How online retail is shaping Tokyo’s logistics real estateMay 2015

The Click Revolution

Industrial & Logistics Japan

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How online retail is shaping Tokyo’s logistics real estate

There is enormous growth potential for online retail in Japan and the sector’s double-digit growth momentum is expected to continue.The e-commerce market is forecast to be worth JPY 25.1 trillion in 2020 with a compounded annual growth rate of 11.9%.

We anticipate that the growth of the online retail market will have a positive impact on logistic real estate demand in Japan, which is expected to top 4.4 million tsubo in 2020. For the Kanto Region (where Tokyo is located), this represents an additional requirement of almost 150,000 tsubo per year towards 2020.

The additional demand for space from the online retail market is equivalent to more than 80% of the known new supply to be delivered to the Greater Tokyo market on an annual basis over the next few years. This shortfall between demand and supply will likely put upward pressure on rents.

Not only is there a supply shortfall in the Greater Tokyo market, but the logistics market in Japan has traditionally been dominated by lower grade warehouses, with an undersupply of modern facilities. The bullish growth of online retail will hopefully push developers and landlords to deliver higher grade assets to the market.

-commerce tenants offer a number of bene ts that make them more attractive compared to other warehouse occupiers, particularly given the bullish outlook on the growth of the sector. That said, the opportunity comes with its fair share of risks and challenges.

Japan’s e-commerce market will almost double in size in 2020

Online retail will create additional demand for logistics space in Greater Tokyo

Greater Tokyo’s supply pipeline is not fully equipped to service this new demand

Higher grade logistics facilities will come onto the market in response to online retail demand

Vast upside potential for investors exists, despite risks and challenges

Tokyo’s logistics real estate sector is ripe for disruption and the thriving online retail market will fuel much of that transformation towards 2020.

Despite having one of the world’s highest internet penetration rates, only a small fraction of retail sales are actually transacted online in Japan. This is set to change as online shopping evolves from a sporadic activity to something more habitual.

Already, traditional brick-and-mortar retailers are expanding their logistics real estate footprint to accommodate growing online sales. Pure e-commerce players such as Amazon and Rakuten are also aggressively developing their stronghold in the market.

In this whitepaper, JLL will explore the trends driving online retail growth in Japan, its effect on logistics space demand and how market supply should respond.

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1 Rakuten Largest e-commerce retailer

2 Amazon Biggest online book retailer; also offers general merchandise

3 Yahoo Online information portal that offers online shopping in addition to its search engine and Internet directory

4 Japanet Takata Direct sales company, based in Kyushu. Established in 1986, started online sales in 2000

5 Senshukai Catalog retailer

6 Start Today Operates ZozoTown website, established in 1998; Specialty is apparel

7 Nissen Mail-oder/catalog retailer targeting women 25 to 59;

8 Joshin Denki Leading Large-scale discount consumer electronics chain operator

9 Dell Dell’s Japanese subsidiary; sells PCs and peripherals

10 Stream Online retailer of PCs and home electronics

Japan may be home to some of the world‘s most connected consumers, but online shopping has only recently caught on.

There are a number of reasons for this, many of which are cultural. Japanese consumers are incredibly discerning and quality conscious, which means that they prefer shopping in stores rather than ‘take a gamble’ on a product they can’t see. Anxiety regarding security and credit card fraud has also fuelled reticence towards online retail.

At the same time, traditional Japanese retailers have been largely sceptical about the success of online sales. They also face many

The online retail market in Japan will nearly double in size in 20201

Japan’s Top 10 Online Retailers By User

hurdles adapting their supply chain networks to accommodate the speci c needs of online retail such as ful lment and logistics, online shopping experience and customer lifecycle management.

According to McKinsey1, 7 out of 10 of Japan’s top online retailers are pure players, compared with the US where 7 out of 10 online retailers are brick and mortar retailers.

1 Source: McKinsey & Company, “Online Retail in Japan: Too Late for New Entrants?” July 2012

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Retailers that do attempt to distribute online also face stiff competition from established players and as a result, feel compelled to invest heavily in infrastructure and marketing in order to stay competitive.

