One of the more ambitious initiatives in Prologis, Inc.’s (NYSE:PLD) history began with LED lighting.
Several years ago, the San Francisco-based logistics warehousing giant embarked on what turned out to be a successful plan to drive down its warehouse lighting costs. Prologis then realized it could offer its customers LED retrofits at prices they couldn’t obtain on their own. What’s more, Prologis could help customers avoid the inevitable time and resource commitments to search for and vet suitable suppliers.
The episode sowed the seeds of a project that became known as “Essentials,” which after a decent amount of spade work launched in mid-2017. Whether it be forklifts, conveyors, robotics, janitorial services or soft drink machines, the mission behind Essentials is the same: to rely on Prologis’ supplier connections and enormous scale to help customers facilitate the inside-the-warehouse procurement process and buy or lease goods or services at more favorable rates through their relationships with the developer.
As Prologis tweaked the model, the across-the-board upside began to emerge. Its network of established vendors would gain additional business opportunities. Customers could drive down costs and make life easier and more productive for themselves. Meanwhile, Prologis would pocket profitable revenue — it charges a fee for the service on top of the negotiated rent for the warehouse space — by wringing more value out of its size.
“You can’t do this without scale,” Gary Anderson, the firm’s COO, said in a late October interview with FreightWaves, referring to the Essentials program.“I’ve got people in every market.”
In business lingo, Essentials would be considered a “turnkey operation.” Anderson has tried to take a less consultant-speak perspective. The Essentials model is built to work with customers at the local level to get them up and running quickly and cost effectively. Then, it helps them manage their supply and procurement demands as they evolve, he said.
The value add for a customer beyond any cost savings, Anderson said, is in collaborating with a dedicated Prologis customer support team to identify current and future procurement needs and in having the trusted resources readily available rather than having a customer spend time searching for them. Either through full ownership or investment ventures, Prologis operates across 976 million square feet in 19 countries. It has about 5,500 customers.
To support the program, Prologis has merged previously siloed functional disciplines into dedicated “customer experience” teams working with locally based operators, Anderson said. Prologis tries to avoid escalating the interactions up the customers’ corporate hierarchies, believing local warehouse managers have the best understanding of their facilities’ current and future needs. (During the COVID-19 pandemic, virtual meetings have replaced in-person gatherings and Prologis has built a website, Prologisessentials.com, to onboard customers and keep the process going with its existing base.)
As it refined the customer-service concept, Prologis came to grips with the reality that for all its expertise, it could do a better job of deepening its customer relationships. “We weren’t as customer-centric as we needed to be,” Anderson acknowledged in the interview.
The program, which has been kept at a relatively low profile since its launch, does not “leverage Prologis’ balance sheet,” according to Anderson. Instead, the company connects customers with vendors and financiers to help execute transactions. The financial terms will vary, though it’s doubtful a company that’s not Prologis’ size could strike a better deal if attempted on its own. Prologis doesn’t get involved in cost analysis for its customers, Anderson said. “Our customers know what their costs are.”
There is a lot of runway for Essentials to taxi, Anderson said. At companies of comparable size, 20% of the largest customers generally account for about 80% of the business. However, at Prologis, 20% of the largest customers comprise just 20% of its business. Amazon.com, Inc. (NASDAQ:AMZN), Prologis’ largest customer by square footage, makes up just 3.5% of its revenue. That leaves a lot of small to midsize businesses that lack the size or the network to cost-effectively procure warehouse goods and services, Anderson said. Bigger companies could also find Essentials to be a valuable service depending on the specific market or the scope of operations, he added.
According to Prologis’ analysis, the typical good-sized company’s global supply chain costs work out to $132 a square foot. Of that, warehouse rentals account for about $6 a square foot. Transportation accounts for about $60 per square foot of that cost pie. Labor is next at the equivalent of $42 per square foot, followed by inventory carrying costs at $18 a square foot equivalent, based on company data.
Labor is Prologis’ customers’ “single largest pain point” and it is an area the Essentials program eventually plans to penetrate, according to Anderson. The company has partnered with community groups in various cities to hire and train 25,000 warehouse employees by 2025. Programs like these strengthen long-term landlord-customer relationships — the average Prologis lease length is five years — and helps improve the value of a facility that Prologis has developed and could own for 50 years, Anderson said.
“The building owner has more of a stake in developing high-quality labor because they own the building,” Anderson said.