Rebecca Kent (host)
Hello there. Thank you for listening to JLL's perspectives podcast episode three. We're absolutely thrilled at the response to our podcast so far and we've got no doubt this will provide equally great insights.
We're covering the logistics of moving essential goods from suppliers to supermarket or store shelves, through the lens of a consumer good that has gripped the world's attention during the COVID-19 pandemic: toilet paper.
To address the challenges and the opportunities I've got Amy Bentley, who is general manager of supply chain solutions in Australia and New Zealand - global logistics - for Toll Group, and Jamie Guerra who is head of industrial and logistics in Australia, at JLL.
Amy, without wanting to trivialize the massive operation that goes into getting goods to where they need to be, could you summarise for us why we can't get our hands on toilet paper… well, we couldn’t, and in some places we still can't, though I think it's it seems to be picking up just slightly.
Amy Bentley
That’s the ultimate question that everybody seems to be asking. I think it's fascinating. Toll's in a really good place to be able to answer this question because we actually work pretty closely with Kimberly Clark and manage a lot of their warehouse operations nationally. We also look after Coles’ distribution centre in Victoria. So, the biggest reason is it's really difficult to ramp up manufacturing at the best of times, because you depend upon raw materials and things like that.
So, what we're seeing is it's in warehouses, it's actually getting distributed out in much greater quantities than it normally would be. So we're seeing a lot more trucks on the road with toilet paper. But what we're then seeing at the other side is just people are now so concerned about not having toilet paper. Even if they didn't want to panic buy they are, because it's not there within a short space of time.
Because toilet paper is such a big bulky product, you can imagine you can only fit a certain amount of toilet paper on a pallet as compared to something like cans of tomato, where you can fit a lot more on single pallet. So let's say you would typically hold 200 pallets of toilet paper, now you might be holding in a warehouse a thousand pallets of toilet paper, and they have to go somewhere, but you can only hold that amount for a certain period of time.
So the entire chain becomes incrementally higher. For a manufacturer entering into the distribution centre more frequently, and then from the distribution centre into supermarkets or small independent retailer, that’s an incremental amount of traffic as you're trying to manage that storage capability in the middle. And, you know, the good thing is we have a number of additional trucks available because with other retail activity having disappeared we've got the capacity to be able to do it.
Rebecca
How many more trucks are we talking about? How much more movement are we talking about it? If it's possible, maybe give us a picture in numbers.
Amy Bentley
You're talking about almost a quadrupling of a lot of that activity.
Jamie Guerra
I might add to that, because having spoken to a couple of the retailers that we cross paths with, normally in a Christmas event, retailers gear up and supermarkets gear up because they know what happens. So that means extra warehouse space and allowing for it. This is an event which, from a consumer behavioural point of view, has caught people off guard, so trying to scramble to deal with this is a real challenge not just from a manufacturing perspective but from a logistics perspective. The feedback is sales year-on-year being up 20, 30, 40 percent across the whole packaging.
So you can imagine items like toilet paper flour, rice sanitisers - those products that are gone - there's been a massive ramp-up, so the actual manufacturing, the logistics, the warehousing, the deliverables, are where the challenge comes because no-one forecast this, so planning is a is a problem. That impact is flowing across the demand for short-term accommodation for 3PLs (third-party logistics providers) and also the supply chain warehouses of the retailers.
Rebecca Kent
So Jamie, what's the role of the warehouses here? How have they been able to come in and accommodate this huge spike in demand? We've heard of pop-up distribution centres...
Jamie Guerra
I think the other part of it is, we are seeing obviously come-off in lots of other areas of retail. So in the normal course, leases are longer term, they're planned out, and you've got ability to map out and plan out supply chain or logistics. We're seeing very rapid changes both up and down in consumer behaviour, and then what flows from it.
But I think in the in the immediate term, some of the requirements are short term because we don't know how long this will go for. So we're seeing requests where the agent becomes a lot more influential in terms of talking to our clients. Where there may be a retailer that's suffering, there may be a demand that fills it, but that needs to have some flexibility around leases and the ability to grow up and down. We had a recent example where one of the fast food operators needed some cold storage, and because of some of the come off in fish exports and other areas, we're able to identify short term requirements in spaces that normally wouldn't be available.
