Supply Chain Shakeup   //   October 17, 2023

More retailers are paring back on distribution centers as part of their cost-cutting initiatives

Distribution centers, an area that received a massive amount of investment from retailers in recent years, are now starting to be the target of cost-cutting measures.

A few months after closing a distribution center in Bethlehem, Pennsylvania, Stitch Fix announced earlier this month that it would be closing another distribution center in Dallas, Texas. Big Lots and Amazon also announced earlier this year that they were closing a handful of distribution centers to slash expenses not long after accelerating their supply chain investments during the pandemic. 

It’s a stark turnaround from the pandemic, when retailers were investing heavily in newer and bigger distribution centers to keep up with the uptick in online shopping. But in recent months, retailers’ priorities have shifted from expansion to expense reduction due to the slowdown in consumer spending. By downsizing their distribution networks, retailers say they are positioned to save millions of dollars. The decision to do so, however, could slow down retailers’ deliveries and leave them unable to respond if demand picks up unexpectedly.

Many of these newly-shuttered warehouses were opened not too long ago. Ashley Furniture, for example, closed an Ohio distribution center that it opened during the pandemic. And emboldened by the pandemic-driven demand, Gopuff operated as many as 600 micro-fulfillment centers and stores in 2021, and by mid-2022, it had to close 76 warehouses.

Much of the warehouse expansion was driven by companies that experienced a significant uptick in online sales during the pandemic, but have since seen sales growth slow or decline. Back in 2020, Amazon opened almost 300 new facilities to accommodate its growth. But late last year and earlier this year, Amazon kept canceling its planned warehouse openings to curb operating expenses. 

Online furniture retailer Wayfair also canceled its initial plan to open a $133 million fulfillment center in Houston, Texas that would have opened 400 jobs. Wayfair scrapped the opening of the warehouse after it generated a net loss of $1.3 billion last year and sales were down almost 11% to $12.2 billion.    

Closing down distribution centers not only reduces capacity but also risks cutting down on the speed of deliveries. “The key reasons why retailers have opened up all these distribution centers had been the desire for customers to really get things faster,” said Sudip Mazumder, North America retail industry lead for Publicis Sapient. “That has been the key mantra, but that has been changing quite a bit as of late.”

Retailers saw fast delivery as a competitive advantage, but Mazumder said fewer shoppers are willing to pay the extra cost for expedited shipping. A recent survey from ShipStation found that just 22% of shoppers chose delivery speed as the most important factor in placing an online order, down from 29% the previous year. 

Although shoppers might be disappointed with the slower speed of delivery, the cost savings could still be worth it. Ricardo Ernst, professor of operations and analytics at Georgetown University’s McDonough School of Business, said that fulfillment centers have a huge fixed cost — from the space needed to the automation and electricity used to run the facility. 

“If the fulfillment expectations are heavily damaged, then companies need to take reactive actions,” Ernst said. “But for the time being, [retailers] are leveraging on the brand value, they are leveraging consumer loyalty, and they are gambling on the potential risk that may result in a variation in the fulfillment expectations.”

Warehouses are indeed pricey. Stitch Fix said that cutting its distribution facilities from five to three would help save $10 million to $15 million per year. “This consolidated network will allow us to deliver a better client experience, with access to more inventory for a given fix, while, at the same time, allowing us to operate with lower, more cash-efficient inventory levels,” Katrina Lake, who served as interim CEO of Stitch Fix at that time, said during an earnings call in June.

Big Lots executives said in the company’s first quarter earnings call, that it has cut $100 million in annual costs through measures like shutting down distribution centers, among other initatives. Big Lots closed four of its distribution facilities in Georgia, Pennsylvania, Washington and Indiana.   

“We have internally identified more than $100 million of structural SG&A savings that are now incorporated into our forecast for 2023,” Big Lots CEO Bruce Thorn said during the May earnings call. “These include the impact of our decision to close all four of our forward distribution centers to reduce costs and remove excess capacity.”

But by prioritizing savings retailers could be caught off guard when demand climbs back up, especially as the holiday season rolls around and sales jump much higher than expected, said Steve Scales, a partner in the retail practice at AlixPartners. He said that having fewer distribution centers decreases flexibility and options to fulfill orders during peak holiday shopping periods.

“You’re handicapping future growth,” Scales said. “If there is a significant change in business on the upswing, people can be caught flat-footed and take a long time to react.”