A giant box rising from the rubble of a former power station at London's Park Royal estate seems to justify the tide of excitement over the impact of electronic commerce on property. Behind media clamour about potential takeovers, management changes and the impending death of the high street, Sainsbury's has quietly made its bet on the future of retailing.
Powergate is one of the first warehouses designed for the Internet. More than 11,000 sq metres of electronically-driven storage space will be the 'picking' centre for groceries ordered by thousands of home shoppers across the capital. Is this the template for a new kind of distribution network for the 21st century? Sainsbury seems to believe so. Development executive Steve Mitchell is already considering others around the South East and says increasing demand could eventually see a spread across the UK. Arch-rival Asda shares a similar vision, with picking centres each side of London in Croydon and Watford and two more planned by the end of the year. 'Within five years we would aim for 12 to 15 across the UK,' says spokeswoman Rachel Fellowes. And that strategy was worked out before Wal-Mart gobbled up the supermarket group, so there could be even more ambitious plans in the pipeline.
A huge questionmark hangs over this vision of automated warehouses serving home shoppers, however. Tesco, which has tenaciously held onto its position as the country's leading food retailer, scoffs at the whole idea. Despite pioneering home shopping in 1998 and planning a huge expansion to more than 300 stores this year, it does not expect to need a single new warehouse. 'We could not find business model in the world that showed grocery shopping to be profitable based on picking centres,' says spokesman Russell Craig. Instead, the group is running the service from existing stores.
This is not too distant from Sainsbury, which will be feeding goods from its picking centre to 27 stores, where deliveries will be split for trans-shipment to doorsteps. The crucial factor is that these are break-bulk additions to each store rather than using staff to plunder the existing shelves. Somerfield leans more to the Sainsbury model. It bought Flannagans, a south London firm, to deliver to online shoppers from dedicated depots. The group, along with Waitrose, is also extending into a slightly different customer base by delivering to workplaces. Orders can be bundled into larger shipments and delivered a couple of times a day rather than scattered in small numbers around a wide area.
Profits will not be easy to find. 'We have spent years cutting staff and creating large stores to help trim prices. Now we are adding them back,' said one insider. 'But we can't afford not to do it in case we lose customers.'
No-one expects stores to close as tele-shopping takes off. It is seen as an add-on rather than a substitute. 'We are still passionate about getting customers in the door,' says Fellowes - which accounts for a barrage of gimmicks like in-store weddings, concerts and Elvis lookalike concerts. Tesco points out that home deliveries reached 125m pounds last year and could quadruple this year. But in-store sales 18.5bn pounds and are still rising.
This leaves the property industry in a quandary. How do you plan for a future when it comes in such variety and is still so uncertain even among advocates? 'Guess,' says one retail consultant.
THE VISION
Industrial real estate is on the threshold of revolutionary change, according to Jones Lang LaSalle Research, which took a long, hard look into its crystal ball at the potential impact of electronic systems on warehousing. At one extreme, home shoppers will demand fast, efficient service. This is already generating 'fulfilment centres' around town centres - close enough to get fresh produce delivered quickly. At the other, a shake-up in supply chains will lead to high-tech mega-centres, distributing across whole countries or continents. A classic example is the 70,000 sq metres being created by ProLogis at Milton Keynes for Amazon, the online bookseller.
'The sheer scale of these units balances any temptingly provocative argument that e-tailing, with direct contact between supplier and client, will lead to the demise of sheds,' says the report. In other words, the most advanced on-line electronic systems will still need to move goods around. The difference is that the market will become much more sophisticated in its choices. Property will become an 'interactive touchdown facility' in a fast-moving supply chain. The focus will move from bricks and mortar to clicks and mortar as businesses integrate online ordering and business-to-business deliveries into the physical infrastructure.
THE SCEPTICS
The anticipation of wholesale and rapid change is rare at the sharp end of the market, even among those working closely with a new generation of e-tailers. 'I may be a cynic but you have to question whether the switch to Internet trading will be significant enough to alter the traditional pattern of warehousing,' says Paul Harknett of warehousing specialists Brown Harknett.
Less than 2% of Britain's annual retail turnover is estimated to come via online shopping and few insiders believe this will expand much beyond 5% in the next decade. 'But no-one knows how much business will be done on the Internet, so no-one can put their shirt on a new kind of network,' says Harknett.
And while Amazon is held up as an example of the new order, he points out that WH Smith is embarking on the same course from its Swindon base with no special request for extra warehousing. In fact, non-food retailers are conspicuously absent from the market for a new kind of distribution network.
Bruce Usher, leasing manager at Slough Estates, might be expected to bang the drum for Amazonian operations, as he gave the bookseller its first toehold in the UK with a second-hand 3,700 sq metre shed on the firm's giant trading estate. But he, too, is cautious about the potential for change across the market. 'Remember that many goods bought on the high street are already delivered remotely. You don't take a washing machine home from Comet or a sofa from IKEA. It comes from a warehouse. A lot of business supplies like stationery also comes from phone or fax orders. Moving this onto the Internet will not change the places where they are stored.
'I understand that speed of delivery is the key to e-commerce but that is also the case with the current system. That is why the best locations are on good motorway links. The danger will be to those which are not already well-located, or food warehouses which cannot easily service overnight delivery.'
