Friday 17th Aug 2018 - Logistics Manager Magazine

Central attraction

If people are battling to save their jobs at a factory that makes HP Sauce you know the UK manufacturing industry is in trouble. But with factory workers becoming an endangered species in some parts of the country, are jobs being created in logistics as imports replace goods that were once manufactured?

Not necessarily – many of the pressures that are pushing manufacturing jobs out of Britain are also making it hard to set up logistics and distribution centres.

Traditionally, US-based firms often sited their European operations in the UK for linguistic or cultural reasons, but much of that business has now moved to mainland Europe. It’s a tendency that will only gather pace not only as more manufacturing shifts into eastern Europe but also as local consumer markets grow there.

But firms that import large volumes of goods from the Far East might consider a UK site if they have a large consumer market in that country.

Manufacturing has certainly had a rough time of it in the UK in the past few years and there are many pressures on the labour and property markets to make companies think twice before locating there.

The pressures may be enormous but the UK does have a few things going for it, says Deloitte’s Guy Turner, the director who leads the consultant’s order fulfilment practice. ‘A lot depends on your commodity. If it’s an easy product to export – for example, one that can be couriered – the UK can be attractive.’

And while the Benelux countries may seem the obvious place to put a DC from a geographic and transport standpoint, it can also be hard to find land and labour in these countries. While the UK will never be an ideal spot from which to service the whole of Europe, for a commodity with a strong British market it might also be possible to consider Ireland and Northern France from a UK base.

Moreover, many companies are beginning to question the wisdom of concentrating all their European distribution into a single DC and are instead developing more flexible systems based on a grid of DCs. The UK may not be the best location from which to serve Germany it can be a useful back-up if for some reason it cannot be supplied from the Netherlands, for example. Modern ERP systems make it much easier to take this kind of flexible approach.

But people need to throw away the old logistics textbooks and think carefully about where they site their UK operation. A few decades ago, people drew lines on maps and came up with the small engineering town of Lutterworth as the ideal spot from which to distribute to the country. Nowadays, you can pretty well forget about the Midlands if your warehousing requirements are of any size. Some surprising places are emerging as DC locations, says Turner. ‘One is the M5 corridor – places like Tewkesbury or Gloucester. But you have to be careful not to get too close to Bristol, which has become a bit of a hotspot.’

Jon Sleeman partner for logistics research at property consultant King Sturge points out that a large warehouse-type development could generate perhaps 500 jobs and a cluster of similar developments perhaps 1500- 2,000 jobs, ‘which is a lot to find in some parts of the country.’

There is no shortage of ports in the UK, though almost all the country’s international container traffic is funnelled through Felixstowe, Southampton and Thamesport. Although ports in other parts of the country are attempting to break into the deep sea container business, notably Bristol in the South-West and Teesport in the North-East, other ports cater mainly for transhipment containers or bulk traffic.

Some UK ports have also developed distribution hubs. For example, DIY retailer B&Q has a major DC on Humberside and supermarket Asda has something similar at Teesport.

The UK’s other main outlet to the wider world are the ports of Dover and the Channel Tunnel, both of which are situated in Kent, one of the country’s most crowded corners. Most traffic entering or exiting the country this way is on rubber wheels. Despite high hopes, international rail freight via the Channel Tunnel has not taken off in anything like the hoped-for quantities, although regular services operate between Italy, Germany and rail hubs in the Midlands. The railways also shift significant quantities of deep sea boxes between the main ports and the major inland cities.

Heathrow is the world’s busiest international airport for passengers, but not freight. Gatwick, Manchester and, increasingly, Stansted are other important hubs and many other local airports have seen an upsurge in business, though most of it is, again passenger rather than freight.

Finding the right spot for distribution in the UK, more than in most other European countries, is a delicate balance. You can’t move into too rural an area because labour will not be able to reach you. But move too close to a popular city centre and you will encounter labour shortages.

