Walmart Strategy Demonstrates Retailers’ Ongoing Demand for Warehouse/Distribution Space

In 2009, American retailers occupied more than 5 billion square feet of warehousing/distribution space. Although significant new leases are way down, retailers do continue to extend and/or renew their lease holdings. Many are attempting to downsize, but all are said to be reviewing their long-term warehousing strategies.

Marc Wulfraat, a transportation industry expert at TranSystems in Montreal, CA, suggests we look at the distribution strategy of Walmart, the world’s largest and most successful retailer, to better understand why retailers will still need distribution centers. “At last count, Walmart’s U.S. network consisted of 147 large-scale distribution centers, comprising flow-through general merchandise facilities, grocery distribution centers, fashion/apparel facilities and dedicated import facilities,” Wulfraat notes. “Walmart’s distribution centers are absolutely massive. The prototype general merchandise distribution center is 1.2 million square feet; the typical grocery distribution center is 880,000 square feet; and its largest import facility in Texas is 4 million square feet. Most of the distribution centers are an average of 125 to 150 miles from the stores—a huge competitive cost advantage compared to retailers who ship from farther away.”

It is generally accepted that the world’s largest retailer set the stage for warehousing strategies. “It is estimated that Walmart self-distributes 85% of the cost of goods on its retail shelves as compared to less than 50% for its competitors,” Wulfraat says. “While Walmart has contracted with third party logistics providers for specific distribution operations, it owns and operates the vast majority of its 120 million square feet of distribution center space. In simple terms, Walmart’s entire business strategy is based on squeezing out cost across all levels of operations to achieve its low-price competitive advantage. For most retailers, logistics represents one of the largest controllable expenses on the income statement and Walmart’s distribution efficiencies are at the heart of why this company has grown to $405 billion since the first Walton’s five and dime was opened in 1962.”

The need for warehousing is directly related to the type of products sold. Turnover of product SKUs and restocking requirements will ultimately define the warehousing strategy. Calibrated correctly, calculating square footage will be a simple metric exercise. If short-term and long-term distribution strategies are not professionally determined and leveraged against best practices, spikes in demand will create expensive and disruptive challenges to the retailer.

-Paul A. Waters, SIOR, CCIM, CRE, FRICS



Based in New York City, Paul Waters, SIOR, CCIM, CRE, FRICS, is Executive Vice President-The Americas at NAI Global, where he is responsible for business development and client relationships among major corporate end users of office and industrial space.