don’t know, we just don’t know,” said one exasperated property insider when SHD Logistics asked for a steer on Amazon’s UK warehouse strategy. After a few calls to colleagues around the UK, SHD’s contact came back with some extra information: “We still don’t know, but there are rumours.” That sums up current market knowledge.

Amazon’s UK property advisor, CBRE, declines to talk about plans, and Amazon itself is notoriously unwilling to discuss forward strategy. So, what is the best industry guess about Amazon’s warehouse plans? SHD has spoken to the warehouse property world’s movers, shakers, talkers and thinkers – and this is what they told us...

WHAT AMAZON WANTS:
Amazon is piecing together a network of smaller sub-regional depots clustered around the main metropolitan centres. They will be around 70,000 sq ft each.

It is also understood to be looking for 1m sq ft in the north-west and perhaps also for a smaller depot which could help fulfilment in the north-west and Yorkshire.
Rumours that the firm requires another 1m sq ft in the Midlands are regarded by some sources as improbable. But the rumours persist all the same.

WHAT AMAZON HAS:
Amazon occupies a little short of 5m sq ft around the UK. The main fulfilment centres are at Swansea Bay (800,000 sq ft), Rugeley (700,000 sq ft), Milton Keynes (700,000 sq ft) and Dunfermline (1m sq ft).
 
It has smaller but still substantial distribution centres in Doncaster (400,000 sq ft), Peterborough (550,000 sq ft) and Hemel Hempstead (450,000 sq ft).

WHAT MATTERS IS WORKFORCE
Workforce matters most when choosing a regional distribution centre location. According to David Smeaton, regional head at Colliers International in Birmingham, it must have been a large part of the appeal of Amazon’s recent decision to double its 700,000 sq ft Rugeley depot.

“Rugeley is a very poor part of Staffordshire,” he says. “I’m sure Amazon are looking for cheap labour, but this comes with a cost. If they stray too far from the main customer markets the cost-benefit of cheaper labour is gone. Their analysis must be very tight.”

Swansea Bay, where Amazon has 800,000 sq ft, is regarded as a classic example of a location chosen not for its transport links, but for its labour force availability.
Observers say that balancing location against labour-force availability has been responsible for slow progress on Amazon’s 1m sq ft north-west RDC. Whilst Liverpool has been favoured – the 53-acre site at Stonebridge Cross offers plentiful labour on the doorstep – its links to the motorway network via the busy A 580 East Lancs Road could be better. Alternative sites, such as Omega Warrington or Logistics north at Cutacre, Bolton, risk tapping into higher paid and more mobile workforce.  

FOLLOW THE MONEY
Amazon bosses would be foolish if they didn’t look at the benefits of building or occupying warehouses in areas which qualify for government grants.
Grants were an important part of the deal when Amazon moved into Scotland in 2011. The 1m sq ft Dunfirmline fulfilment centre and 300,000 sq ft Inverclyde service centre qualified for a £4.3m Scottish Enterprise Regional Selective Assistance grant and training awards, and another £6.3m was available for construction through the Scottish Enterprise Property Support Scheme.
Some sites in north-east Wales – Ellesmere Port in particular – are said to have been studied by Amazon thanks to their grant-attracting potential.

However, bad publicity about the amount of tax Amazon pays in the UK seems to have chilled plans to move to grant-attracting locations. It simply wouldn’t look good to take taxpayers money with one hand, whilst being criticised for paying just £4.2m tax with the other.

For now, big grant-attracting locations seem to be off the agenda. But that could easily change.

FOLLOW THE FLOORSPACE
There aren’t many 1m sq ft warehouses sitting around waiting for occupiers – and there aren’t very many developers sitting on sites ready and able to take a 1m sq ft warehouse anytime soon.
According to research by Savills, the supply of big sheds across all regions is tiny: in the East Midlands it totals perhaps 5m sq ft, in 21 units. Many of them would be too small, or too old, or just not right for Amazon. In some regions, there is just one large unit available.
Not surprisingly Savills reports that occupiers looking for big sheds have paused their searches during 2014.
“Despite over 19m sq ft being transacted in the year, a number of occupiers delayed decisions, as the lack of good quality space in key locations impacted on take-up numbers. So far 2014 has seen a pause in take-up, but there are still plenty of requirements in the market, with the retailers leading the way,” Savills says.
Amazon’s choice of location is, then, strictly limited by the property market.

FUTURE PROOFING
Nobody knows what the future will bring – but for retailers working in the fast-moving online marketplace the future is not some distant far-away prospect. For Amazon, the future is the day after tomorrow.
Amazon’s latest experiments – with drone deliveries by unmanned helicopter and with special wands which customers can wave at their household goods, triggering an automatic re-order – are attempts to future-proof its business.
But how to future-proof the warehouse? One close collaborator with Amazon told SHD: “Amazon want to make sure their warehouses are good not just for today, but for tomorrow, and that means looking at new racking and dispatch systems. And it’s a big cost – they don’t want to get it wrong.”

The consequence is that Amazon have hesitated when making big property decisions. No point in asking for a new warehouse to be built to suit you, if you don’t know what suits you. Maybe you need an airfield and air traffic clearance for your drone take-offs? Or maybe you don’t?
Says Collier’s David Smeaton: “Amazon’s technology is changing rapidly; look at the drone delivery idea – if that works it could literally take them to the next level.”


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