Rebecca Kent
Is that what you've been seeing, Amy?
Amy Bentley
Yeah, it's a good point. Because we're a 3PL, we often have capacity that's available in our network. So we might have 4000 pallets worth of space somewhere, we would absolutely use that for overflow for, say toilet paper, before we went out to market for anything else. We've got high profile in things like specialty retail, and a lot of those businesses are not operating at present. So we've got the ability to even use those warehouses in the interim whilst they aren’t operating.
Jamie Guerra
So, a bit of that depends on the supply chain, and some of those who have got greater reliance on the 3PLs and externals, versus some of them that do it internally and control it.
What we are seeing is some questions from a supply chain perspective - particularly the manufacturing or the elements that rely on China, imports. Not just the raw product, but for the elements that go with them, the packaging and other parts and so. We've gone through a period of time where efficiency and cost-driven outcomes have led to offshoring. I think questions are now being asked about manufacturing and what what's critical? What do we do onshore? What's the balance? The hard bit is unpacking that. It's not just the one item, it's all the elements that come with it that we tend to rely a lot on.
Amy Bentley
Jamie, I think that's a really valid point. And you know, already there's discussions around what do we do in the future as far as supply chain resilience type questions are concerned, you know, to ensure that you know, we have protection for our local communities, particularly on critical items, so …
Jamie Guerra
Healthcare and those matters you can see in particular, right. So, face masks, and those are things that we now see: hand sanitizers, medication.
Rebecca Kent
I'm interested in both of your assessments on the ability for the supply chain and logistics network, and warehouse network, to respond to dramatic shifts.
Amy Bentley
Supply chains are typically not very quick to change, but there's been a necessity here that has driven a substantial amount of adaptation really quickly. And I'm sure Jamie would be saying this as well - the quick shift by a lot of businesses to an online operating platform to deal with the whole social distancing aspect or the shutdown of their business, in the way that they would typically operate … the entire supply chain has to quickly navigate to being able to contend with that, because you've now got a lot more people required within the distribution side of it to be able to execute those online deliveries. But also, too there's a different way of working to a normal distribution model. So setting up a new channel, quickly has been really fascinating to see.
Jamie Guerra
There's a couple of points on that from me. I guess from a manufacturing perspective, it's interesting, because we've seen a lot of that go offshore. We're seeing so much of that skill set and employee base go, and that's the challenge in terms of when a lot of it's gone, we lose that ability to do it.
The second part that I talked about was around supply chain and we are seeing a lot more movement towards e-commerce. Interestingly, Australia is still well behind behaviour in China or in America. JLL research pegs us at … while we've rapidly grown, we are still just over nine percent of our overall retail spend, whereas, it's almost getting up to towards 30 in America which is well above us. So I think we're starting to see that behaviour evolve and grow. This is likely to fast track it.
Amy Bentley
One of the really pleasing things that we've seen is the number of the constraints we would typically operate under in a logistics context, for example, curfews into stores. The government's really very rapidly moved to disband a lot of those things in the current circumstances. As a global business we see some huge opportunities in what comes after that. There's been some real challenges around being able to maintain environmentally friendly transport networks, cost effective delivery solutions, etcetera, under the current way things are structured. This opens up a whole new opportunity to do things really differently to be able to support businesses and minimize congestion on the roads from an environmental perspective, so I'm excited about that.
Rebecca Kent
So, after normality has resumed, you've got the ear of government and you can present to them a wish list. What will be on that wish list?
Amy Bentley
I think there'd be a few. One would be how do we effectively deliver into businesses. One of the things that a number of people in our logistics space have been talking about for a long time is can we do more deliveries at night, as an example? Because that means we have less trucks on the road when there's less people commuting. And that way, there's less environmental impact, we also get there quicker, which means we use less fuel. So therefore it's better cost outcome.
I'd like to think that with some of the constraints that have been existing around our road network, that some of those will be challenged as well. So for example, can we use B-doubles on a road now, which previously we haven't been allowed. So, I think there's a really good opportunity here to take away some of the sacred cows.
