Urban Outfitters, others plunge aggressively into online sales

Posted: November 05, 2013

They are rising in farm country west of King of Prussia like giant garrisons positioned to deploy packages to shoppers up and down the Atlantic Coast: automated warehouses of herculean proportions aimed at moving online orders to people's doorsteps in just hours.

Philadelphia's Urban Outfitters Inc. is among a rush of titanic store-based retailers spending staggering sums to open online fulfillment centers closer than ever to customers, in a red-hot patch of Pennsylvania along the state's toll-free I-81 spine.

Development officials say they are witnessing a surge of interest in building warehouses that can pick, pack, and ship people's orders at lightning speed. The mad dash is fueled by the promise of same-day and overnight delivery, an ante set by Internet-only Amazon, a $61 billion player whose own billions spent thus far are a powerful incentive.

"Their job," e-commerce expert Michael Golden said of Amazon, "is to make sure you don't want to shop anywhere else."

Stepping up its game Oct. 7 with a big-money announcement was Philadelphia-based Urban, a front-runner in e-commerce.

The retailer, with headquarters at the Navy Yard, announced it would break ground this month on a million-square-foot center on 52 acres in Lancaster County for products spanning its Free People, Anthropologie, Urban Outfitters, and other brands.

The planned $110 million facility in Gap, Pa., will be built across from a 200,000-square-foot warehouse that ships merchandise to the $2.8 billion corporation's stores. The move aims to turbo-boost Urban's industry-leading capacity to move its apparel and accessories to the customers who buy it on cellphones, iPads, and computers and from catalogs.

Until now, Urban filled this need with operations as far away as Reno, Nev., and Trenton, S.C.

Other store-based retailers are prowling, too, eager to capitalize on the region's interlocking interstate highways, proximity to the dense Northeastern United States, and increasingly numerous FedEx and UPS hubs and stations, all key to achieving cost-efficient same-day and overnight delivery.

The push is giving Pennsylvania traction against farther-away states, whose development incentives, in years past, could lure conventional warehouses.

Seattle-based Nordstrom Inc. is in talks with communities near Lancaster and Chambersburg for an 800,000-square-foot center for the department-store chain's online needs, said Mike Ross, president of the Franklin County Area Development Corp.

And three large, unnamed retailers are considering up to five sites, said Michael Rossman, who leads the deal-making Governor's Action Team of the Pennsylvania Department of Community and Economic Development (DCED).

"What we're hearing is a lot of people trying to keep pace with Amazon and their current ability for same-day delivery," Rossman said.

The leader in online retailing, Amazon has three fulfillment centers in York and Cumberland Counties, two in Lehigh County, and one in Luzerne County, according to the DCED. In 2012, Macy's opened a $150 million, 1.3 million-square-foot facility south of Chambersburg in West Virginia.

"It only seems to be accelerating," said David Nikoloff, who helped negotiate tax breaks with Urban as president of the Economic Development Company of Lancaster County and is in talks with another retailer. "I'm expecting other people will be knocking on the door."

From Day One, Urban made clear that its preferred location was not, as in the past, somewhere faraway. It wanted Pennsylvania, Nikoloff said, because the rules of online now require it.

"Location and proximity for overnight delivery," he said, recounting what company officials stressed in meetings.

Urban Outfitters declined to comment for this article.

The chase follows an Amazon-led movement dubbed microfulfillment: "Putting the product as close to the consumer as they can," said Golden, who helped many retailers develop online selling platforms over the last decade through GSI Commerce, a King of Prussia company he helped establish and that has since been sold to eBay.

Seattle-based Amazon has spent almost $13.9 billion on fulfillment expenses, including 50 new facilities, since 2010, according to Bloomberg News. And the retailer recently announced new centers in Florida and Baltimore.

Store-based retailers are acting with urgency to up their own capacity. The timetable for locating and opening fulfillment centers is shorter than ever, according to state officials, and the facilities are larger than old-style distribution centers, too.

"We have a number of these retailers who are trying to rush," said Ross, a 28-year development official in Franklin County, whose proximity to I-81 and the Pennsylvania Turnpike have long made it a locus of more conventional warehouses. "There's a need to get these centers sited and built as quickly as possible."

For store-based retailers, expanding online capacity is a matter of survival. Sales at stores are flattening overall as customers divert dollars to online vendors at a remarkable pace. Online retail sales reached $231 billion in 2012 and are forecast to hit $262 billion this year and $370 billion by 2017, outpacing growth at stores, according to Forrester Research Inc.

Each time a retailer loses a sale to an online competitor, it reduces the pot of revenue the company is left with to cover costs associated with stocking and operating stores.

But online sales are important in another way: They can be more profitable because it is cheaper to sell out of a warehouse than a store - as long as delivery costs are contained and a high volume of merchandise flows out.

Urban is pursuing this latter promise of higher profits more than defending against competitors like Amazon, said analyst and managing director Barbara Wyckoff of CLSA Americas, who has followed the e-commerce trailblazer for 13 years.

A company founded four decades ago as a single storefront, Urban has been visionary, long ago investing cash to develop in-house information-technology capabilities to support the growth of online sales.

Urban differs sharply from Amazon by not selling goods at the lowest price. Nor does it offer free shipping from, say, its pricey Anthropologie brand, Wyckoff said.

"They are one of the few that still makes you pay shipping most of the time," Wyckoff said, "which really sets them apart."

Urban is so full-steam-ahead with online growth that it continues to expand its headquarters to support those ambitions. And since retaking the chief executive's post in 2012, founder and chairman Richard Hayne appears to have only intensified Urban's pursuit to sell more merchandise through the Web and catalogs.

"That channel continues to be a more profitable channel than stores, mainly because the cost of occupancy is higher than the cost of delivery," chief financial officer Frank J. Conforti told investors in September, according to a transcript of remarks at the Goldman Sachs Global Retailing Conference.

"We think the consumer is going to continue to move to the Web in a greater way and in a bigger way," Conforti added.

Eight percent of all U.S. retail sales in 2012 were from e-commerce, Wyckoff said. At Urban, that number is 25 percent, accounting for online and catalog sales. That share outstrips even tech-savvy Nordstrom, according to CLSA estimates Wyckoff recently published.

Urban's strategy is not, simply, to emulate what it sells in stores worldwide. The company also sells Web-only products, and uses the Web to keep inventory low at stores - another profitable maneuver.

If a customer is in an Anthropologie or Urban Outfitters store in search of a missing color or size for a shoe, associates can find it digitally in inventory, ring up the transaction, and have it shipped to the customer, Wyckoff said.

In that sense, store-based retailers are seeking an edge over Amazon by expanding online.

"Brick-and-mortar retailers . . . are recognizing that stores can be used as an advantage," said Mark Larson, national sector leader for retail at KPMG.

But achieving same-day and overnight delivery is no easy thing.

Goods can be shipped from stores, or from warehouses close enough to customers, said Barbara Kahn, director of the Baker Retailing Center at the University of Pennsylvania's Wharton School. The presence of many FedEx and UPS hubs is critical.

"EBay now is testing in five different cities delivery within an hour," Kahn said.

Whether retailers can manage this without going into the red is unclear.

"That's the million-dollar question," Kahn said. "There's just no question that delivering in a very short period, that last mile, is expensive."




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