The Rise and Rise of Warehousing in India

The onslaught of Covid has brought upon India several challenges that it has never before seen. Equally challenging was the scale at it one sector, in particular, has stood up to the challenge, Supply Chain Logistics. Let us have a sectoral look and the growth potential of this domain.

BUSINESS ENVIRONMENTS:

India was pegged to grow to 160 Billion USD from the 70 Million USD in 2019, however, the Business Environments since then have changed dramatically. On a Global Level, China was viewed as the Factory that led the world with its extensive production and shipping logistics. However, the Covid Pandemic has forced many companies to relook this dependency and there has been a push to manufacturing critical supplies locally. Given this backdrop, India had enacted a few changes that did help favourably during the pandemic.

The most significant of the above changes include the GST, which greatly helped simplify the tax code. Prior to GST, most companies had multiple, small warehouses across states for the sole purpose of minimizing taxes. The introduction of GST allowed firms to start focusing on building efficient supply chain networks by establishing optimal-sized warehouses in fewer locations. 

Another major step the Govt. took was, to classify the entire Logistics sector as an 'Infrastructure'.

This gave the sector the much-needed impetus and funding it was in dire need of. Prior to the reorganization, it suffered from the below-listed problems. The strong institutional interest in warehouse development and operations over the last few years has transformed the warehouse from being just a large storage room to a facility that adds value in packaging, inventory management, and extraction of products. 

The sectoral end-users of warehouses can be broadly classified as 3PL (Third Party Logistics), e-Commerce, Manufacturing, FMCG, Retail, Consumer Durables. 

While some sectors such as automobiles and engineering have experienced a COVID-19 led prolonged slowdown thereby reducing demand for warehouses, others such as e-commerce and FMCG have seen a transformation in consumer behavioural patterns leading to accelerated acceptance, which in turn has led to an enhanced demand for warehouses from these end-use sectors. 

3PL operators have maintained their position as the leading end-users of warehouses over the previous three years. This observation is in line with the trend of most companies, including those in FMCG, Retail, and e-commerce outsourcing their logistics operations to 3PL operators.

The warehousing absorption by e-commerce has grown at a CAGR of 55% between FY 17 and FY 20 and stands at 8.5 Mn square feet in FY 2020. Its share in warehouse demand also grew from 15% in FY 2018 to 23% in FY 2020. 

The lockdown (March 2020 – July 2020) witnessed a specific sub-segment of e-commerce take center stage in India – online grocery, including fruits & vegetables. Falling under essentials as per the government's directive, e-commerce players in this segment continued to operate during the lockdown. In the absence of functioning physical stores in their neighbourhood, almost everyone was forced to adopt the online route for their household’s daily needs. This was further enforced due to the safety of digital payments. Interestingly, over the period of the pandemic, this forced adoption has led to transformative customer behaviour as far as e-commerce is concerned.

any e-commerce companies started opting for in-city warehousing to reduce delivery times of perishable items as well as to avoid the movement restrictions that were placed on even inter-district transportation. In-city warehousing is being seen as an important infrastructural requirement, especially in the major consumption centres, where delivery timelines are shrinking from ‘next-day’ to ‘2 hours’. 

PLIs:

The Government’s program of “Atmanirbhar Bharat” (Self-Reliant India) focuses on limiting imports and increasing domestic manufacturing capabilities. The recently introduced Production-Linked Incentives (PLIs) in various sectors such as electronics, pharmaceuticals, food products, white goods, telecom & networking products, auto components, etc. is targeted towards attracting global manufacturers and choosing India as the preferred destination. 

According to Knight Frank’s India Warehousing Market Report – 2019, the warehousing space requirement of the manufacturing sector in India will grow at a compounded annual growth rate (CAGR) of 5% in the next five years to 922 million square feet in 2024.

The biggest companies in this sector are as follows.

• Indospace-37 Mn square feet
• Mahindra Logistics-16 Mn square feet
• Welspun One-single 110 Acre Grade A logistics park
• Logos India- 2.2Mn Square feet
• Greenbase- to develop 12Mn Square feet

In terms of the different sectors that are prominent, as a function of sales, below is a block representation of the total costs when taking into account the warehouse costing.

On a High level, when trying to visualise the logistics infrastructure in the country, we have to keep below in mind

And when taking into account the city-wise warehouse growth, the following city regions were notable. Data is taken from the 2017 Knight Frank market study.

Data and Image courtesy: Binswanger-Anarock Indian Industrial & Logistics Study, Oct 2020

Of particular note is the rise of tier 2 and tier 3 cities during this lockdown in warehousing.

Also when taking into account the macro-economic arguments for India's growth

CONCLUSIONS:

India has always had a huge potential given its size and position on the global supply chain. However the issue earlier was that the country was fragmented, the sectors were unorganized, which led to several issues with efficiencies. Now given the push to streamline processes, and given the higher adoption of technology, as well as funding capital, India is poised to grow exponentially particularly in the Warehousing space.

-BasuDeo Dubey