February 2, 2009

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Taking Stock and Cashing In

Distribution Centers are Moving to Utah

Spencer Sutherland

February 2, 2009


Touting the greatest snow on earth for decades, Utah has drawn tourists from every corner of the country to its slopes, but it wasn’t until just a few years ago that businesses realized the lucrative advantages the state’s winter sports arena could offer. Now, though, thanks to vigorous state recruitment and incentives, ski leaders including Rossignol, Scott USA, Descente and others have operations in Utah, creating the largest ski industry hub in North America. Today, distribution centers are following suit, moving into the Beehive State and turning it into a distribution hub. The Economic Development Corporation of Utah (EDCU) and the Governor’s Office of Economic Development (GOED) are now working tirelessly to create a similar hub effect within other industries. Thanks to recent relocation announcements by major corporations including Proctor & Gamble, Hershey and Sephora, Utah is fast becoming a major player in the distribution field. Why Utah? Jeff Edwards, CEO of EDCU, says there are three major factors that make the Beehive State an appealing location for distributors: population, geography and fuel costs. A Shifting Population As the U.S. population moves west, companies are looking for ways to get closer to these growing markets. “Utah has grown a lot in recent years,” Edwards says. “But so have our neighbors. There’s a large market in the West that didn’t exist before.” Location, Location, Location Located at the nexus of Interstate 15 and 80, Salt Lake City is literally the crossroads of the West. It is also the first city west of the Sierra Mountains where the rail lines from Northern and Southern Calif., and the Pacific Northwest converge. Road or rail shippers can easily reach large western markets in as little as one day. “You can be in Calif., but not of Calif.,” Edward jokes. “You can serve Calif. markets, but you don’t have to go through the headache and high costs of having a facility in Calif.” Fluctuating Fuel Costs To save on capital costs, companies have traditionally built a large distribution center in one part of the country and then shipped everything from that location. However, with diesel fuel prices rising above $4 per gallon earlier this year, it has become difficult for them to justify the cost of moving a product from New Jersey to Calif. Though distributors welcome the recent dip in fuel prices, Edwards believes it is unlikely that they will remain low for long. “I think we’ll see prices go back up,” he says. “Maybe not as high as they have been, but certainly higher than they are right now. So if you are a prudent distributor, you are going to want to think about the long term. The western U.S. makes a lot of sense.” Money Talks Though Utah’s geographical benefits are attractive for companies considering relocation or expansion, neither EDCU nor GOED are waiting for businesses to come to them. “We are very proactive and targeted in our recruiting efforts,” says Jason Perry, executive director of GOED. “We are constantly getting the message out about the great state of Utah to site selectors and businesses all over the world, letting them know that our cost of business is low, we’re in a very strategic location for their business, and our workforce is second to none.” Utah’s most important selling point is the state’s wide range of tax incentives. By law, the state can rebate up to 30 percent of a company’s taxes—including income, sales and withholding—for up to 20 years. “This is an incentive that makes us competitive with any state in the country,” Perry says. The incentives are awarded post-performance, meaning the state does not give the rebate until it is has received its new state revenue from the company. “It’s a great way for the state to protect its interests, but also to help grow a company quickly,” he adds. Cash or grant programs are also available to help companies relocate to the state and rural economic development incentives are given for jobs created in rural communities. What’s in it for Utah? It would seem that by offering incentives and rebates, the state would be losing tax dollars, but the opposite is true, Perry says. “The incentives result in amazing amounts of new state revenue,” he says. In 2008, the state awarded roughly $172 million in incentives—to be awarded during the course of the next five to 20 years—for more than 5,000 new jobs. Perry says the return on investment during that same period will be $1.7 billion in capital investment, $3.36 billion in new state wages and $617 million in new state revenue. “The return on investment is staggering,” Perry exclaims. The state’s biggest success to date is bringing the new Procter & Gamble manufacturing and distribution center to Box Elder County. The state offered P&G more than $80 million in tax breaks and, in return, the company will invest more than $350 million in building its environmentally-friendly facility. More than 1,000 jobs will be created at over 225 percent of the county’s median salary. Perry says this in not only one of the best deals in the state, but in the United States. The Hershey Company, North America’s largest chocolate manufacturer, is also headed to Utah. Its new facility, located in Business Depot Ogden, is expected to represent a capital investment of about $38 million. A tax rebate of up to $2.6 million will be awarded to the company and the state plans to see about $13 million in new revenue over 10 years. The company will create 100 new full-time jobs in the area. Expansion in a Slowed Economy Despite a severe economic downturn in many industries, companies are still considering moving their operations west. “There is certainly a lot of money on the sideline all across the country,” Perry says. “But the number of businesses wanting to relocate to the state has not slowed in any way. We have not had a month in two years without an announcement of a business relocation or expansion in the state.” Despite having economic troubles of its own, the state