India's warehousing sector checks into the fast lane

Warehousing is a crucial part of the supply chain for businesses that are engaged in manufacturing, importing, exporting, and transporting of physical goods. From being mere holding places of stock or low-grade godowns, warehouses have metamorphed into smart buildings replete with insulation, ventilation, climate-proofing, surveillance and standard safety procedures, and IT infrastructure.

From a largely unorganized, asset-heavy industry, warehousing has also undergone an evolution in India, especially after a multitude of factors like the expansion of pharmaceutical, e-commerce, and manufacturing sectors. Some growth can also be attributed to favorable government policies in recent years and an increase in the spate of institutional investments.

However, the unavailability of land, the high acquisition cost for land, and the lack of adequate warehouse infrastructure in the country are some drawbacks apart from the perennial power shortage crisis in India. As the industry expands, its growth is also set to be propelled by technological advancements like automation, robotics, and digitization.

Incidentally, the Coronavirus pandemic which broke out in 2020 has only managed to accelerate the pace of development, investments, and technological advancement in the warehousing sector. However, Covid-19 and the resulting global supply chain crisis and fuel prices which impacted industries across the world have also caused a significant shift in construction costs, resulting in slightly higher material costs and supply chain disruptions leading to an increase in costs.

The pandemic and the ensuing e-commerce wave which made consumers move towards online shopping from discretionary to essentials ensured that warehousing and logistics emerged as the most preferred real estate asset class for institutional investors who chose them over commercial office segments that were traditionally more favored.

Up until 2020, the warehousing market in India was valued at Rs 1050 billion in 2020. The segment reportedly attracted an all-time high of $743 million (more than Rs 5,500 crore) in investments, accounting for more than half of the $1.36 billion attracted during the second quarter of 2021.

BY THE NUMBERS
Global property consultancy Knight Frank India in their India Warehousing Market Report 2021 estimated that the annual warehousing transactions for the top eight Indian cities (primary markets) will grow at a compound annual growth rate (CAGR) of 19% to 76.2 mn sq ft (7.08 mn sq m) by the financial year (FY) 2026 from 31.7 mn sq ft (2.95 mn sq m) in FY 2021.

As per the projections shared by the consultancy for the next 5 years (FY 2022 – FY 2026), the e-commerce segment is expected to take up significant space estimated to be 98 mn sq ft (9.1 mn sq m) approximately registering an increase of 165% from the preceding period of FY 2017 – 2021.

Third-Party Logistics (3PL) and other sector companies are expected to take up 56% (83 mn sq ft) and 43% (53 mn sq ft) more space respectively, over the same reference period.

While the warehousing industry in India is currently centered around Tier-1 cities like Mumbai, Kolkata, Bengaluru, Chennai, Delhi-NCR, Pune, and Hyderabad but with rising demand from e-commerce and quick commerce, it looks like tier 2 and 3 cities are also seeing some of this growth now.

As per the report, warehousing demand in secondary markets has grown 31 percent y-o-y compared to a 23 percent y-o-y de-growth for primary markets, in FY 2021. Among the secondary markets, Indore and Jaipur noted exponential growth of 306 percent and 219 percent respectively in FY 2021.

A significant development in the April-June 2021 period was the $700 million deal in May when private equity major Blackstone announced the acquisition of Embassy Industrial Parks, a JV of Warburg Pincus and Embassy that controls 22 million sq ft of Grade-A warehousing in major industrial hubs including Bangalore and Delhi.

Earlier this April, FM Logistic, a French third-party logistics (3PL) company, opened its first owned multi-client facility in Farrukhnagar, Haryana, which is part of the $150 million investment plan it announced in March 2019.

Later in May 2022, leading Indian real estate developer Lodha announced a $1 billion 'Green Digital Infrastructure Partnership' with real estate industry leader lvanhoé Cambridge and global private investment firm Bain Capital. Their first project is a 110-acre logistics and industrial park development at Palava, Mumbai.

EMERGING TRENDS IN WAREHOUSING

• SPURT IN GRADE A FACILITIES

In its April report earlier this year, Savills India estimated that in the first quarter of 2022, Mumbai and Kolkata witnessed the highest construction costs at Rs 2,115 per sq. ft. for grade-A warehousing space and Rs 3,295 per sq. ft. for a general manufacturing facility. This was followed by Pune which saw the costs at Rs 2,100 and Rs 3,265 per sq. ft. respectively.

Construction costs have increased due to rising material prices such as crude oil, steel, aluminum, cement, labour, equipment rental costs, and costs of plumbing and fixtures. Additionally, Covid-19 has caused a significant shift in construction costs, resulting in slightly higher material costs and supply chain disruptions. When compared to its international counterparts, general manufacturing in Indian cities range from $ 453- $465 per sq. m whereas for Grade-A warehousing it ranges from $291-$299 per sq. m as of Q1 2022.