This explains why many retailers opt to trade on Rakuten instead. This home-grown retail giant is primarily an ‘online shopping mall’ with more than 40,000 merchants. In 2014, its merchandise sales topped JPY 2.01 trillion roughly around one third of the entire online retail market in Japan. Merchants big and small set up digital shopfronts, while Rakuten takes care of hosting, advertising and payment processing. On top of this, Rakuten also sells and distributes its own products.

Japan’s number two online retailer is Amazon, with a reported US$7.91 billion in sales in 2014. Amazon entered the market in 2000 and since then has been aggressively adding new product categories and expanding its ful lment network nationwide to nine facilities.

Currently, online retail (ie the sale of physical goods) makes up 52% of all e-commerce transactions in Japan and is worth JPY 5.84 trillion. Of this, the most popular purchase categories in Japan consist of apparel and footwear, media products and F&B.

Breakdown of Japan’s E-commerce Sales

Top Online Retail Categories in Japan, 2014

Retail 52%

Services18%

IT24%

Other 6%

Source : Japan Ministry of Economy, Trade and Industry 2013

USD billionSource : Euromonitor International

Traditional Toys and Games (0.40)

9 8 7 6 5 4 3 2 1 0

Food and Drink (5.30)

Media Products (5.50)

Housewares and Home Furnishings (2.31)

Home Improvements (0.50)

Home Care (0.10)

Consumer Appliances (1.29)

Consumer Healthcare (0.60)

Consumer Electronics and Video Games Hardware (3.00)

Apparel and Footwear (8.00)

Beauty and Personal Care (2.60)

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A signi cant share of these products is transacted through Amazon and Rakuten. In fact, the two retailers make up more than half of all online retail sales in Japan.

Japan’s e-commerce market as a whole doubled in size from 2008 to 2013, where it hit JPY 11.17 trillion. However, the e-commerce to total retail sales ratio is relatively low at 4.9% when compared to that of the US (6.5%) and UK (13%) . This quickly changing as more and more consumers embrace the channel.

According to Nomura Research Institute, the e-commerce market is forecast to be worth JPY 25.1 trillion in 2020 with a compounded annual growth rate of 11.9%.

■E-commerce Market (left scale) 　 EC Ratio (right scale)

Source : Japan Ministry of Economy, Trade and Industry and Nomura Research Institute

0 0%

1%

2%

3%

4%

5%

6%

7%

8%

5

10

15

20

25

30

E E E

JPY trillion

6.09

2008

6.70

2009

7.79

2010

8.46

2011

9.51 11.17

20132012

12.80

2014

14.40

2015

25.10

2020

E-commerce Sales in Japan

Unite

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China

Finlan

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Norw

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South

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Denm

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US

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14%

16%

13%

10.1% 9.8% 9.7% 9% 8.6%

7.3%6.5%

5.2%4.9% 4.6%

Online Sales vs Total Retail Sales, 2014

Source : Quartz and eMarketer, December 2014

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Rising smartphone and mobile commerce adoption will play a key role in the growth of the sector. For example, last year, orders through mobile devices accounted for 44% of overall sales at Rakuten.

Japan’s ageing population will also encourage more consumers to buy online as opposed to visiting physical stores, especially for the purchase of groceries and household goods. Several retailers have already started to react, through implementing more ef cient e-com-merce infrastructure (see sidebar). This is expected to have a major impact on the design and location of logistics and warehouse facilities serving the online retail sector.

In fact, Japan’s largest truck express delivery provider, Yamato Holdings invested JPY140 billion on its largest processing warehouse next to Tokyo’s Haneda airport. Yamato is taking advantage of a boom in online buying that has boosted express parcel deliveries more than 10-fold in the past three decades in Japan. The new complex, known as Haneda Chronogate, offers 200,000 square metres of sorting space and will be better equipped to service same day package deliveries.

There is enormous growth potential for online retail in Japan and the sector’s double-digit growth momentum is expected to continue.

Why convenience stores are the new battleground for online retailers in Japan

By 2020, almost a third of Japan’s population will be over the age of 65. This poses a signi cant ‘last mile’ challenge for retail operators. As this demographic becomes less physically able and convenience becomes a priority, how can retailers structure their distribution chain to better serve their customers?

