The demand figure behind every logistics forecast, built from inventory days, the value of a pallet and how much of an e-commerce shed is racking at all.
Work back from the stock: sales at cost, times days of inventory, divided by the value of goods on a pallet, gives the pallets to store; positions per m² of racking and the share of the building that is racking turn that into floorspace. For an illustrative online retailer with 60 days of stock and $2,500 of goods per pallet, $1 billion of sales needs about 45,841 m², roughly 0.49 million sq ft. Halve the value per pallet or double the stock days and the answer doubles, which is why rules of thumb for this figure disagree so widely.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
| Input | Value |
|---|---|
| Online sales a year | $1,000,000,000 |
| Gross margin, so cost of goods is 60% | 40% |
| Days of inventory held | 60 |
| Value of goods on one pallet, at cost | $2,500 |
| Average utilisation of pallet positions | 85% |
| Pallet positions per m² of racking zone | 2.25 |
| Racking zone as a share of the building | 45% |
| Rent per m² a year (illustrative) | $85 |
The 2.25 positions per m² of racking zone is a wide-aisle layout with six or so beam levels under 12 m of clear height, as built up in how many pallet positions fit in a warehouse. The 45 per cent racking share is low for a warehouse and typical of e-commerce, where pick faces, packing, sortation, returns and a large dock and marshalling area take the rest.
1. Cost of goods = $1,000,000,000 × 60% = $600,000,000
2. Inventory at cost = 600,000,000 × 60 / 365 = $98,630,137 (6.1 turns a year)
3. Pallets of stock = 98,630,137 / 2,500 = 39,452
4. Pallet positions = 39,452 / 85% = 46,414
5. Racking zone = 46,414 / 2.25 = 20,629 m²
6. Building = 20,629 / 45% = 45,841 m², or 493,430 sq ft
Excel: =Sales*(1-GM)*Days/365/ValuePerPallet/Util/PosPerM2/RackShare
The other 25,213 m², 55 per cent of the building, holds no stock at all. In a traditional retail distribution centre shipping whole cases to stores the racking share would be higher, and the same inventory would need less floor.
At $85 per m² the rent is $3,896,499 a year, 0.39 per cent of sales. At an average order of $60 the building ships 16.7 million orders a year, 364 per m², and the rent is $0.23 an order. That is why occupiers in e-commerce are relatively insensitive to rent and highly sensitive to location: a few cents of rent per order is small against the delivery cost of the same order, and a building closer to customers saves more than it costs. The same logic, applied to labour, is worked in how much more rent a labour saving buys.
| Days of inventory | $1,000 a pallet | $2,500 a pallet | $5,000 a pallet |
|---|---|---|---|
| 30 | 57,301 | 22,921 | 11,460 |
| 60 | 114,603 | 45,841 | 22,921 |
| 90 | 171,904 | 68,762 | 34,381 |
| Days of inventory | $1,000 a pallet | $2,500 a pallet | $5,000 a pallet |
|---|---|---|---|
| 30 | 0.62 | 0.25 | 0.12 |
| 60 | 1.23 | 0.49 | 0.25 |
| 90 | 1.85 | 0.74 | 0.37 |
Across a plausible range the answer moves fifteenfold, from 11,460 m² for a fast-turning seller of small, valuable goods to 171,904 m² for a slow-turning seller of bulky, cheap ones. Furniture, garden products and bulky homewares sit on the left of the grid; electronics, cosmetics and pharmacy on the right. The racking share moves it too: at 30 per cent the base case needs 68,762 m², at 60 per cent 34,381 m².
Any single figure of floorspace per billion of online sales is an average over a mix of retailers. Applied to one occupier, or to a forecast of demand in one region, it needs the occupier's own inventory days and value density, which is a short calculation and changes the answer by more than any change in the online share.
Using sales instead of cost of goods for the stock. Inventory is carried at cost, and at a 40 per cent gross margin using sales overstates the stock by two thirds and the building with it. The second mistake is to convert pallets into floorspace at the gross area of the building divided by the pallet footprint, which ignores the aisles and the levels; the third, specific to e-commerce, is to assume a racking share from a traditional distribution centre, when the packing and sortation areas can take more than half the floor.
The book works occupier demand back to the building in the same way, from the goods to the cube to the rent; the models are in the free workbook for this case.
Because the answer scales directly with days of inventory and inversely with the value of goods on a pallet, and both vary enormously by product. In the worked grid, 30 days at $5,000 a pallet needs 11,460 m² per $1 billion of sales, while 90 days at $1,000 a pallet needs 171,904 m², a fifteenfold range.
Picking single items, packing parcels, sorting by carrier and handling returns all take floor that holds no stock. In the worked case racking is only 45 per cent of the building; the other 25,213 m² is operations. With a 60 per cent racking share the same inventory would need 34,381 m² instead of 45,841.
Usually a small share. At an illustrative $85 per m² the 45,841 m² building costs $3,896,499 a year, 0.39 per cent of $1 billion of sales, or $0.23 on each of 16.7 million orders at $60. Delivery and labour costs per order are far larger, which is why location outweighs rent.
This article is one calculation from Logistics and Industrial Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.