"The government is also planning to introduce a warehousing policy to help ease transportation and logistics costs. It aims to lay the roadmap for developing exclusive warehousing zones through public-private partnerships."Sundaresan Vaidyanathan, Welspun One Logistics Parks

Srinivas N, Managing Director, Industrial and Logistics, Savills India said in a release, "Industrial and warehousing is one of the most resilient segments in India. The demand for industrial and warehousing facilities is expected to remain unscathed in the long term. We expect construction costs for industrial and warehousing projects to increase in 2022. However, the magnitude of growth is dependent on material costs, labour, equipment rental costs, interest rates, and other related costs."

• ON-DEMAND WAREHOUSING

With India's warehousing sector gradually picking up pace with massive investments, the on-demand warehousing segment seems to be growing. "Everyone is moving to the D2C model and to facilitate quick deliveries, on-demand warehousing is a must. To facilitate the consumers on time or rather before time, everyone has started adopting micro warehousing models too," Harshad Vagdoda, Head of Innovations & New Engineering, Vinculum Group told Indian Transport & Logistics News (ITLN).

There is a move towards built to suit model of warehouses says Abhijit Verma, Executive Director and CEO of Avigna Group who told ITLN, "The changing technical specifications of the client, be it in the size of the boxes due to increasing total square feet requirement from 40K on an average up to 8 lakh square feet or the height requirements changing from 8 meters to 14 meters are some of the reasons for the insistent demands towards the creation of a more 'built-to-suit' model of warehouses from the previous ready-to-move models are some of the big changes at the top of my mind."

Varun Gada, Director of Contract Logistics at the Liladhar Pasoo (LP) Group told ITLN, "E-commerce majorly supported the metros during the pandemic and during that time a lot of start-ups like Zepto, PharmEasy grew along with the advent of many dark stores. The backbone of everyone's operations is the warehouse and these players are investing a lot into automation and robotics because they need to process a large number of orders and a smaller number of orders in lesser time. And they have the deep pockets to fund the entire automation and still work at a nominal fee to acquire market share. Most of these are also asset-light as they need to keep moving their warehouses on the basis of demand."

"Everyone is moving to the D2C model and to facilitate quick deliveries, on-demand warehousing is a must. To facilitate the consumers on time or rather before time, everyone has started adopting micro warehousing models too."Harshad Vagdoda, Vinculum Group

• PUSH FOR 3PL WAREHOUSING

The 3PL sector is likely to retain a large market share even as e-commerce and other sectors continue to outsource their warehousing and logistics requirements to them.

Ronak Shah, Executive Director, V-Trans (India) Ltd., V-Trans(India) said, "Companies are now focusing on core business products to regain the economic dip they faced and are preferring to outsource warehousing operations. This will create a huge opportunity for third-party logistics (3PL) companies that can provide them with complete logistics solutions and the scale to grow. The uncertainty due to the Covid-19 pandemic and the focus of companies on regaining the market will further push the development of the 3PL segment. The development of outsourcing will result in increased demand and growth for the warehousing industry."

• IoT, ROBOTICS, AND AUTOMATION

The warehousing industry holds immense potential for adopting the Internet of Things (IoT), robotics, and artificial intelligence (AI) driven automation, and most businesses in warehousing and logistics are looking to grow by harnessing these new technologies. Shah added, "Self-governing vehicles, warehouse industrialization, predictive analytics, and smart roads are all examples of technologies that are becoming the new norm in today's world."

The creation of 'smart sectors' where storage, processes, and operations would be done with higher accuracy, shorter time span, and lesser to no hazardous incidents, all adapting to the consistently changing demands and environment is slowly gaining traction. This has led to a spate of Indian and global start-ups that specialize in the implementation of the very technologies of drones and robotics in the warehousing sector and heavy investments are flowing into the implementation of automation through AI and robotics in India.

Verma told ITLN "The incorporation of RFID, GPS, IoT, automated monitoring systems along with Co-robotics or collaborative robots with human intervention and the surging use and implementation of autonomous robotics, have contributed to the agility and efficiency of work in the warehouse, logistics, and supply chain management. We can also imply that digitalization and automation of processes and operations kept the industry safe from the impact of the pandemic, which despite witnessing restrictions be it in terms of supply chain or operations could still deliver and also recover, thereby establishing fulfillment of the prime objectives of technology that is speed, span, and scope."

The implementation of automation and robotics is imperative for the future of the supply chain and especially in a post-pandemic 'Just in case' world. Companies are increasingly trying to strike a healthy balance between automation and manual intervention not only in terms of operations but also in warehouse management.

Gubba Kiran, CEO of Gubba Pharma Cold Storage said, "Gubba has already finalized its investments for Automated Storage and Retrieval Systems in its food and pharma facilities. By December 2022, our warehouses will be more than semi-automated. We are on the path to bringing world-class innovations to our facilities. We will incorporate a barcoding system for elevating the levels of accuracy in inventory, our ERP system is getting upgraded, and we are talking about IoT and a lot more."