Seven & i Holdings Co. is tackling the ‘last mile’ challenge head on through leveraging its vast network of 7-Eleven convenience stores. With some 5,500 locations in Greater Tokyo alone, Seven & i Holdings intends to offer free delivery on a variety of products as long as the customer is willing to pick their purchase up at a local 7-Eleven. This initiative is likely to come into effect sometime next year, but the company is already in the midst of a trial run involving magazines.

According to Seven & i Holdings President Noritoshi Murata, the company will focus on implementing an omnichannel strategy across its retail network which includes Ito-Yokado supermarkets and Seibu department stores. The strategy will require an investment of close to ¥100 billion and involve organising over 18,000 retail locations and over three million separate products and channel them all into delivery through 7-Eleven stores.

Lawson, the second largest convenience store operator in Japan is not expected to sit idly by and has formed a new delivery company SG Lawson in partnership with Sagawa Express. Under the new deal announced in April 2015, SG Lawson will offer home deliveries from Lawsons outlets around Japan starting with Tokyo’s Setagaya Ward.

This is a boon for shoppers in Japan who can look forward to speedier and even more convenient delivery options in the immediate future.

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With the uplift in the online retail market towards 2020, how will this affect demand for logistics real estate space in Japan?

Through one-on-one interviews and surveys with major online retailers, JLL has formulated an online retail sales-to-space ratio of 2.8. That is, one tsubo of space typically generates JPY 2.8 million of annual sales revenue in Japan.

Based on online retail market forecast for Japan, we expect total logistics demand in 2020 to hit 4.4 million tsubo, representing an increase of 2 million tsubo from today.

As Japan’s distribution network is very much regionalised, operators tend to run distribution for a particular region out of one or two dedicated distribution centre. Assuming 44% of online retail transactions will continue to take place in the Kanto region (where Tokyo is located), it is expected that the demand for logistics space will increase by 880,000 tsubo from now until 2020 or 146,667 tsubo annually. This is taking the conservative assumption that the pace of growth will remain stable and linear.

The growth of online retail will create additional demand for logistics space2

Source: Japan Ministry of Economy, Trade and Industry, Nomura Research Institute, and retail segment forecast by JLL

Source: Statistics Bureau, Japan Ministry of Internal Affairs and Communications, January 2015

2014 E0

CY

JPY trillion

5

10

15

20

25

30

2020 (F)

■ Retail E-commerce Market　　■ Others

Online Retail Sales Forecast in Japan

6.65

6.15

12.35

12.75

Online Retail Split by Regional Share

Established online retailers typically occupy space directly, either by ownership or leasing from major landlords. Many others nd it more cost effective to engage the services of third-party logistics providers (3PL) with expertise in online distribution. These smaller users also have more modest requirements that do not often warrant a single

occupation, such as the majority of members of the Japan Direct Market Association (JADMA) who make up a sign icant portion of online retail sales in Japan.

For example, in the last few years, both Zara and Toys R Us have successfully launched their e-commerce platforms in Japan. Zara uses the 3PL and warehouse services of Sagawa and Toys R Us employs the 3PL services of DB Schenker which leases the space from a third party landlord. These 3PLs typically handle warehousing, order ful lment, packaging and distribution.

Given the long term growth prospects for e-commerce, 3PLs are keen to increase their e-commerce client bases and have begun providing logistics services tailored to e-commerce rms and traditional merchants establishing an online presence.

3PLs will also look to capitalise on the growing number of retailers looking to break away from distributing via an online retail malls such as Rakuten and Zozotown (Start Today). As these retailers’ online presence matures, they will look to establish their own standalone operations and expand their warehousing facilities to accommodate space-intensive picking and packing for online orders.

44%Kanto

(Tokyo area )

15%Kinki

(Osaka area)

11%Tokai

(Nagoya area)

8% Kyushu & Okinawa

6%Chugoku

6%Tohoku

HokkaidoHokuriku

Shikoku

4%4% 2

%

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Many major e-commerce players prefer to lease space nowadays as opposed to owning space compared to 10 years ago. For example, Mapletree is the landlord for one of Amazon’s biggest facilities in the world in Odawara City and Daiwa House has recently announced a huge BTS development facility for UNIQLO.

The growth in leased space for these e-commerce players in Japan is still not quite as prevalent as it is in China but should increase in Japan given that these e-commerce groups prefer to remain asset light.

