Hunton Retail Law Resource

Events such as the COVID-19 pandemic, extreme weather events and labor shortages have created significant supply chain challenges for retailers. In addition, the demand for more productive internet sales fulfillment centers has dramatically increased and will continue to increase for the foreseeable future. Many retailers were already in the process of converting to automation systems for supply chain facilities and internet fulfillment centers as a means to increase efficiency, productivity and revenue on a per square foot basis of logistics space, and the recent supply chain challenges have accelerated that process for many retailers. Automation includes equipment installations, automated vehicles, robotics and software products, and is designed to increase efficiency and productivity, reduce labor needs and operating expenses, and improve work place safety. Of course, there are many factors to consider for retailers converting to automated systems, including many real estate related considerations. This blog post focuses primarily on leasing issues, but retailers should also consider alternatives such as using or purchasing owned land or contracting with a 3PL service provider.

Cost

Automation will typically require a significant capital investment in the supply chain facility. Accordingly, retailers involved in that process will want to insure that their facilities have longer lease and lease renewal terms to allow for the amortization of the investment in the automation fixtures, equipment and software. Retailers will also want to insure the lease (or equipment lease) properly addresses unexpected costs that may arise due to automation, such as maintenance necessitated by machine failures and utility outages. With the rise of on-demand warehousing, retailers should also consider using excess warehouse space for 3PL purposes to help defray costs. Retailers should make it clear in the lease that they may use the leased premises for 3PL purposes or enter temporary licenses for use of excess space without triggering sublease constraints or lease violations.

Future-Proofing

One of the primary characteristics of future-proofing is flexibility. Retailers should pay particular attention to: (i) alteration provisions, (ii) expansion/development, and (iii) utility capacities. A retailer may be on the fence on whether to convert to automated processes for a variety of reasons, such as high upfront costs or a dearth of information on benefits and implementation. Alteration provisions should be flexible to allow retailers to convert warehouse space down the line or to upgrade equipment to the extent necessary. One of the benefits of automation, with respect to real estate, is that automation reduces the need for large building footprints. As multistory layouts or mezzanine systems are more space-efficient, retailers should consider expansion provisions that allow them to expand vertically. In addition, retailers will want to insure that their facilities have sufficient utility capacities to support the automation systems. Buildings need to have constant and reliable access to power that can support current and fluctuating needs.

Equipment/Fixtures

If automation equipment and systems will be leased or financed, retailers will need to insure that the facility lease includes adequate lessor/lender protection provisions, including (i) lien waivers, (ii) requirements for landlords to provide default notices to the equipment lessor/lender, and (iii) provisions allowing the lessor/lender to remove the fixtures and equipment regardless of the manner of installation.

Investments in automation technologies can result in increased efficiency, productivity and profitability; however, retailers must include real estate considerations in any plans for implementing automation.