continues to be a hot relocation destination. “We are experiencing slowing like everyone else,” Perry says. “But in spite of how difficult it is right now, we are really weathering the storm better than any of our neighbors.” A recent survey conducted by The Boyd Co., one of the nation’s leading corporate site selection companies, found that the Salt Lake/Provo area has the second lowest operating costs for distribution centers in the nation. The survey considered such factors as the cost of labor, shipping, land, construction, sales tax, etc. “That’s something that these companies care about,” Perry says of the survey’s finding. “[Companies] look for the places where the cost of doing business is low and where the economy is still favorable to some degree. The state of Utah is really on the map. Site selectors are choosing us and companies are getting to know us.” Help from the Top Less tangible than operating costs, but no less important, is the governor’s commitment to economic growth, Perry says. “Governor Huntsman is involved in every aspect of economic development in the state. If there is a business we are trying to land, he is on the phone with the CEOs of those companies, making the case for the state of Utah. He flies to locations to help bring the project here and is actively involved in our strategic plan.” The governor is committed not only to growing the economy, but encouraging long-term, sustainable growth. “The kind of companies that are relocating and expanding here are companies that are not just important for us today, they’re important tomorrow, in five years, in 20 years,” Perry says. “Now is not the time to not be thoughtful about the business you’re recruiting. You want to bring the right kind of companies that hire the right type of employees and pay the right kind of salary to help our economy.” Perry adds that the state projects this growth to continue for the next 20 years, and when the economy changes, believes Utah will come out ahead. Growing Local Businesses With all the efforts targeted at out-of-state companies, EDCU is also working to keep local businesses growing. “We’re very interested in helping the companies that are already here to stay here and to grow,” Edwards says. “Most of the headlines are generated when a new company comes to town and they receive an incentive from the state, but the state’s incentive programs can also be used to help existing Utah companies with their own expansions.” Neways International recently open-ed a new distribution center in Salem, replacing its former operation in Spanish Fork. The 309,000-square-foot facility features laser-leveled cement floors that allow high-speed, wire-guided turret trucks to move among the storage racks. The warehouse will ship more than 100 ocean-going containers around the world each month, in addition to thousands of individual packages on a daily basis. “It’s a much more modern facility than the combination of space we had previously,” says Brian Slobodow, Neways’ president and chief operating officer. “For starters, we did not have all of our distribution activity under one roof—that alone is a huge advantage. There’s also sufficient room for us to assemble products and prepare complex international shipments.” The Salem distribution center is one of two centers the company has in the U.S., with other outlets in Japan, Australia, Mexico, Taiwan and Holland. Slobodow says the multiple distribution operations result in faster shipments to distributors, increased product availability and lower operating costs. In addition to being close to its international headquarters in Springville, the Utah facility gives the company good access to shipping lanes to Asia, one of the company’s fastest growing markets. Neways is also working to streamline its processes to reduce fuel costs. “The best way to combat rising fuel costs is to do less transportation. We have been focused on less back-and-forth between our operations,” Slobodow says. “We previously transported products made in Calif. back to Utah for inspection and storage and then returned them to Calif. for shipment to Asia. With a local warehouse in Calif. we have eliminated that practice.” The company continues to benefit Utah County, employing more than 400 workers in the Springville/Salem area and supporting numerous local youth athletic programs, the arts and community outreach programs. On the national and global level, the Neways Empower program provides relief at home and around the world. Nicholas & Company is another Utah company that has recently expanded its efforts. The food distributor’s newly-enlarged facility includes more than 10 million cubic feet, making it one of the largest food distribution centers in the country. The company boasts that the dry warehouse is so large that if it were filled with nothing but potato chips, there would be enough servings for every person in Utah to have a bag every day for nearly three months. If the freezer was filled entirely with corndogs, it would hold enough for every person attending a Jazz game at the Energy Solutions Arena to have one at each game for the next 600 seasons. “Our expansion has been necessitated due to the thriving success of the food service and hospitality industry in Utah and surrounding areas,” says Nicholas & Company President Peter Mouskondis. “We are excited for this opportunity to better serve the community and economy in which we all live.” EDCU and GOED are very enthusiastic about the growing success of these and other Utah businesses. “There’s an old marketing slogan that says it’s a lot easier to keep a customer you already have than to make a new one,” Edwards says. “We want to recognize and keep the strength of companies that have built their businesses here and do the things we can to help them stay here and be successful.” Perry adds that it’s these companies that are allowing the economy to grow and are helping fund education and infrastructure in the state. “We have to be mindful of these companies and these efforts because the effects will be felt for generations to come.”
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