Rebecca Kent
Jamie, how do you think the industrial property capacity can be or capabilities can be optimized along with perhaps some different transport modes to cope with future demand and future spikes in demand?
Jamie Guerra
I think I think we saw a bit of this coming out of post-GFC where, as the recovery came in those typical long-term leases, hard areas... we've seen in office space with the flexible work environment and the equivalent in industrial is having a bit more flexibility within leases, we're starting to see some of that play out. Typically, it's under a sublease arrangement - I talked a bit about the cold store example. You know, I think we're going to have to see greater flex and greater ability – to the point that Amy made - there are some businesses that are going to take less space and some that will take more, and in Toll's case, yeah, that's what they do. They can upscale and down for their clients.
But I think as landlords the challenge is going to be that's not the norm, because of the way that the finance is structured and everything else in relation to valuation and shareholder value, is around leases and return and capital values. So, there's going to need to be a bit of a shift around how the landlord works with various tenants, and I guess as agents, we play a big role in actually bringing that together and communicating across the board.
Rebecca Kent
So what might a more flexible lease look like?
Jamie Guerra
Yeah, well, I guess it's typically floor space. So, having some ability to upscale or downscale sizes and walls and that's not always easy to do given that you've got businesses together, sharing areas sharing yards. But we're seeing bit more of that. The bigger groups who hold multiple estates are certainly prepared to be much more accommodating and being very client focused around a group and saying, ‘hey, you might have outgrown that, but we've got a facility elsewhere we can put you into and because we are the same landlord, we've got flexibility around estates. That goes back to that that institutionalisation of the market and great visibility across multiple markets with owners in that industrial space.
Amy Bentley
Yeah, and I'll add to that, if that's right, Jamie. I think we are going to see a number of businesses not survive this current situation. But also, the flip side is we're going to see a lot of new start-ups or entrepreneurial businesses trying to do something really different off the back of this revolutionary opportunity. So I agree that our industrial facilities need to be a lot more flexible and the structure and construct around those as well. What we might see is a lot of those smaller businesses don't have the volume to be warranting going to 3PL but they might want to band together and say look four different types of businesses will take on a property together, so they've got capacity to grow, and can leverage the fixed costs together. They might say, I just want that for four weeks because I, just want to lease week-to-week because I don't really know whether my business is going to take off or not. So I do think there is going to have to be an adjustment on how we deal with all things relating to being able to support distribution and logistics in Australia in the coming 12-18 months.
Rebecca Kent
I'm interested to know about the role of technology. How reliant has the industrial property network and the logistics network been on technology to respond to current challenges? And does it need to be better?
Amy Bentley
In some cases, a number of businesses are heavily reliant on automation. So if you have automation associated with e-commerce platforms, you will be going gangbusters and that's hugely advantageous to have an automation solution in your online situation right now. But you only have to look to some of our major supermarkets and they've had to actually expand beyond that already just because of the sheer volume. Ultimately, automation still has a throughput threshold, so you can only do so much in 24 hours across automation.
Rebecca Kent
Jamie, I understand once upon a time supermarkets themselves used to have warehouses at the back where they used to store a lot of their stock, and that's no longer the case. Is that right? Can you clear some of that up for me? I understand maybe technology was a driver or the cost of space…
Jamie Guerra
Yeah I think it's been a while since that that was the case. We talked before about the way manufacturing worked and the just-in-time and the reliance on some of the cheaper manufacturing abilities offshore, so we saw a greater drive for efficiencies and return on investment so those products were housed elsewhere.
Amy Bentley
One of the big things in supply chain is ‘safety stock’ and how much you should hold and where you should hold it. I think we’re going to see a shift to probably holding a bit more of things and probably holding a bit more of those critical products, centrally somewhere in Australia. Also, I think we're probably going to see a real shift to decentralisation. We’ve typically look to consolidate major distribution centres in certain locations, but we’ll probably see a larger push into how you could hold more in particular locations closer to the customer base.
Rebecca Kent
Thank you very much for the conversation, Jamie and Amy, and for your insights. Hope to catch up with you sometime again in the not too distant future.
Amy Bentley
Fantastic. Thanks very much, Rebecca. Thanks, Jamie.
Jamie Guerra
Thanks, Amy
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