There are some sectors that will survive the current slowdown better than others. Storage and warehousing (S&W) within the logistics sector is one of them. Although other segments of the logistics supply chain such as transportation and retail have been affected marginally by the slowdown, S&W seems to be well insulated. This is because the demand for warehousing exceeds the supply of storage facilities. Warehousing infrastructure in India is still underdeveloped, with major LSPs just beginning to develop their warehousing infrastructure to global norms. According to Tushar Jani, chairman, warehousing service provider Transmart, "The warehousing market in this country is 3,922 million sqft and it is growing at 31 per cent annually, but supply is very miniscule."

Key Growth Drivers
All major players in the warehousing sector are either building up new capacities or developing existing assets to modern warehouses. Says Ajay Singhal, CMD, Om Group: "After a successful commissioning of our warehouse at Bhiwandi, near Mumbai, we have several upcoming warehousing projects, at Bangalore, Faridabad, Chennai, Ahmedabad, Halol, Pune, Noida, Goa, and Patna, all of which are scheduled to become operational by end-2009." An indicator of the demand for warehousing facilities is the shift in real estate investment from housing to warehousing. This shift has been caused by a depressed realty market and a rising demand for modern warehousing.

According to a study entitled 'Retail Distribution Warehousing - Empowering the Indian Retail Revolution', by Jones Lang LaSalle Meghraj (JLLM is a global real estate consultant specialising in commercial property management): "The Indian retail logistics and warehousing sector is one of the most promising sectors in the real estate context, owing to a huge demand for suitably specified retail logistics pipelines and warehousing facilities across the country that can be capitalised on." The real estate potential for warehousing primarily builds from the optimised land use in warehousing projects.

Cost cutting
The cost of logistics in India is higher as per the global norm, partly because an individual company with its own warehouse cannot reap the economies of scale generally enjoyed by an LSP. The demand for warehousing is just beginning to pick up as manufacturers, distributors, and retailers are trying to expand their reach to include new marketing territories. The biggest component in a company's logistics costs is of warehousing.

Approximately 13.5 per cent of India's GDP is spent on logistics services, which amounts to Rs.4.3 trillion. Of this, 27 per cent is spent on warehousing, and 24 per cent on carrying inventories. Companies lacking in-house expertise in warehousing are now beginning to realise that they can reduce their inventory carrying and warehousing costs by outsourcing them to an LSP. Compared to the global practice of 60-70 per cent companies outsourcing their warehousing operations to an LSP, in Indian only 25-30 per cent companies outsource their warehousing. The current low level of outsourcing in India leaves potential for a huge market in India for warehousing.

To cut costs, companies are increasingly refining their supply-chain strategies to squeeze out operational efficiencies. This they are doing by either consolidating their warehouse assets or outsourcing their storage needs. This need for cutting operational costs, along with the need to expand geographical reach, is fuelling the demand for warehousing in a major way.

Regulations
The other factor fuelling demand for warehousing services is the Warehousing Act, which was passed by the government in 2007. The lack of infrastructure necessary to comply with the Act has forced most companies to start outsourcing their warehousing requirements. Prior to this Act, a simple shed or a godown was adequate for them to store inventories on the premises. However, to comply with the new storage stipulations, companies are demanding specialised warehousing, especially in the case of hazardous and bulk storage. According to Ramesh Nair, managing director-warehousing and logistics solutions, JLLM, "The warehousing bill passed by the government in 2007 is expected to have a positive impact on the warehousing industry. Regularisation of warehouses is expected to improve quality standards and norms, which will in turn have a positive impact on the industry." Consequently, the new Act is among the major factors fuelling demand for outsourced warehousing services. Apart from manufacturing, demand for warehousing is also largely generated in the retail and export-import sectors.

Demand elasticity
Of late, a new trend in demand for warehousing is emerging. Earlier, with customers considering only the price factor in the absence of any storage regulations, demand for warehousing was very price-sensitive. But now, driven by the twin imperatives of the new Warehousing Act and the need to cut logistics costs, "Companies have become more sensitive to the quality of warehousing. The new demand for warehousing has shifted from being price-elastic to being quality-conscious," says Akash Bansal, logistics head at Om Logistics. According to JLLM's Nair, "The warehousing market is expected to be Rs.2,50,063 crore in 2015, on the back of an annual demand pegged at around 24 million sqft."

Lease v/s ownership
As far as ownership preferences go, a majority of occupiers prefer to lease warehouses because it lowers their capital expenditure and keeps their warehousing portfolio flexible in tune with the changing business needs. But significantly, companies that have already consolidated their warehousing on a regional basis prefer to own their distribution warehouses.

Industry structure
According to Manish Tripathi - assistant vice-president at IL&FS Infrastructure Development Corporation Limited, "The S&W sector is very fragmented. Nearly 80 per cent of the sector is unorganised, fragmented, and dominated by small players." However, the new Warehousing Act and increased outsourcing are metamorphosing the structure of the warehousing sector, from an unorganised to an organised sector.