In an attempt to counter shortages of warehouse workers the UK has resorted to importing labour on a big scale and it is now one of the prime attractors of migrant workers from the eastern members of the EU. Voiceactivated technology has overcome many of the language barriers (and in any case, many migrant workers speak adequate English). The UK’s relatively flexible labour laws are also an attraction, says Turner.

‘For example, we’re starting to see a lot of twilight shifts (6pm to 9 or 10pm) which are especially attractive to ladies with families.’

It’s also far easier to devise systems such as rolling shifts in which a normal 40-hour week is concentrated into a four-day working week, than in many other EU countries. This can be attractive to migrant workers wishing to travel home for the weekend. Even the availability of low-cost airlines from the UK could be a factor in attracting workers to the country, Turner adds.

Kevin Storey, head of industrial at property agent Cushman & Wakefield, says many planning authorities are still biased against warehousing developments on the grounds that they don’t create as many jobs per square foot as manufacturing, and also that many of them are low-paid, low-skill jobs.

A larger footprint
Meanwhile, it is becoming harder than ever to find sites for distribution operations, particularly larger sites in the so-called golden triangle in the Midlands. This has been exacerbated by an increase in typical footprint to around 500,000 sq ft for a distribution centre.

‘Places like Doncaster and Stoke-on-Trent have come to the fore because of land and also labour issues. These are places that previously wouldn’t have been looked at for distribution activities,’ says Storey. Companies are also more willing to accept locations on trunk roads rather than motorways. Some developers have a strategy of building sheds in places where old industries like mining and manufacturing have gone into decline.

Meanwhile it has become hard if not impossible to find any large sites near the northern segment of the M25 orbital motorway around London, says Storey.

Certainly, Greater Manchester has had some success in attracting blue chip companies’ logistics operations, says the area investment agency, MIDAS. Head of business development for the ‘dynamic’ sector, Steve Small says that there is no prejudice against logistics operations in the region, with recent operations attracted to the region including L’Oreal, Heinz and Next. ‘The focus is on increasing gross value-added, and logistics is an integral part of that,’ he says.

Greater Manchester’s strengths include good transport links. It sits midway between the ports of Liverpool and Humberside, has one of the 20 busiest airports in the world and has a rail terminal with regular services to Europe. It also boasts a strong local market (60 per cent of the UK’s businesses are within two hours’ travel) and, perhaps most importantly of all, a strong local labour force with around 44,000 employed in the sector in Greater Manchester alone. Local universities and colleges have also banded together to set up the Logistics College North West. Often, the skills element of the industry is neglected in regional development strategies but the idea in this region, says Small, is ‘to ensure that companies can continue to increase their labour forces’.

Manchester is home to Trafford Park, still one of the largest purpose-built industrial estates in the world and this, together with other developments like Bolton’s Wingate, Kingsway in Rochdale, Ashton Moss to the east of the city and Heywood Distribution Park, ensure that there is a good variety of sites available from 5,000 to 500,000 sq ft.

Trafford Park is typical of its era in that it was developed relatively close to a city centre, long before the days of universal car ownership. The Slough Estates development 18 miles to the west of London is another such example. It’s only in the past 30 years or so that the concept of industrial estates miles from town and city centres has taken hold. Given the difficulties in attracting labour, perhaps the city centre industry is due for a comeback.

The region surrounding Birmingham has also seen an influx of logistics activity in the past few years, says acting director of Black Country  Investment, Charles Roach. Traditionally, this region was the workshop of the world, and while manufacturing is still important, there is recognition that logistics too can play a part in boosting local employment. ‘In fact, over the past two years logistics has become a dominant, if not the dominant sector in terms of filling space,’ he says.

‘One issue here has been getting land in large enough amounts but we’ve found that people are acquiring sites with buildings on them and redeveloping them.’ Historically, sites in the Black Country have been quite small but many logistics companies are assembling larger areas. Some large areas have been created in this way, and there has been a steady stream of enquiries for sites of around 250,000 sq ft.

Recent logistics successes include a DC for retailer TK Maxx and logistics firm Geopost, which moved from a smaller site near Birmingham to a location near junction one of the M5.