Physical rather than virtual access also dominates the thinking of Duncan Moss as he plans a new generation of giant distribution parks around the UK for Burford. 'It is increasingly important that if you order something, you want it tomorrow, but this is already the essence of our thinking,' he says.
Cabot Park in Bristol and the recently announced Trafford development in Manchester are located specifically to link road, rail and sea, so bulk loads can be broken and stored for fast overnight delivery. A network of centres will be aimed at offering proximity to all the large markets and at 5m sq ft each, to provide a spread of accommodation for new occupiers who do not know what it will need tomorrow, let alone in five years.
Andy Galliford, head of industrial at Jones Lang LaSalle, says his firm's research shows that outdated and poorly located regional centres will suffer but the better ones will survive. Fast-moving goods with unpredictable demand levels or the need for protective environments like refrigeration will still need strategic centres.
The bulk of distribution will still flow through conventional outlets, adds Giles Scott of Chesterton. Food retailers and furniture manufacturers will need to get their goods to stores, while confectioners and tyre producers will still focus on delivery to garage forecourts. Regional centres could change imperceptibly, however, into consolidation points, where different kinds of goods are brought together under the same roof.
The grey area surrounds choices by new types of retailer. Amazon is not a good template for most start-ups. Despite some outrageous market valuations, most are still working on a wing and a prayer. Giant, expensive sheds are out of the question until reserves - and covenant strength - are established. Most demand appears to focus on much smaller, older premises. Andrew Johnson of Chancerygate, which is building Sainsbury's centre at Park Royal, has a dozen or so e-tailers buzzing around his second-hand space at Hayes in west London.
'Speed is the essence,' he says. 'These operators want to be up and running tomorrow, so they look for existing space at the right price.' The other crucial factor is flexibility. Short leases and break clauses are important when you don't know what the future holds. Whether tenants can get them is another matter. Landlords are not keen on start-ups with minimal covenant strength.
'This is something the property industry will have to solve, as it is not going to go away,' says Charlie Binks of Fuller Peiser. Terms and buildings will need to be flexible enough for such a young and thrusting sector.
Slough says it is already on the case. 'We agree to rip up any lease for an occupier wanting to trade up to larger premises,' says Usher. The only reason Amazon looked elsewhere was that Usher did not have the land at that time to handle such a big jump from the first foothold to a national distribution centre.
THIRD PARTIES
Distributors are adjusting to the Internet revolution a lot faster than their landlords, and their expertise could be vital to guide investors through the fog of uncertainty. Shippers are already urging manufacturers to create new kinds of vehicle geared to doorstep deliveries. Iveco Ford, one of Europe's largest motor producers, expects the home delivery sector to boom from around 400m to 6 billion pounds in the next three years sand is developing a fleet capable of fast turnaround of smaller loads.
That could indicate the type of property distributors will demand in future. Standard Life's plans at London's Park Royal had to be rejigged by developer Chancerygate to include 18 small dock doors for outbound traffic - twice as many as incoming - to meet Sainsbury's needs. The delay and redesign could have cost around 1m pounds. Fortunately, Chancerygate builds its own property via Trak Construction, so costs were minimised. But this kind of uncertainty over design requirements could make investors think twice about speculative development.
One solution is to consider joint ventures with distributors. Occupiers have already got this message, says Fiona O'Callaghan of FPD Savills. Preliminary findings from a study of the impact of e-commerce and warehousing due to be published soon shows that more than 80% of firms use third-party distributors . Part of the Amazon development in Milton Keynes, for instance, includes a purpose-built Royal Mail depot.
'A lot more of these partnerships will emerge as Internet retailers farm out deliveries,' she says. These are likely to be with big names like NFC - recently renamed Exel. The company has already built a flourishing business in the US with virtual retailers. In this country it has helped Rover streamline deliveries by replacing five buildings around the Oxford car plant with one assembly building.
'The quest for quality at lower prices with faster delivery will increase corporate alliances and outsourcing to third parties and demand for larger, technically advanced warehouses,' says the 'Bricks and Clicks' report by JLL Research. This could have a downside for developers, however. Giles Scott at Chesterton points out that slicker supply chains have left businesses like Booker with surplus space in existing warehousing. This could be adjusted for home deliveries or even farmed out, reducing the potential demand for new space.
Brown Harknett has found this already happening in a straw poll among its national chain of clients. 'One major distributor which has taken on home deliveries for some big names said it had no interest in acquiring space in the near future as it could handle everything internally,' says Paul Harknett.
That offers some interesting possibilities that e-tailers may begin treating third-party depots as magnets for their call centres, raising the value of surrounding property in areas which have tended to be low key. But it could be a mistake. 'Warehousing and call centres should be kept strictly separate,' says Andrew Jenkins of BT. They require different types of labour skills.' An even bigger mistake would be to combine the two in single buildings as some are already doing as investors would be unwilling to pay the higher prices demanded when content creeps up to 20%.
But things may change. 'The fundamental truth is that no-one is really sure how the sector will develop,' says Binks. 'Even the retailers are all on a steep learning curve, which is why they want short leases. What is right today may not be right next year.'