Will limited-assortment warehouses help Chewy avoid ‘demand shock’?
A number of retailers have set up smaller warehouses to support last-mile delivery. Chewy last week said it opened its first “limited-catalog fulfillment center” to handle surges in orders.
Chewy’s new warehouse, centrally located in Kansas City, comes following a first financial quarter in which the online retailer experienced “demand shock.” Shipping volume catapulted 50 percent in March versus February as marooned households doted on pets and adoptions soared. The company saw elevated out-of-stocks, while split shipments, longer delivery distances and expedited orders required to fulfill orders in a timely manner impacted margins.
Last week, on Chewy’s second-quarter conference call, Sumit Singh, CEO, said the incremental fulfillment capacity at the new limited-assortment warehouse provides “flexibility to effectively load balance” across its other 10 fulfillment centers. The site also “acts as buffer capacity” to support abnormal surges, including those related to holiday selling.
“This new FC is a capital-light, high-velocity operation focused on fast fulfillment during peak demand periods,” said Mr. Singh.
Chewy is also counting on automation to drive logistical efficiencies. Its first automated fulfillment center is set to open next month and the second is slated for mid-2021. The retailer expects automation to drive up to a 60 percent improvement in safety and economics-related metrics, a 25 percent increase in throughput capacity per square foot, a 50 percent increase in labor productivity and a 30 percent reduction in fixed and variable fulfillment cost per unit.
The broader trend has been opening smaller warehouses close to major population centers as demand for speedy online shipments accelerated well before COVID-19’s emergence.
Last October, a report from CBRE found that the availability rate for warehouses between 70,000 and 120,000 square feet, which the real-estate consulting firm referred to as “light-industrial” properties, continued to outpace that for larger warehouses (plus 250,000 square feet), driven by local economic activity, urban population growth and same-day delivery expectations of consumers.
A Wall Street Journal article from last December found numerous grocers opening or testing micro-centers as small as 10,000 to 20,000 square feet in part to support fresh food deliveries. The article still found grocers such as Kroger relying on large bulk warehouses to tap economies of scale.
- Latest Q2 2020 Results – Chewy
- Chewy (CHWY) Q1 2020 Earnings Call Transcript – The Motley Fool
- Chewy (CHWY) Q2 2020 Earnings Call Transcript – The Motley Fool
- Bigger Not Always Better: The Case for Light Industrial – CBRE
- Safeway Owner, Rival Grocers Bet on Smaller Warehouses – The Wall Street Journal
- E-Commerce Driving Bigger Demand for Smaller Warehouses, CBRE Says – The Wall Street Journal
- Retailers need way more fulfillment space to keep up with booming online sales – RetailWire
DISCUSSION QUESTIONS: Will limited-assortment warehouses effectively help Chewy and other retailers better manage inventory flows? Do you see the trend toward smaller and more specialized distribution centers over larger ones continuing in the years ahead?