This story is part of our collaboration with CFO Brew on changing retail investing strategies.
It will come as no surprise that as e-commerce surged during the pandemic, the country’s biggest retailers have leased or purchased plenty of real estate for warehouses and distribution centers.
While much of the space is used for the ever-growing volume of fulfillment and processing returns, there’s another reason major retailers are in the market for warehouse space.
Manufacturers traditionally have transported shipping containers of their products made in China and elsewhere to their own distribution centers (DCs), then shipped them to retailers’ stores or warehouses. But today, those containers increasingly are being shipped directly to retailers’ distribution centers. It’s a practice called direct import, and it’s created a need for more warehouse space for retailers while relaxing the need for such space from the retail brands they’re purchasing from.
One company that the direct-import surge is reshaping is Razor, the brand famous for the scooter it introduced in 2000, and whose products now include hoverboards, go-karts, and electric-powered ATVs and dirtbikes.
- In 2004, only 9% of Razor’s products were shipped from overseas factories directly to retailers’ distribution centers including Target, Amazon, and Walmart, according to data from Razor.
- In 2023, 83% of Razor’s products were shipped directly to retailers’ centers.
To find out more about the rapidly shifting state of direct import, we asked Bryan Wood, the VP of global supply chain at Razor, for an explainer. Like test driving one of the brand’s briskly selling products, the Crazy Cart Shuffle, there were lots of twists and turns…but we held on tight.
Freight and switch: When it comes to retailers switching to the direct-import model, “for us Target was the biggest one right off the bat,” Wood said. “They were the first to come in hard and adopt quickly and saw the benefit of it more so than everybody else.”
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Wood explained that the shift is more involved than Razor shipping the containers to retailers’ DCs rather than to its own, which is in Rialto, in Southern California, about three hours by truck from their arrival point, the Port of Long Beach.
“Where the ownership changes is the difference,” Wood told Retail Brew. When a retailer like Walmart takes ownership in China of a container filled with the 5,000 scooters that fit in it, it also negotiates all the logistics to get it from there to a Walmart warehouse.
In the traditional scenario, if a big box retailer bought a container full of scooters from Razor, the brand would pass along its logistics expenses, but direct importing is more of an à la carte option, Wood explained.
With Razor lowering its price for retailers who direct import, rather than being a loss or windfall for Razor, it’s “a little bit of a wash for us,” Wood said.
“If you’re a large retailer—Walmart and Amazon and Target—they move enough volume where they get a better deal on ocean freight than I do,” Wood explained.
Path of lease resistance? For Razor, the direct-import trend has allowed it to lower a significant fixed cost, namely the amount of warehouse space it leases, since all those scooters and other products are bypassing them for the retailers’ warehouses.
“Because we’ve moved so much [to] direct” import, Wood said, “we’re doing much much smaller square footage—like significantly smaller.”
While Wood declined to give specific numbers about the reduced footage and costs, in a follow-up email he said that in the last seven years, the amount of DC space the company needs has seen a “relatively steady decrease,” after increasing and then plateauing in the previous 14 years.