Case Study #2: Savannah’s Move into the Distribution Centre Business

In 1975, Savannah was ranked the 14th-largest port in the U.S. Between 1975 and 2008, container volume in Savannah has grown at a CAGR of 12.1%. In the midst of the global economic recession, in 2008, total container traffic in Savannah increased to 2.616 million TEUs, up a marginal 0.5% from 2007, but significantly higher than the 3.5% drop in container traffic across North American ports. Today, Savannah is ranked 4th in North America for containerized cargo moving through its port (after Los Angeles/Long Beach, New York/New Jersey and Seattle/Tacoma)¹⁵⁰.

Savannah does not have a distance or transit time advantage over its competitors on either the Atlantic or Pacific coasts. A container moving from Shanghai to Savannah takes 30 days to make its journey through the Panama Canal, compared to 16 days for Vancouver and 18 days for Los Angeles. Rotterdam to Savannah transit times are 12 days compared to 11 days for the Rotterdam-New York route or 10 days for the Rotterdam-Montreal route¹⁵¹. Savannah does not have the natural advantages of L.A./Long Beach, New York/New Jersey or Seattle/Tacoma, i.e., a well-populated hinterland. Savannah has a population of only 130,000 people and Georgia has a population of 9.5 million. And yet, Savannah has seen its market share of container traffic more than double, from 2.4% in 1990 to 5.1% in 2008.

The “secret sauce” of Savannah’s success was a proactive and strategic approach to moving on trends in the global shipping and distribution business. The Georgia Ports Authority embarked on a strategy to attract big box retailers’ distribution centres to Savannah in the year 2000. While Home Depot and Pier 1 Imports already operated facilities there, site-selection decisions for distribution centre operators are driven by unique considerations of land availability, labour, local and state incentives, and port proximity.

The Georgia Ports Authority set up a different department that worked with the Savannah Economic Development Agency, private landowners, realtors and trucking and rail companies to assemble a compelling argument for a location close to Savannah¹⁵². One such location is the Savannah Port Authority Industrial Park (SPAIP), which is a site specializing in satellite activities such as container and chassis storage and repair, thereby reducing the pressure on the container terminal¹⁵³. About 10 km from the port terminals are two large logistics zones: the Crossroads Business Park (CBP) owned by the Savannah Economic Development Agency and the Savannah River International Trade Park (SRITP) owned by the Georgia Port Authority. Both parks have a revenue-generation landlord model, where facilities are built by the landlord and leased to tenants.

This type of strategy can help attract customers, since their entry costs are lower. On the other hand, the risk taken by the Savannah Economic Development Agency and the Georgia Ports Authority is higher, since tenants can decide to break their leases and move elsewhere. For instance, in 2008, due to a drop in retail volumes, Wal-Mart decided to break the lease on its 800,000-square-foot distribution centre in CBP and consolidate its activities in Statesboro, about 70 km inland¹⁵⁴.

An additional incentive provided to retailers is that both the SPAIP and the CBP are considered, in their entirety, as Free Trade Zones (FTZ). Retailers are able to use this to delay payments on their imports until they leave the FTZ and head for their stores or regional distribution centres.

This strategy was also underpinned by infrastructure investments. Savannah is the only U.S. East Coast port with two Class 1 railroads operating on-terminal. In addition, it is the only port in the U.S. offering two Intermodal Container Transfer Facilities: a clear reflection of how important intermodal rail traffic has become for the movement of goods¹⁵⁵.

The strategy has worked so far. Savannah has been able to attract continental distribution centres of household names such as Wal-Mart, Bass Pro Shops, Kmart-Sears, Heineken, Best Buy, Target, IKEA, Hasbro, Petco, Dorel and Avon.

In terms of low-risk investment attraction policies and programs, Georgia has a full complement of programs and policies in place that it markets in a 15-page brochure titled Georgia: Business Incentives. These programs are quite extensive and include:

• Low corporate tax rates and credits: Georgia’s state corporate income tax rate is 6%, one of the lowest in the U.S. This is heavily promoted in Georgia’s marketing collateral, in addition to other advantages conferred on firms operating in the state. Georgia also offers corporate income tax credits based on the “tier status” of the community in which a company operates, which allows companies to potentially eliminate all Georgia corporate income taxes.
• Quality jobs tax credits: Companies that create at least 50 jobs and pay wages equivalent to at least 110% of the county average are eligible to receive a credit of US$2,500-US$5,000 per job per year for up to five years. Credits may be used to offset the company’s payroll withholding once all other tax liability has been exhausted and may be carried forward for 10 years.
• Retraining tax credits: A company’s expenditures in training can be claimed as a tax credit of up to US$1,250 per employee per year, with the credit used to offset up to 50% of a company’s state corporate income tax liability.
• Child care tax credits: Georgia offers child care credits ranging from 75% to 100% of costs. A child care tax credit can be used against 50% of a taxpayer’s income tax liability in a given year. Employers who provide or sponsor child care for employees are eligible for a credit against their Georgia income tax equal to 75% of the employers’ direct costs.

Georgia has a number of medium-risk policies and programs specific to what it terms “strategic industries”. These include distribution, technology, manufacturing, telecom and processing companies. For these industries, Georgia offers:

• Job tax credits: For companies operating in these strategic industries and their headquarters based in Georgia, the state offers the Georgia Job Tax Credit. Depending on a community’s tier, companies that create between 5 and 25 net new jobs per year qualify for this credit. For each year (up to five years) the jobs are maintained, qualified companies can claim a tax credit of between US$750 and US$3500 per job per year. Unused job tax credits can be carried forward for ten years. These credits can be taken against 100% of corporate income tax liability in Georgia’s Tier 1 and Tier 2 counties, and against 50% in Tiers 3 and 4. Savannah is a Tier 1 county in Georgia, and a distribution centre operating in Savannah with a staff complement of 50 will receive US$156,250 over 5 years that it can credit towards eliminating its Georgia income tax (US$1,250 x 5 years x 50 jobs x 50% of tax liability = US$156,250).
• Port Tax Credit Bonus: In addition to the Job Tax Credit described above, Georgia offers a Port Job Tax Credit Bonus. The port tax credit is a US$1,250-per-job bonus for taxpayers that increase imports or exports through a Georgia port by 10% over the previous year. Unused credits can be carried forward ten years. For our distribution centre example above, establishing in Savannah gives a distribution centre employing 50 people an additional benefit of US$156,250 over five years.
• Port Tax Credit Bonus for Investment Tax Credits: Georgia has an investment tax credit of between 1% and 3% of new capital investments that are bonused up to 8% for eligible investments in manufacturing, telecommunications, recycling, pollution control and defense conversion.

We note that while the Port Tax Credit Bonus and Port Tax Credit Bonus for Investment Tax Credits could be construed as high-risk policies, they are not high-risk, because they apply to all companies eligible to receive them and are not negotiated with individual companies.

In addition to the above, Georgia has a number of tax abatements and exemption programs, including sales tax exemptions for materials handling equipment, pollution equipment and manufacturing machinery, and tax-exempt industrial revenue bonds for manufacturing facilities. Other programs include electricity rate discounts, county inventory tax exceptions, a rapidly expanding business tax credit for Georgia companies growing faster than 20% per year and eligibility for the HOPE Scholarship and HOPE Grant (tuition and fees at Georgia public and state technical colleges).