Knowing this, our projection on logistics demand highlights a signi cant supply shortage in the Greater Tokyo market. The additional annual supply of 146,667 tsubo required to service the growth of online retail is more than 80% of the known supply to be delivered to the Greater Tokyo market on an annual basis.

This shortfall between demand and supply will likely put upward pressure on rents but more importantly pinpoints opportunities for new supply to come onto the market.

Greater Tokyo’s supply pipeline is not fully equipped to service this new demand3

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F 2017F

0.15

0.00CY

million tsubo

0.20

0.05

0.25

0.10

0.30

0.35

0.40

0.45

Supply of Modern Logistics Facilities in Greater Tokyo

Source : JLL

0.02

0.15

0.31

0.17

0.03

0.110.14

0.28

0.17

0.39

0.22

0.16

Average supply of 177,000 tsubo

Major Landlords Major 3PLs• Prologis• Global Logistic Properties• Mapletree• LaSalle Investment

Management• Redwood• Daiwa House• Goodman• Nomura Real Estate

Development

• Hitachi Transport Systems• Nippon Express• Seino Holdings• Senko• SBS Holdings

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Not only is there a supply shortfall in the Greater Tokyo market, but the logistics market in Japan has traditionally been dominated by lower grade warehouses, with an undersupply of modern facilities. Current estimates suggest that some 90% of existing warehouse stock in Japan is not considered to have “high speci cations”. The rise of online retail will hopefully push developers and landlords to deliver higher grade assets to the market.

As shoppers increasingly come to expect next-day or same-day delivery, online retailers will also look to increase the ef ciency of their overall supply chain and warehouse space.

Typical requirements for a high grade facility are highlighted below.

Higher grade logistics facilities will come onto the market in response to online retail demand4

Ceiling HeightIn order to curtail horizontal transportation, ample ceiling height is required. Currently, the market requires a minimum of 5.5 metres for ceilings.

Floor Load

5 metric tons/tsubo 10 meters

With elevated ceiling heights, oor loading of 1.5 tonnes per sqm is required. This supports racking and material handling systems within the facility.

Vehicle AccessAccessibility to loading docks with multiple bays is particularly important for online retail operators given the volume of incoming and outgoing deliveries. While online retail operators prefer large oor plates that support delivery ow on one oor, these facilities

are incredibly dif cult to nd given the scarcity of land in the Greater Tokyo area.

AmenitiesAttractive onsite amenities such as staff canteens, resting rooms and child care facilities will appeal to a wider range of occupiers, amid an anticipated labour shortage.

5.5 - 6.0m

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The migration of supermarket sales online will increasingly expand towards 2020 as Japan’s ageing population discover the bene ts of home deliveries.

‘Dark stores’ have recently emerged as a distribution solution for major supermarkets. Dark stores are a ful lment platform designed speci cally for servicing online purchases.

Following successes in the UK by chains such as TESCO and Asda, Seven & i Holdings recently opened its very rst dark store in March 2015.

The Net Super Nishi-Nippori store is built inside an existing warehouse and is equipped with advanced picking and packaging system as well as a 600 metre long conveyor belt. With a total store oor space of 1,100 tsubo, the store has a maximum delivery capacity of 2,000 orders per day which is ve times the average operations of existing stores.

It is expected that store operation ef ciency will improve and Seven & i Holdings will look to expand its dark store network in Japan.

2 Source: McKinsey & Company, “Online Retail in Japan: Too Late for New Entrants?” July 2012

According to McKinsey2 , F&B is the fastest growing online purchase category. This will lead to a greater need for warehouses with refrigeration and food handling capabilities, and eliminates sites that are in remote or poorly connected locations due to the time sensitive nature of perishable deliveries. However, where manufacturing takes place in relatively remote locations, there is often a need to locate logistics faciliites within close proximity. For example, DANONE developed their facility adjacent to their existing factory in Tatebayashi City in Gunma prefecture.

The emergence of warehouse ‘dark stores’ will also encourage the delivery of a slightly different type of logistics asset to the market (see sidebar).

Are the “dark” ages approaching ?

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Online retail tenants offer a number of bene ts that make them more attractive compared to other warehouse occupiers.　

