Is Mexico Ready for the Last Mile?

Confinement due to COVID-19 has brought new opportunities to many industries and the real estate market is no exception. Investors who specialize in the development of distribution centers are monitoring these opportunities, given consumers’ new practices and the trade agreement between Mexico, United States and Canada.

The exponential growth of online sales has created many opportunities for businesses involved in the supply chain, such as vendors of goods or logistics companies.

If we compare the second quarter of 2020 with that of 2019, we can see that the online sales of the six major retailers that trade on the Bolsa Mexicana de Valores (BMV) grew 140%, while their “floor” sales dropped by 45%.

Sanborns’ online operation grew from 8% of total sales to 60%. During this period, Liverpool and Palacio de Hierro’s online activity grew from 12% to 78% and from 12% to 60%, respectively.

According to a survey conducted by the Asociación Mexicana de Ventas Online (AMVO) 2.20% of the businesses have experienced growth upwards of 300% in online sales. For 2021 its expected that online sales will represent more than a third of all sales.

“For those servicing e-commerce's supply chain, efficiency is measured by how fast products are delivered to consumers.“

In Mexico, deliveries are generally not fulfilled within 24 hours. In the US and Canada, delivery times have been reduced to same day. Once again, this depends on the conditions of each market. The objective of these players is to reduce delivery times and distances to streamline their operations.

A few of the challenges that these logistic companies face include the cost of transporting the product, which accounts for 53% of the total cost of the supply chain. Additionally, customers are apprehensive to purchase online in part due to the high cost of fast delivery.

Another challenge is the cost of fuel, which accounts for 5% of operation expenses. Moreover, it’s a dollarized cost that lies outside the control of the retailer or the logistics company.

In regions or countries such as the United States, Canada or Europe, the “crowd-tasking model” is well known. It consists on a group of previously verified individuals acting as independent contractors to the company, who offer their personal vehicles to complete the final steps of deliveries (last mile). This is a collaborative solution that could help reduce costs and increase process efficiency.

We must also consider the “reverse logistics” factor. During the third quarter of the year, returns were made on 20% of total online sales in the United States. On the other hand, 21% of online buyers reported to have returned their products in México, according to a survey by AMVO. Nevertheless, more than two thirds of online buyers reported an interest to return purchased products to exchange for another item.

These types of companies lease distribution centers that receive, package and ship products to smaller distributors who are in charge of delivering the last mile. These businesses will increasingly expand their footprints to be closer to the final consumer.

Interested parties have approached SiiLA México to gain insights on the last mile.

SiiLA monitors 442 class A and B distribution centers in Mexico City which lie within 9 industrial submarkets. Of these, 24% are located within a 15-kilometer radius of the center of the city. If we take filter those assets with a Gross Leasable Area (GLA) of less than 20 thousand square meters, the number is reduced to 104 B class properties. Out of these properties, only 13% of them have vacant space.

It is worth mentioning that the two major players in the Mexican E-commerce industry have continued with their expansion in packaging and distribution centers. Mercado Libre has grown 620% in one year (Q3 19 vs Q3 20), occupying more than 132 thousand square meters of GLA. Amazon, on the other hand, occupies more than 185 thousand square meters of GLA making it the largest in terms of square meters.

Additionally, businesses of this kind lease distribution centers where they receive, package and ship products to smaller distributors who are in charge of delivering the last mile. These businesses will increasingly expand their footprints to be closer to the final consumer.

As demonstrated in the previous chart, available space in highly urbanized cities is scarce; this is due to the limits of urban planning, zoning and other geographical conditions. Opportunities for distribution centers with last mile capabilities are few so these spaces tend to price higher in comparison to other industrial assets designated for manufacturing.

Much is said about other asset types that could be converted to function as distribution centers or to fulfill the last mile needs, such as shopping centers. From a real estate perspective, this kind of conversions involve numerous legal, urban and business implications that need to be addressed.

Currently, it is very burdensome process to change the land-use permits as well as the zoning laws; more so in the country's urban areas including: Mexico City, Monterrey and Guadalajara.

On the other hand, logistical activities do not provide the same rental income as initially projected by retail developers. Landlords will have to weigh the cost vs. the benefits of the conversion and decide whether they are willing to modify their business plans and adjust the risk and return expectations. Decreasing rents will have an impact on the asset’s value and returns.

Monterrey’s the industrial market within a 15 km radius from the city center is composed of 410 class A and B properties spanning from 540 to 43 thousand square meters of GLA. Of these properties, 90% are class B, 8% are class A and the rest, are class C. Only 9% these properties have immediate availability

Currently, there are 94 companies that provide distribution and logistics services in this market, either 3PL’s (third party logistics) or proprietary brands occupying 746 thousand square meters of GLA. Of the space occupied by this type of company, 88% of occupied space is between 1,500 and 15 thousand square meters indicating the market’s interest in this type of space.

Transportation and logistics companies have grown their industrial footprint by16% over the past three quarters. This growth began prior to Mercado Libre and Amazon’s arrival to Monterrey. This last tenant established its first distribution center during the third quarter of 2019 and occupies 5,112 y 21,982 m2 respectively.

Guadalajara has 205 distribution centers –within a 15 Km radius from the city's center, of which only 6.3% of the properties have vacancy, a total of 41,859 m2. During the third quarter of the year, Amazon occupied 18,741 m2 at Parque Industrial Tecnologico warehouse number located within the “El Salto” submarket. This lease makes Amazon the first major player to establish operations in this market.

Today we see a logistics industry that could accelerate land development with the arrival and expansion of players such as IKEA, CEVA Logistics, Mercado Libre and Amazon.

Nevertheless, we also see many challenges that need to be addressed to reduce costs and provide a shopping experience that keeps the customer engaged and returning.

Is Mexico Ready for the Last Mile?

From SiiLA México’s perspective, there is fierce demand for assets that can facilitate the last mile. The pandemic has triggered exponential growth in online sales for traditional retailers.

Nevertheless, Mexico's main cities present important challenges to meet these demands. It is necessary to take certain measures to facilitate this process:

  • In the face of immediate inventory scarcity for institutional companies, a conversion of assets with the proper physical and geographical characteristics is necessary.

  • Understanding the need to adjust zoning laws in key areas to promote the arrival of the logistics industry.

  • Consider reverse logistics as an additional service to the client. Make this process simple and easy to fulfill. Eliminate unnecessary steps in the return of goods and money.

  • Innovation as part of the solution of delivering to the customer. For example, implementing strategies like the “crowd-tasking model” to contribute to the distribution process and to reduce expenses.

  • Use updated quality data that suits the information requirements of the companies and developers that want to rent or invest in these types of assets.