The new M6 toll road – the UK’s first tolled motorway built to relieve the existing M6 through the region – has also opened up a swathe of development possibilities in and around Cannock, to the north of Birmingham.

The Black Country is another of those regions that benefits from proximity to large centres of population. In fact, workers in the sector are reportedly bussed from the region to other locations in the north Midlands and this, along with the Working Time Directive, has also been a factor in attracting logistics investment back from some of the more outlying parts of the Midlands, Roach believes. It also has arguably some of the best motorway links in the UK – at least, when they have not succumbed to the UK’s notorious congestion.

Charles Binks, partner at Knight Frank, has done some work for internet fulfilment operators looking for sites in the region. ‘Their requirements are different from mainstream logistics players. They need no more than 150,000 to 250,000 sq ft and they want to be close to labour and the hubs of the overnight parcels operators. For one customer in north Birmingham, we came up with a cluster of four sites.’

Faced with all these pressures, does anyone seriously consider the UK as a location for international distribution these days? Peter Anderson, IBM’s supply chain transformation leader for UK, Ireland and South Africa, says that international distribution from a UK base is not dead but concentrated almost entirely on high-value, low-volume goods for which air freight is suitable. But even here, land prices near Heathrow are extremely high – among the highest in Europe. Virtually all the major distribution developments are to satisfy the UK domestic market.

Storey says one emerging trend is for companies to set up satellite hubs in and around the south of England, mainly to counter increasing congestion and higher transport costs, which are making it harder and more expensive to feed goods into the London area.

Binks says that while the UK is not an ideal location for a European DC geographically, some international firms do base themselves there because of the size of the consumer market. Clothing retailer Gap, which has sited its European DC at Rugby in the English Midlands, is one such company.

Binks notes ‘a change in the dynamic of the UK property market, especially for units of 500,000 sq m or more. Areas like South Yorkshire have come on stream.’ The attraction of the north of England is that ‘you can still get big sites and there is good labour availability’, he explains.

Pressure on property costs continues, especially in traditional favourite distribution industry spots like the Midlands, although closure of yet more of the region’s motor industry might free up some space. ‘It’s one reason why areas of the North-West – places like Skelmersdale, Widnes and Runcorn – have become popular, or South Yorkshire and towards the Humber,’ says Binks.

But another interesting phenomenon has developed in the South-East of England around London – the big, empty distribution shed.

‘Around London, there has been a lot of speculative development of sizeable sheds but at rents of about £8 ($12) per sq foot. How many people can justify having their main DC there?’ asks Binks.

Research by Knight Frank for one major retailer suggests that a better solution might be to have a smaller site to serve London, with a main hub further afield. ‘We found that even moving to a location like Bedford, you could drop the rental figure to something like £5.75 ($8.5),’ he adds.

It’s interesting to speculate whether the market might one day correct itself and some of these big empty sheds might come on the market at more reasonable rents.

There are some big parcels of unused land in some of the less-favoured eastern parts of London, although the Olympics might soak up some of the surplus. But there are hug tranches of land in places like Purfleet, well away from the main Olympics site, standing idle. All it needs is for prices to come down to more reasonable levels.

Binks also sees growing activity in the UK ports – at least in those that have sufficient space in their dock estates. ‘But we’re also looking at inland locations that have good rail connections to the ports.’

While there was a flurry of building railconnected distribution sites in the early to mid- 1990s in anticipation of large amounts of rail traffic moving to and from the Continent (most of which failed to develop) the emphasis is now on rail movements to and from the deep sea ports. ‘Consider that the planning consent for the expansion of the ports of Felixstowe and Harwich stipulated that at least 30 per cent of the traffic should move by rail. But rail also has the advantage – if you can move it by train all the way without having to use road transport, you can pack up to 40 per cent more into the container than for a road movement.’

Jon Sleeman of King Sturge, says that it is important to take a macro approach. ‘Certainly, if you want a big warehouse in one or two specific locations you’ll find there’s a shortage but there has been quite a lot of building going on in the UK lately.’

