Cornwall–a growing epicentre for Canadian distribution

In 2012, I wrote a somewhat controversial article which explained why Cornwall, Ont., a small city of 46,000 people, is slowly becoming a Canadian epi-centre for distribution centres (click here for more information).

At the time, I predicted that Cornwall would continue to attract distribution companies because of its strategic geographic location.  This is because Cornwall is in Ontario and it is just across the border from Quebec thereby providing cost-effective access to the Quebec market.

In December 2013, the company Supply Chain Management (SCM) issued a press release to announce that they will expand their existing Cornwall distribution operation to include a high velocity distribution centre (HVDC).  The HVDC will service Walmart stores with ambient grocery (non chilled, non frozen) and high velocity / high cube products (paper towels, toilet paper, water, baby food, etc).  The HVDC will be a business within a business and will exist within the current SCM building such that an overall increase in volume of 10% is projected.

SCM is a third party logistics company that Walmart has worked with since 1994 when the company first entered into Canada with its acquisition of 122 Woolco stores from Woolworth Canada.

In the United States, Walmart does not outsource any of its 42 general merchandise distribution centres.  When the company entered into the  Canadian market, it was uncertain about the landscape and decided to outsource its distribution operations to a third party logistics firm. They partnered with Tibbett & Britten Group Canada Inc. which eventually opened up a new company called Supply Chain Management  to provide Walmart with dedicated retail logistics services.

A general merchandise distribution centre was constructed in Cornwall in 1999/2000 to service Eastern Ontario, Quebec, and the Maritimes all the way out to Newfoundland.

Today the facility is 1.42 million square feet and employs over 1,000 associates.  To this day, it remains one of the largest distribution centres in Canada.

By locating its distribution centre in Canada, Walmart unknowingly created a launch pad for the city to become a new Canadian epicentre for distribution companies.  Over the past decade a number of high profile distribution centres have been built in the Cornwall Business Centre including:

1. In 2010, Shoppers Drug Mart opened a new 550,000 square foot distribution centre on a 64 acre property in Cornwall’s main industrial park right beside the Supply Chain Management facility.   The Shoppers Drug Mart employs approximately 130 full-time associates and is outsourced to a third party logistics provider (Matrix Logistics Services).

2. In 2011, Target Canada started construction on a new 1.4 million square foot distribution centre which was opened in 2013.  The facility is located on a 169 acre property in the Cornwall Business Park. The operation is outsourced to Eleven Points Logistics (EPL is a subsidiary of Genco) with 400 new jobs were created at the time of start-up. The Target facility services stores in Quebec and Eastern Ontario.

3. In December 2013, The Benson Group announced that it is expanding its 213,000 sq. ft. autoparts and tire distribution centre in the Cornwall Business Park following the acquisition of a 217,000 sq.ft. building across the street from its headquarters resulting in a total footprint of 430,000 sq.ft. of building space on 60 acres.

4. In 2012, Boundary Properties acquired 121 acres of land which is rumored to be the future home of a 600,000 square foot retail distribution centre.  Reliable sources indicated that it may be a grocery distribution centre to be constructed for Loblaws.

5. Other companies like Atelka and Olymel have been growing their operations and creating new jobs and high profile growth opportunities for the city of Cornwall.

Cornwall is 114 km away from Montreal which has a population of 1.6 million people and an estimated metropolitan area population of nearly 3.9 million people.  Purely from a transportation perspective, it is more logical to locate large distribution centres nearby Montreal for two reasons:

1.To be closer to the Port of Montreal which means inbound import containers can be transferred into the distribution centres with a short haul trip.

2.To reduce outbound transportation miles to points of demand in Montreal, and all locations East of the Montreal.  After all, every truck that departs from Cornwall to service stores in Montreal, the rest of Quebec, and the Maritimes, is effectively driving 228 km further return as compared to departing from Montreal.

So why then are companies setting up shop in Cornwall?

Based on my discussions with executives from companies that are making these decisions, the following reasons are cited for locating in Cornwall:

1.The land that is being offered for sale in the Cornwall Business Park is selling for about $20,000 per acre fully serviced which is very reasonable when one considers that land costs can reach $700,000+ per acre in urban centres such as Vancouver and Calgary.  In general, start-up costs are also relatively low.  Along the 401 Highway, this is a bargain relative to other locations.

2.Less political bureaucracy – Quebec is the only province that has two separate taxation systems which significantly increases administrative expense.

3. Higher fuel prices – Quebec is consistently between 5 to 10 cents higher per litre than neighboring Ontario which is purely because of imposed provincial taxes.  This burden is a major disadvantage given that distributors have to run major trucking operations to move goods to market.  For some companies fuel expense can be in the tens of millions of dollars and this fuel price difference can be a show stopper.

4.Property and business taxes are much lower in Cornwall than in Montreal.  Companies are quite simply choosing to set up distribution facilities in Eastern Ontario because of lower operating expenses, despite the transportation penalty of being in Cornwall relative to being in Montreal.

5.Quebec has a highly unionized labour force as compared to Ontario which has a large non-unionized labour force.  Unionization rates in Canada vary by province and by industry.  In general, the unionization rate in Canada has decreased gradually over time, falling from 33.7% in 1997 to 31.4% in 2009.  In 2009, 39.8% of Quebec workers belonged to a union as compared to Ontario at 27.6%.

6.Quebec has very strict language and labour laws that make it unattractive for big companies from the U.S. and the rest of Canada to set up distribution centres in the province.  The business reality is that companies that are not "Quebec-based" simply do not wish to incur the additional overhead expense, human resource requirements, and hassle factor to adhere to Quebec’s language and labour policies.

7.In short, companies want to do business in places where the business climate is friendly, where the labour force is flexible, and where they can earn a decent profit.

Now our firm consults for manufacturers and distributors in many diverse markets and rest assured that the situation described above exists in many different parts of the world.

One example that immediately comes to mind is the massive build-up of huge distribution centres in Eastern and Central Pennsylvania at the expense of New Jersey.

Pennsylvania simply offers a more business-friendly, less bureaucratic,  and lower cost business climate than neighbouring New Jersey.  What happens in these situations is that jobs and opportunities are created  in one region of the country which causes a net outflow of workers and wealth from a neighbouring region.

It is unrealistic to legislate companies to establish distribution centres in a province such as Quebec because this is not an economic reality given the huge variety of products that are produced and shipped into the province, and also due to the reality that Quebec is a relatively small market within the North American context.  As such we can expect that in future Cornwall will continue to grow by successfully attracting new business at the expense of Quebec - as long as it can continue to provide a business-friendly environment, a flexible labour force, and economically favourable business conditions.