What Is Retail Warehousing? Challenges and Solutions

There comes a time when you’ll outgrow using your retail stockroom as a place to store inventory. As your product assortment expands and your storage requirements increase, many retailers turn to separate warehouses. 

Retail warehouses are separate locations to store inventory and fulfill customers orders. But there’s a lot to consider when building out your warehousing strategy. Where is the best location? Which type of retail warehouse do you need? And how can you operate one as effectively as possible?

This guide answers all of those questions, complete with challenges to avoid when implementing a retail warehouse. 

What is retail warehousing?

Retail warehousing refers to how a business stores inventory in a warehouse. Instead of holding inventory in the stockroom of your brick and mortar stores, many retail warehouses act as a distribution center to control inventory and fulfill orders that will be shipped to a customer’s preferred location.

Why retail warehousing is important

Maintain inventory levels

“Out of stock” are three words that could turn customers away from your brand and towards a competitor. The issue is, however, that your retail locations have limited inventory storage space. It’s not always possible to store large quantities of popular products and continually replenish inventory to prevent stockouts. 

Retail warehousing helps mitigate this issue. You can receive inventory and maintain stock levels at the storage facility, then transport products to your retail locations when stockroom quantities are running low. 

An alternative strategy combines fulfilling orders from warehouses and retail locations to efficiently process and ship orders to customers. Decentralized order fulfillment routes orders from the most efficient location (warehouses or retail locations) based on your fulfillment strategy. 

Maybe you want to minimize split shipments, or maybe you want orders to get to customers as fast as possible. No matter how you build your strategy, using a combination of retail and warehouse fulfillment can help you reduce costs and improve product availability.

Fulfill orders quickly

The truth of the matter is customers don’t like to wait for their orders. Fast delivery has become the norm—you need to meet customer expectations if you’re to stand any chance of offering world-class retail experiences.

To successfully implement a decentralized fulfillment strategy, consider setting up Shopify’s ship-to-home feature. This feature turns retail locations into mini fulfillment centers, optimizes inventory management and improve omnichannel operational flexibility.

Once an order is completed and assigned to a retail location for fulfillment, staff receive a notification in-app to pick, pack, and ship the customer’s order to their preferred address.

The POS interface uses color-coded tags to prioritize order fulfillment at the retail warehouse. Those with a red tag need fulfilling immediately to meet the customer’s delivery expectations. 

Cost savings 

The decentralized approach to retail warehousing means you’ll store inventory in multiple shipping warehouses, instead of a single location. Ideally, these warehouses are located in customer hotspots—or at least spread out across your largest markets.

A retail business with physical stores in Denver and Los Angeles, for example, might lease their first warehouse on the East Coast. This strategy offers two main benefits: reduced transportation costs and faster delivery times. By storing inventory closer to East Coast customers, shipments would travel shorter distances, cutting delivery expenses. Orders can also be fulfilled and delivered more quickly, improving customer satisfaction.

Meet customer demands

The goal of your own retail warehouse is to ship orders on-time and pack products accurately—both of which go a long way in improving customer satisfaction and saving on cost and resources. 

Efficient inventory management across fulfillment locations also ensures that products are available, so that when customers visit your retail store or order an item online, real-time inventory tracking confirms that it’s in stock before the customer pays.

📌 Pro tip: Set up Shopify Shipping to buy discounted shipping labels from couriers like DHL, UPS, and USPS. It’s how brands like Snarky Tea have been able to scale its fulfillment operations and save $25,000 per month on shipping.

Types of retail warehouse

Distribution centers

A distribution center houses inventory before it’s made available for sale. You hold inventory in the distribution center and transport it to retail locations or fulfillment centers when levels are low. 

The biggest benefit of this retail warehouse is that extra storage capacity within the distribution center means you can benefit from bulk discounts from suppliers. This can bring down costs and increase profit margins on each product. 

Fulfillment centers

A retail fulfillment center is a type of retail warehouse in which you fulfill customer orders. They’re designed for short term storage—inventory might only be on the shelves for weeks before they’re shipped to a customer. These gaps are then filled by incoming shipments sent from your distribution center.

Customers can also ship unwanted products to your fulfillment center instead of overloading your retail team with in-store returns. Your warehouse team receives the returns and cross-check them against your returns policy. Customers with eligible returns can have their money refunded, sent a replacement or exchange, or receive a gift card with credit to spend on their next purchase.

Cross-dock facilities

A cross-dock facility is a specialized type of retail warehouse to receive inventory. Also known as a sorting center, shipments from suppliers are approved in a cross-dock facility, and inventory goes through quality control. Approved products are then immediately transported to a distribution center or fulfillment warehouse.

Cold storage warehouses

Retailers that sell temperature-controlled products store their inventory in cold storage warehouses. These storage facilities can store inventory that needs to be kept cold throughout the retail supply chain, such as pharmaceuticals, food, and beverages.

Modern retail warehousing solutions

Third-party logistics partners

Managing a retail warehouse doesn’t have to be a responsibility that falls on your shoulders. Many retailers partner with third-party logistics (3PL) companies to manage inventory, storage, and fulfillment.