"We can also imply that digitalisation and automation of processes and operations kept the industry safe from the impact of the pandemic, which despite witnessing restrictions be it in terms of supply chain or operations could still deliver and also recover."Abhijit Verma, Avigna Group

• MULTIMODAL PARKS - NEXT BEST THING?

Multimodal parks provide a real big opportunity for warehouse developers as the volumes at these parks are going to be huge, and efficiency and technology support will enable better services. Planned infrastructure projects alongside multimodal logistics parks would help secure a drop in logistics costs from the current 14% to about 9%, observes Sundaresan Vaidyanathan, the Chief Investment Officer, Welspun One Logistics Parks.

• POLICY SUPPORT

In recent years we have seen a surge in infrastructure development through budget allocation as well as through private and foreign investments. As per Knight Frank's Warehousing Market Report, Indian Logistics' cost percentage of its GDP is nearly double the logistics cost of developed countries.

The lack of efficient intermodal and multimodal transport systems could be considered a major attributor to the same. Therefore many industry players believe that the Indian government is working extensively to enhance the country's infrastructure, as it aims to reduce the logistics cost to less than 10% of its GDP, through various policy and project implementations.

"Lack of efficient intermodal and multimodal transport system could be considered a major attributor to the same. Some of the notable mentions are the National Logistics Parks Policy, the inclusion of the logistics sector under Infrastructure by the Government, Bharatmala and the Sagarmala Project, Gati Shakti-National Modal Plan for Multi-modal Connectivity, Delhi- Mumbai Express Highway, Dedicated Freight Corridors, Sanctioning of REITs, Establishment of Goods and Services Tax and Make in India Initiative to name a few. The creation and development of industrial corridors, port and road infrastructure, multi-modal connectivity, support through various initiatives, and digitalization are expected to attract better investments, improved quality of assets, cold storage, connectivity among major cities and industrial corridors, reducing logistic costs, time to travel, improved last-mile connectivity thereby making Indian business more attractive and competitive. The impact would not only benefit a single or related sector but would also affect and benefit multiple sectors," Verma tells ITLN.

"Everyone is moving to the D2C model and to facilitate quick deliveries, on-demand warehousing is a must. To facilitate the consumers on time or rather before time, everyone has started adopting micro warehousing models too."Harshad Vagdoda, Vinculum Group

Apart from systematic reforms like implementation of the GST and accordance of infrastructure status to the sector, it is going through many positive changes. On the policy front, there have been multiple reforms aimed toward infrastructure development by the government, which is slated to work well for the sector

Sundaresan Vaidyanathan told ITLN, "New programmes like Bharatmala and Sagarmala are some of the classic examples of the government spending on infrastructure projects. The government is also planning to introduce a warehousing policy to help ease transportation and logistics costs. It aims to lay the roadmap for developing exclusive warehousing zones through public-private partnerships."

Vaidyanathan added, "We at Welspun One have recently signed an MoU with the Haryana Government with a total investment of Rs 1500 crores in the state and aim to explore the available government land parcel for building Grade A warehousing facilities across key warehousing micro-markets. Last December, we acquired 40 acres of land located on the Malur-Hosur road to set up a large-scale warehousing facility. This is the first of six projects as part of the MoU that we signed with the Government of Tamil Nadu's nodal agency to set up warehousing facilities across the region. The projects to be executed under the MoU are expected to bring indirect investments of approximately Rs 2500 crores to the state."

Speaking on the new warehousing policy that is on the anvil, Ronak Shah added, "The idea is to curtail pollution and traffic congestion in major cities. The modern-day warehouses will build cold-storage chains which will be able to store all kinds of cargo. These amenities are estimated to be built in the outskirts of the cities so that large trucks transporting the cargo need not enter the city to unload their goods."

• NEED FOR SKILLED WORKFORCE

Highlighting the need for a skilled workforce in a modern warehouse, Sanjay Tiwari, Co-founder of 21CC Education told ITLN "Specific product knowledge in warehousing and logistics is of the essence for employees. A box is not a box, i.e. what's inside matters as different products have different handling requirements, scanning requirements, packaging requirements, etc. With the changing and more stringent FSSAI and FDA requirements, it makes it even more important that employees understand what the composition of products is, what their sensitivity to temperature is, etc. The industry is scaling up and specializing at the same time, which is quite a challenge!"

"Gubba has already finalised its investments for Automated Storage and Retrieval Systems in its food and pharma facilities. By December 2022, our warehouses will be more than semi-automated."Gubba Kiran, CEO Gubba Pharma Cold Storage

Tiwari added, "We can help to close the skill gap by working directly with warehouse employees to skill them by using our digital platform. 21CC Education, in a tie-up with IndoSpace, has signed up more than thirty warehousing and distribution companies in Chennai, Bangalore, Mumbai, and Haryana, with a total of 7,500 employees. The 21CC content is being used to educate the frontline / blue-collar workers on the basics of logistics. We are helping DB Schenker do the on-boarding of all their new employees, using our app and content as well as DB Schenker's "day zero" module called 'Samvardhan'."