Manish Saigal, Managing Director, Alvarez & Marsal India
The pandemic has affected millions of lives and changed the way we live, work, and run businesses. Consequently, the supporting supply systems have assumed greater importance. Over the last few years, as scales have tilted in favour of these systems, all the sectors related to them have received an impetus.
Warehousing, which is one such sector, has seen significant growth during this period. Strong demand from customers of the e-commerce, 3PL or third-party logistics and modern retail segments has driven growth in the sector and its outlook in the country is buoyant.
Warehousing of the future involves two key factors. First is building world-class warehouses and second is making them sustainable. These factors are critical to success and make business sense. The Indian Green Building Council or IGBC-certified warehouses not only get benefits from the central and state government agencies, but also command a premium among large-scale global clients who are used to the higher standards of the West. These clients are aware of and willing to act against the adverse impacts that commercial activities in the sector have on our planet. Green buildings are commonly assumed to be newer, better designed and even set up in premium locations. As per industry estimates, the premium for a BREEAM-rated green building in the UK can reach up to 12 per cent. A NABERS certification can get an 18 per cent premium for a structure in Australia.
Absorption of Grade A level warehousing in the country has grown from 100 million sq. ft in 2019 to about 150 million sq. ft in 2021. While this looks like a substantial change, penetration of Grade A warehousing in India stands at only about 11-13 per cent. China, on the contrary, has a Grade A penetration that is about 3x higher than us. There is great space for such warehousing to grow in India. About 1,200-1,250 million sq. ft of warehousing in the country, which is built on repurposed land, has scope for an upgrade. By financial year 2026, we expect about 390 million sq. ft of warehousing to fall under the Grade A level.
Let us look at five factors that are critical to the development of modern, high quality warehousing across the country.
Consumption and dispersion
After a two-year slump, consumption seems to be back on track. However, consumption has till recently been limited to the top eight cities of the country. While these cities are likely to continue contributing 40 per cent of GDP and grow at 6-8 per cent, with a radius of about 200 km, consumption is now also trickling down to Tier-3 and Tier-4 towns with investment-friendly reforms and development of infrastructure providing a boost. As expectations for faster supply rise in these areas, so does the need for warehousing.
China is the manufacturing hub of the world and India has been vying for the top spot for a long time. The pandemic provided just the opportunity we were looking for. One of the key components of India’s current growth story is its tremendous potential of becoming the factory of the world.
With global supply chains seeing multiple disruptions, countries saw the immediate need to have a China+1 strategy – and India was the beneficiary. The government’s product-linked incentive (PLI) scheme has helped further. Foxconn has begun to manufacture iPhone 14 for Apple at its facilities outside Chennai, in a first for India.
Warehousing now has an additional point of focus besides pure retail consumption – providing supply and storage to industrial or production clusters. The high warehousing demand in cities such as Pune, Chennai, among others, comes from this segment. Moreover, the entry of MNCs in the country has raised the need for large modern warehousing with global best practices and amenities like fire safety, quality flooring, parking, and docking spaces.
As warehouses become larger, there is an augmented need for technological solutions and more automation. This can include both machines or hardware, and software, which includes end-to-end solutions like warehouse management systems.
While the West has highly automated warehouses, the Indian market cannot ape the model. One of the primary reasons for this is that we do not yet have the giant budgets of the developed world. But that does not mean that India cannot build a strong warehouse infrastructure for itself. This is where the Man-and-Machine model comes in. Given the high volume of production coming out of China, one would picture a highly automated warehouse. In fact, these warehouses deploy a large number of workers. This, combined with the right kind of automation, helps produce high volumes. A similar model in India would prove to be beneficial to the sector’s growth.
Government’s regulatory push
A friendly policy environment is important for any sector to flourish. The government has been encouraging foreign companies to ‘make in India’ since it first came to power. About a month into the pandemic, the government launched the PLI scheme. This scheme now spans sectors from electronics and telecommunications to automobile and cell manufacturing.
The Centre launched the National Logistics Policy in September 2022. The policy introduces warehousing standards that will increase efficiency and bring down logistics costs. It has also started the Unified Logistics Interface Platform and electronic logbooks to streamline processes.
These, along with reforms like the GST e-way Bill, the National Industrial Corridor Development Program, the PMO’s thrust on manufacturing world-class, multimodal logistics parks along with plans to invest $ 1 trillion over the next five years in infrastructure will help boost development of warehouses.
E-commerce and 3PL push
Five years ago, you could not imagine ordering a gift online for a friend’s birthday two days before the party. You either ordered in advance or you had to physically go to a brick-and-mortar outlet to make the purchase.
Since then, much has changed. In the last five years, the e-commerce market has seen exponential growth – more than 40 per cent year on year — and delivery timelines have shrunk for the consumer, with even same-day delivery options available for some items. This has created the need for a deeper warehousing network in the country and e-commerce and 3PL have become two of the most prominent drivers of growth in the sector.
The sustainability factor
There is no denying that the future is greener. Not only is the warehousing sector itself aware of the pressing need to reduce pollutants, but companies or tenants aiming for a net zero carbon footprint across their supply chain also make choices informed by the sustainability of a warehouse.
Warehouse developers are using ecological and recycled materials like precast concrete, recycled and reclaimed plastic, wood, steel, and plant-based polyurethane foam to reduce their carbon footprint.
Warehouses are being designed to reduce dependence on non-renewable energy sources. This is being achieved with the use of skylights and automated LED lights to utilise natural light, cool roofing, and a green cover to ensure temperature control and rooftop solar panel systems to become self-reliant. Companies such as Rhenus India, Mahindra Logistics, TVS ILP, and Snapdeal have installed solar panel systems in their new warehouses. Technological solutions like warehouse management systems, robotics, RFID and bar-coding are further optimising warehousing operations and energy requirements.
Resource utilisation is another key area to drive up sustainability. Warehouses are now being equipped with utilities like non-evaporating cooling systems to maintain temperature, rainwater harvesting facilities to conserve water. Mahindra Logistics has installed a liquid discharge system to reuse and prevent water wastage and recycling facilities for packaging and storage materials.
There is a business case here. Therefore, building sustainability into a warehouse is also a commercial must-have.
The way forward
Warehouses in India and other countries are getting larger in size and more automated compared to a decade ago to achieve operational efficiencies and cater to the growing demand.
In India, not long-ago, 50,000-100,000 sq. ft warehouses were being classified as Grade A/A+. However, with the entry and expansion of global players, the Indian warehousing market has witnessed rapid maturity akin to more developed nations with single tenants leasing over 1 million sq. ft in big cities.
Larger, more environment-friendly warehouses are the best way to optimise demand going forward.