With a background in computational biology, Rueben Scriven joined Interact Analysis two years ago and leads the warehouse automation and on-highway commercial vehicle research areas. Rueben has spoken at some of the leading industry events and moderated several panel discussions on the topic of commercial vehicle electrification. He’s also appeared on CNBC to provide insight on the global electric bus market.
During the past few years, the warehouse automation market has been enjoying double-digit growth rates driven, in part, by the rise of e-commerce and omni-channel retail. With the growing consumer demand for faster and cheaper online delivery options, many retailers have been investing in warehouse automation to reduce order processing times and to cope with the increasingly complex network of distribution channels.
In addition to the logistical complexities of online order fulfilment, labor availability has also been a significant driver for automating warehouses. With the US unemployment rate currently at 3.8%, recruiting and retaining qualified staff is plaguing retailers and manufacturers alike, especially those exposed to e-commerce where demand is more difficult to forecast and the seasonal spikes in demand can be several times higher than the rest of the year. In light of these circumstances, many retailers and manufacturers have implemented automation to alleviate some of these pressures.
Our recently released market report forecast that the warehouse automation market will grow at a CAGR of 12.6% over the next five years; however, we forecast a temporary dip in revenue growth between 2020 and 2021 (See Figure 1). With the growing trade tensions between the US and China, coupled with slowing demand in Europe, the global economy is looking increasingly vulnerable and many businesses are delaying capital expenditure which has been reflecting in warehouse automation vendors reporting a sharp drop in their order intake.
Worrying Drop in Order Intake
Q1 2019 provided some hope for the warehouse automation market with Dematic and Honeywell Intelligrated reporting strong order intake (OI) and revenue growth. In fact, Dematic’s OI was up 52% YoY in the quarter. However, the results from Q2 2019 painted a different picture. Dematic’s H1 2019 OI – a good indicator of future revenue generating capacity – was down 13% YoY (although this was in part due to a record H1 2018). Furthermore, Honeywell Intelligrated reported Q2 revenue growth of just 6.8% YoY, a significant drop compared to previous quarters. Kardex Group’s Q2 results were particularly interesting. While its Mlog division, which integrates large-scale solutions, recorded a decline in bookings of 43% YoY, its Remstar division, which sells smaller ‘stand-alone’ storage solutions which typically cater for SMEs, saw an increase of 7.5% in bookings. Kardex Group attributes this discrepancy, in part, to a certain hesitance in the market to go ahead with major investments.
Service and Maintenance: An Increasingly Important Revenue Stream
With market growth forecast to slow in 2020 and in particular 2021, service and maintenance and aftermarket sales will become an increasingly important part of system integrator’s business models (See Figure 2). Service and maintenance contracts are paid on a predictable and recurring basis which means that as the installed base increases, the revenues generated from service and maintenance contracts will also increase over time which will alleviate some of the pressures from weaker order intake in the short-term. Furthermore, while the typical margins for equipment sales tends to be between 3% to 5%, margins for service and maintenance can be as high as 15% which will have a positive impact on profitability.
While most system integrators will encourage their customers to take out service and maintenance contracts, the contract length and the level of service provided can vary significantly. On one extreme, the system integrator will provide on-site maintenance and premium hotline services, while in some cases, the customers choose to service and maintain the automated systems themselves. In other cases, the integrator might provide annual system diagnostics and offer hotline services for software and PLC faults. The propensity for customers to take out service and maintenance contracts is correlated to a number of key factors:
- Geography: The uptake of service contracts varies considerably by region. For example, companies based in the UK typically take out full service contracts, whilst German and US-based companies are more likely to service the equipment themselves.
- Company type: Manufacturing industries which have their own on-site technicians will be less likely to take out full servicing contracts, while retailers, on the other hand, which have fewer on-site technicians tend to require more service from the integrators.
- Business model: The growing demand for e-commerce has resulted in the proliferation of online retailers. The competitive and dynamic nature of the online market-place means that retailers are frequently adapting and adjusting their business models. As a result, service contract lengths for e-commerce warehouses have decreased from 10 – 20 years to 3 years with a 3 -5 year extension clause. Furthermore, online retailers tend to have higher order throughputs and invest more in servicing and maintenance to limit system downtime.
While order intake for large warehouse automation projects may be slowing in the short-term because of political and economic uncertainty, we forecast the market will return to double-digit growth rates by 2022 following the dip in revenue growth between 2020 and 2021. In the mid- to long-term, the logistical pressures which e-commerce puts on distribution networks and the growing consumer demand for faster and cheaper online delivery options will drive long-term and sustained growth in the warehouse automation market.