While investors and developers have started to take notice and are now aggressively pursuing higher-yielding logistics opportunities, the online retail opportunity does not come without its share of risks and challenges.

Online retail tenants tend to be aggressive on rents Online retail tenants tend to be aggressive on rents, however they will usually commit to longer leases than 3PLs. In spite of the better rents that traditional occupiers can often pay, landlords tend to look favourably upon online retail operators, due to their growth prospects.

Vast upside potential for investors exists, despite risks and challenges5

Increased ef ciency in warehouse operations The delivery of higher quality warehouses to the market will enhance the operational ef ciency of distribution platforms. This in turn will lead to improved merchandise turnover and a higher sales-to-tsubo ratio. As such, the additional space required by online retail operators may naturally be absorbed into the current supply. Nonetheless, the increase in space demand is signi cant enough that it should not be ignored.

Rising construction costs and labour shortagesThe market will likely see a labour shortage particularly in the lead up towards the Tokyo Olympic Games in 2020. This means that well connected warehouse and distribution centre locations will become key considerations in order to attract the right talent.

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Lack of suitable landSites for new large scale logistics developments appear increasingly scarce, particularly in prime locations such as eastern Kanagawa, southern Saitama and Tokyo Bay. Given that accessibility is a key consideration for online retail operators, occupiers will look for facilities located within a 30 kilometre radius from the Tokyo city centre. In particular, sites dotted along the Ken-O and Gaikan Expressways offer strong connectivity throughout the Tokyo area, which is especially attractive to online retailers who offer same or next day delivery.

■Planned New Highways

Ideal Logistics Locations in Greater Tokyo

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Despite a slow start, Japan is set to become an online retail powerhouse, with incredible growth potential in the long term. This will be accelerated by improvements in technology, an ageing demographic and infrastructure enhancements among other factors.

JLL anticipates that the growth of online retail will have positive ow-on effects on the logistics real estate market in a number of ways, including:

• Online retail operators and 3PLs will seek larger, higher grade logistics facilities in the Greater Tokyo area, where almost half of all Japan’s e-commerce sales is derived

• A need for logistics properties that cater to the speci c needs of online retail operators such as food and beverage

• Increased competition for sites within a 30 kilometre radius of Tokyo’s city centre, particularly along the new Ken-O and Gaikan Expressways

• A movement towards longer term leases as more online retail operators break off from 3PL agreements to set up their own distribution and ful lment networks

While there are risks in play, Japan’s logistics real estate sector presents many upsides and forms an attractive investment proposition for developers and core investors looking to enter the market or expand their portfolio.

Is Tokyo’s logistics real estate readyfor the online retail boom?

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JLL K.K.Tokyo4F Prudential Tower, 2-13-10Nagata-cho, Chiyoda-kuTokyo 100-0014Tel: +81 3 5501 9200

Fukuoka11F Daihakata Bldg.2-20-1 Hakata-ekimae, Hakata-kuFukuoka 812-0011Tel: +81 92 471 6831Fax: +81 92 471 6833

Tokyo5F Seitoh Kaikan, 5-7Sanbancho, Chiyoda-kuTokyo 102-0075Tel: +81 3 5210 8400Fax: +81 3 5210 8271/8281

Osaka6F Honmachi ALLGO Bldg4-4-25 Honmachi, Chuo-ku, Osaka-shiOsaka 541-0053Tel: +81 6 6282 3777Fax: +81 6 6282 3770

Zina ZhangSenior Manager, Markets+81 80 4929 7556Zina.Zhang@ap.jll.com

Neil HitchenInternational Director+81 3 5501 9203Neil.Hitchen@ap.jll.com

Hirokazu NiheiAssociate Director, Markets+81 3 5501 9305Hirokazu.Nihei@ap.jll.com

Tsuyoshi YamadaAssociate Director+81 3 5501 9327Tsuyoshi.Yamada@ap.jll.com

Pelham HigginsNational Director+81 3 5501 9377Pelham.Higgins@ap.jll.com

Authors MarketsAkihiko MizunoInternational Director+81 3 5501 9947Akihiko.Mizuno@ap.jll.com

Capital Markets

COPYRIGHT © JONES LANG LASALLE IP, INC. 2015. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently veri ed those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report re ect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.

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