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Q & A Steve Howard: To Expand or Not to Expand Your Warehousing Facilities. That is the Question.
In warehousing logistics, there’s a great space challenge. When is the right time to expand your warehouse facilities? And when is it time to make better use of what you have?
These are the questions we posed to Steve Howard, President of Esquire Express in Hialeah, FL and a member of the Board of Directors of the Customized Logistics and Delivery Association.
During his 25 years in the logistics business, Steve has done it all: From owning his own warehouse, to leasing space, to expanding and contracting when the economy failed. Today, his business has 65,000 square feet of warehousing space at its disposal and he’s considering expanding in the summer.
Steve offers his advice about balancing the needs of current and future clients with the financial realities of the warehousing business.
Question: The big question is always how much space is too much space?
Howard: It’s always a balance. You want enough to make a profit from existing accounts plus room to grow so that you can keep bringing in new business.
You start with your current clients’ needs. You have to push them to communicate their plans. They don’t always tell you. There has to be good and open dialog with customers in terms of what their future plans are. You need to know about any upcoming spikes in their business so you can adapt. Speak to your clients often about upcoming trends in their business. Don’t be blindsided when things happen. Learn what you can by maintaining two-way communications with your clients.
I did that aggressively at the beginning of 2015. I called all my customers and said, “Look at your crystal ball. What do you see in next year, in the next three years? In the next five? I’m not asking you to commit. I’m trying to get a feeling of what you think the future will hold.” I got some really useable info, which is one reason that I’m considering taking on more space.
Let me tell you what happens when a client blindsides you with a huge influx of business: Last summer, we got caught off guard by a number of our clients who deal with kitchen cabinets. We do a lot of business in this sector. In June the factories were running behind on orders. So they were telling our customers (cabinet retailers) that they needed to order 60 days out. Which they did. Now, here’s the rub: the factories were able to deliver those cabinets in less than a month, but my clients’ customers weren’t ready to accept them. Everything arrived at the beginning of August. We ran out of space to store them until the customers were ready for them. On top of that, two of our larger customers ran massive 10 percent-off sales. There was a huge pent up demand for the product, so lots of people took them up on their offers.
It was a good news/bad news joke for us. We had the business. We were using our space to the max. But we ran out of places to put all the merchandize. It got so bad that we had to rent trailers to hold excess inventory. And because our warehouse was so full, we had to move things around to fulfill orders. When you’re touching things too many times, damages go up and it’s tough to keep track of everything.
Question: What do you consider taking on more space?
Howard: Two things: profitability and market volatility. In the logistics world we’re confined by our four walls. They dictate how much we can take in, how much we can push out and how much new business we can go after. If we’re confined by our four walls, it’s a challenge to attract new business. And there’s where the challenge lies.
On the other hand, if you are paying rent on more space than you’ve got business to fill it, you’ve got a problem. Available (i.e. unused) square feet translates to space you’re not earning income on, but you’re paying for.
Volatility is all about the swings in rental rates for space. If you’re in a stable market in terms of the rental rates, say two or three percent a year, there isn’t the push to nail down a long-term rental rate for a large amount of space with your landlord. But if you’re in a market like mine, where we can see 20 percent spikes in rental rates overnight, you may want to look for longer term arrangements with a landlord to lock in rates.
Question: Speaking of landlords, talk about working with them.
Howard: You want to deal with a landlord who’s both local and flexible. Local because they have the ability to be flexible. They are willing to work with you as you expand and contract over time. Landlords that are used to dealing with logistics companies understand that. It’s a risk they are willing to take, but that’s not the case with big national landlords. They won’t make concessions and they won’t work with you as you expand and contract. My advice is to find a local landlord with significant square footage that’s willing to work with you.
For example, I’m thinking about taking on a third-more space. I have the possibility of a new and rather large customer, but they aren’t ready to commit right now. One of the landlords I’m considering working with is someone who’s willing to allow me to take the 100,000 square feet I need, but only charge me for the space I’m actually using right now. And he’s willing to do that for eight months. After that, he’ll allow me to sub-let any space I don’t need. This allows me to have that space available if the client moves without taking on the expense of paying for the full space while they consider it. That’s why I like dealing with the local guys. They are more willing to make a deal especially if they understand the logistics business.
Whenever I negotiate a new lease I build in certain clauses that allow me to take more square footage when I need it and scale down when I don’t. I won’t do business with a landlord who won’t build that into the contract. Without that clause I’d potentially be paying so much in rent that it would put me out of business.
Question: What about owning your own space? It’s certainly one way to avoid parrying with landlords. What’s been your experience?
Howard: I’ve done it all. I bought a warehouse and office complex at the height of the boom cycle. But I made the mistake of buying a building with just enough space to meet my needs at the time. When I got more business I had to rent space in three other buildings. So there I was, owning one building and renting space in three others. In hindsight, I should have bought a larger building that allowed me to grow instead of one that was perfect for the size at the time. So, the big lesson here is if you’re going to own the property you have to own more than you’re going to need at the time you purchase it.
Now, let’s talk about the ROI of owning a building. If you’re looking to buy a substantially larger building than you need, you have to look at the make-up of tenants who are already in that building. Do they fit with your business? Are they in stable industries so they’ll be able to pay the rent each month? If the economy is strong and rents will go down, will they leave for lower rents? What will the impact of that be on your ability to cover your costs?
Owning a building also taught me another lesson: I don’t want to be a landlord. When you’re the landlord you’re no longer in the logistics business; you’re in the leasing business. You have to worry about everything in that building from the cost of routine maintenance to the expenses that are a result of catastrophic events like hurricanes and snow storms. I found out that I don’t want to be in the leasing business. I want to stay in the logistics business. So I sold the building and now I lease. I don’t have to worry about being a landlord and I don’t miss it.
In the end, it’s all about balance. Balancing current needs, new business prospecting and the return on your investment. And that balance will change at various times in your business’ life. The best advice I can offer is that you keep an eye on the space you have, the needs of your clients and the ultimate profitability of your business.
Steve Howard will also be speaking at the 13th 3PL Summit happening in Chicago June 16th-18th.