The Shopify Fulfillment Network, for example, connects your commerce platform with Flexport. Ship your inventory to its network of fulfillment and distribution centers, then have Flexport’s warehouse team pick, pack, and ship orders directly to your customers whenever a new order comes through.

Jason Lee, CEO of Kizik, says: “Flexport has been instrumental in helping us uncover new areas of growth for the Kizik business so that we can continue to delight our customers and partners with an exceptional delivery experience.”

Warehouse management systems 

Whether you’re managing a private warehouse or outsourcing logistics to a 3PL, many moving parts contribute to effective warehouse operations. A warehouse management system (WMS) makes that easier by acting as a central dashboard to manage everything in one place. 

The best WMS can:

• Create order fulfillment checklists
• Arrange staff schedules and workforce management
• Conduct real-time inventory tracking
• Automate warehouse processes
• Track shipments 
• Handle returns 

Automated storage and retrieval systems

Automated storage and retrieval systems (AS/RS) use machine learning to store and retrieve goods within a retail warehouse. They can organize inventory and utilize warehouse space—often allowing you to condense stock or stack items vertically to cut down square footage requirements and warehouse fees.

AS/RS systems can also speed up the order fulfillment process by delivering products to packing stations, ultimately getting products in a customer’s hands quicker and improving order accuracy.

Radio-frequency identification

Radio-frequency identification (RFID) is considered a step up from barcode scanning systems. The technology doesn’t need a direct line of sight to retrieve product details. Instead, it uses radio frequencies to retrieve information from an RFID tag attached to each item. 

RFID technology improves retail supply chain visibility as it automatically tracks the movement of goods throughout the storage facility. It can also help your warehouse team retrieve product information by scanning the RFID tag, as opposed to physically looking at it—which is great for packaged goods or items stored on high shelving units. 

Artificial intelligence and machine learning

Artificial intelligence (AI) has changed the way we do business—and technological advancements aren’t set to slow down anytime soon. Per McKinsey, three-quarters of organizations surveyed in 2024 believe that generative AI will lead to significant or disruptive changes in the coming years. 

In a retail warehousing context, AI and machine learning can be used to:

• Detect inventory shrinkage and highlight potential fraud
• Track inventory levels and auto-replenish popular items
• Optimize warehouse layout for maximum operational efficiency
• Train robots to pick, pack, and ship orders without human intervention

Some retailers also use AI to configure order routing rules. For example, you could route incoming orders to the retail warehouse with the most capacity, or one that is closest to the end customer to reduce transportation costs. 

Common challenges in retail warehousing

Omnichannel fulfillment

Omnichannel experiences are the table stakes of retail. Studies have shown that shoppers make purchases 70% more often than those who only shop in-person. 

Difficulty lies, however, with the behind-the-scenes management of multiple fulfillment methods and sales channels. Customers can place orders online and pick up in-store, or do the reverse: pay for orders in-store and have it shipped to their home. How do you manage the logistical complexity of fulfillment when there are so many variables involved?

Platforms like Shopify can unify all of your orders into a centralized dashboard—ecommerce sites, retail stores, marketplaces, and social media storefronts included. Integrations with WMS and inventory management software (like Stocky, Shopify’s first party inventory management tool) also means you can see real-time inventory levels across all of your retail warehouses to prevent stockouts and redistribute stock when required.

“The expectation set by companies like Amazon is that if you order something, you’ll get it the next day,” says Thomas Goepel, co-founder of Tico Coffee. “Our customers don’t want to wait three days to have their coffee delivered. 

“With our inventory synced across our online and in-person shop, when our customers order something, we have it—and that means we can get it to them quickly.”

Order volume fluctuations

Storage space is expensive; you don’t want to pay for space you’re not using. However, storage requirements can fluctuate throughout the year. You’ll probably need more storage space during peak seasons like Black Friday and Cyber Monday than earlier in the year when consumer spending takes a hit. 

The same is true if you’re outsourcing order fulfillment. Logistics partners need a rough estimate of order volume to ensure they can meet fulfillment timescales and leave enough storage space to hold your inventory. 

Shopify’s inventory reports surface how many units you sell at each point throughout the year, including metrics like sell-through rate and days sales in inventory (DSI) for each SKU. Multiply this by your average annual growth to get a conservative estimate of how much storage space you’ll need. 

Disconnected or outdated technology

Outdated systems cause more harm than good, particularly if they don’t offer advanced features like integrations with inventory management systems. 

Many retailers stick with legacy systems because of fears surrounding migration. Will my workflows break if I move platforms? How much time and money do I need to spend training my team on how to use the new one? 

Consider the the cost versus benefits of investing in retail warehousing technology like RFID tags or retail warehouse management systems. Implementing new technology might come at an additional cost—but the time you save by eliminating manual tasks could ultimately lead to significant long-term savings and improved operational efficiency. 

Take the headache out of retail warehousing

Operating a retail warehouse is no small feat. You’ve got large volumes of inventory coming in and out of the warehouse every day—not to mention a whole new team you’ll need to manage, all while fulfilling customer orders and delivering on their speedy expectations. 

Shopify helps take the stress out of retail warehousing. Manage alternative fulfillment options from the POS interface you already know and love, integrate WMS for maximum operational efficiency, or outsource the entire process to the Shopify Fulfillment Network—the choice is yours.