Speculative building boom
What has changed in the past 10 years, he says, is that there has been a lot more speculative building of 500,000 sq ft properties by the likes of Prologis, Gazeley, Rosemound, Astral and Gladman. ‘I wouldn’t say there’s an immediate shortage of space.’

But statistics suggest there is a lot of quite old building stock in the UK and much of it may not meet the needs of the logistics industry. Tearing down and rebuilding is always an option of course, provided planning consent can be obtained.

Local authorities vary widely in this respect, says Sleeman. ‘When a lot of the big warehouse developments came in during the late 1980s and early 1990s, it coincided with a severe recession and a lot of planning authorities were welcoming, reasoning perhaps that warehousing jobs were better than no jobs at all. But the UK is now in its 15th year of consecutive growth, the jobs market is tighter and local authorities are having second thoughts. Some authorities are hostile to “big box” developments because they are seen as generating fewer jobs than manufacturing and there are perceived traffic problems. And in some areas, like London, there is land competition from other uses, notably housing and retailing. Some of the buildings on the edges of industrial developments are going over to retail and residential use.’

Heathrow is a market apart, with rentals climbing into the low teens, says Binks. What was considered the Heathrow property market has been spreading from the Feltham area northward to spots near the M4 motorway.

Of course, it is debatable whether a true logistics centre generates fewer jobs than manufacturing, always assuming that manufacturers can be enticed away from the low-cost countries of Asia or East Europe anyway. King Sturge’s research with Cranfield University suggests that while 68 per cent of jobs in warehousing developments are warehouse staff, a significant proportion are managerial or administrative. And arguably, the equivalent to yesterday’s assembly line manufacturing jobs are things like configuring goods for market or other postponement-type operations on goods that have been made in the Far East.

A significant trend throughout Europe, but most noticeably in the UK, is for ports to attract more logistics activities. ‘A lot more developers are now looking to seaports for these activities,’ says Sleeman. There has been a huge growth in containerised imports and one school of thought says that money can be saved by cutting out the movement from wherever the goods are taken out of containers to the national distribution centre. The theory goes – why not create the DC at the port itself and fan out from there to regional distribution centres or maybe direct to the retail outlet?

Examples of UK firms that have taken this approach are Asda, with a big DC for imported goods at Teesport in the North-East, and B&Q with a similar development on Humberside. This is also one of the attractions of the planned London Gateway port on the Thames, creating a 10 million sq ft logistics park in a region that not only contains a large number of consumers but is also in a part of the country where logistics space has traditionally been hard to come by.

IBM’s Anderson adds that other factors are subtly changing the UK distribution property market. One is the move to globalisation which, he says, has increased demand for logistics hubs in the UK because firms manufacturing thousands of miles away cannot afford to eliminate local stock holding in the same way that a UK-based manufacturer might contemplate.

A move to parts hubs
Another interesting influence is the ending of block exemption in the European car servicing market which has forced car manufacturers to set up parts hubs within eight hours of customers in order to compete with independent repairers. ‘We’re seeing much the same logistics patterns as in other sectors, such as pharmaceutical, where service levels are crucial,’ says Anderson.

But he does not believe that the Working Time Directive or increasing congestion on UK roads has had much effect on logistics networks, mainly because 3PLs have built networks that take these things into account.

What has happened is that companies have been forced to take unprecedented steps to get around labour shortages. One is the recruitment of labour from abroad, notably Poland, while the other is to look more closely at desired service levels and segment the supply chain accordingly. For instance, it might be possible to warehouse slow-moving or obsolete stock in a really cheap location – maybe somewhere remote like mid-Wales or a defunct manufacturing site. To some extent, firms can also locate their main distribution activities in a seemingly unfavourable location if it makes sense from a cost – and possibly taxation – point of view. After all, for many years much of Europe’s electronic assembly industry operated out of Ireland.

Also, Anderson points out that whatever is said about the high cost of land and labour in Britain, studies rank it consistently in the bottom third in Europe in this regard. The UK is still one of the leading attractors of investment, mainly on the back of the boom in retailing and its associated supply chain.