Traditionally, the warehousing sector was dominated by small players that offered unsophisticated godowns vis-à-vis modern warehouses. According to Transmart CEO Bhairavi Jani, "Over 80 per cent LSPs in the unorganised sector  have space less than 10,000 sqft, 82 per cent of these are not mechanised, and those that are mechanised have only fork lifts or hydraulic hand pallet trucks. This is a far cry from the warehousing infrastructure that is in vogue globally."

During 2006, organised warehousing accounted for only 8 per cent of the total warehousing business in India. In 2008, of the total market of Rs.1,41,267 crore, the share of the organised sector stood at only Rs.13,824 crore. For 2015, in a total market valued at Rs.2,50,063 crore, the share of the organised sector is expected to touch only Rs.49,824 crore -- less than one-third of the total market. What is one of the most critical needs of the sector, today, is the industry status. "An industry as large as 6-7 per cent of our nation's GDP deserves industry recognition," says Jani of Transmart. 

Moving up the value chain
While the new Warehousing Act has made modern warehousing de rigueur, the new mantra in warehousing is to move up the value chain. A major value-addition in recent times by service providers is the flexibility in lease tenures on warehouses offered to potential customers. Most LSPs also offer value-added services such as kitting and packaging to customers at the warehouse itself. Transmart has a warehouse dedicated only to value-added activities. Says Nair: "Warehousing is slowly evolving beyond its traditional storage functions.

Warehouses are also being used as centres for repairs, invoicing, order processing, quality check, bar coding, reverse logistics, MIS, and MRTP tagging. Some warehouses are also being used as a place where material from different factories are mixed and dispatched to distributors." Customised value-added services are also needed to store electronics, ICs, motherboards, EV panels, and sensitive electronics such as integrated circuits, which need special care. According to Bansal of Om Logistics, "A major value-addition is providing a 'single window' service that provides an end-to-end logistics solution for the customer."

Bonded warehousing
A good example of value-addition is bonded warehousing. Until recently, the export-import sector was among the traditional growth drivers for free-trade zone (FTZ) and bonded warehousing. But the drop in import-export trade in the wake of the current global slowdown has temporarily suppressed demand for warehousing from this sector. Most export sectors such auto components, gem & jewellery, and readymade garments are showing reduced demand for warehousing services. Even worse, demand from the exim sector is expected to drop further as the current recession peaks up.

Cold storage
There is also major scope for value-addition by developing cold storage chains. India ranks second in the world (after China), in the production of fruits. At 32 million tonnes (mt) annually, this translates into 8 per cent of global production. Approximately 40 per cent of this output (worth a staggering $13 billion) gets wasted due to inadequate cold chain infrastructure, and more often the absence of a cold chain facility. JLLM's Nair laments: "Such infrastructure is virtually non-existent, cold storage capacities are insufficient, cold storages in close proximity of farms do not exist, transportation is inefficient and temperature-controlled transportation extremely rare." This problem also applies to the pharmaceutical sector, where many medicines need to be transported and stored in climate-control environments.

Retail warehousing
Traditionally, retail logistics had two major components - transportation and storage. However, with the increasing complexity of modern retail supply chains, the scope of logistics has also expanded beyond the traditional definition. An efficient retail logistics function has become a significant instrument for retailers to ensure competitive advantage, and its scope now includes plans and processes that allow the back-end to effectively meet consumer demand. Now, retail logistics is a rather holistic concept that involves coordinating main processes that include:

n Inbound and outbound transportation

n Warehousing

n Packaging and labelling

n Shipment consolidation

n Tracking/Tracing the products

n Inventory management

n Quality checking

n Planning for cost control
 

Mostly, retailers choose a hybrid model of distribution. The retailer may choose to manage transportation, while warehousing may be outsourced to a 3PL service provider. As said before, customised value-added services are also needed to store electronics devices and components that need special care.

Retail formats will become highly efficient in terms of space used, and warehouses will become larger and detailed. Earlier, warehouses were little more than sheds where goods were stored to be transferred to retail stores. Today, retail warehouses are more technology-oriented, with information technology tools like WMS (warehouse management system) linking stocks with retail store. Distribution of goods is more specific, based on what is being sold. Retailers are now stocking only moving goods at stores. Goods that do not move for long are retransferred to the warehouse.

For decades, retail logistics has evolved through various models. Years ago, retailers and manufacturers had to rely on a traditional distribution channel composed of transporters, clearing and forwarding agents and stockists. Since mid-1990s, the emergence of alternative modern distribution channels has allowed retailers to choose from a range of logistics service providers to achieve an efficient storage and flow of products.



Currently, there are four logistics delivery models that retailers can choose from:

n Entirely self-managed logistics and warehousing network

n Partly outsourced to traditional service providers like transporters, clearing and forwarding agents and stockists

n Partly or completely outsourced to third-party logistics service providers (otherwise known as 3PL players)

n Completely outsourced to fourth-party logistics providers
 
While the above four are broad delivery models available to manufacturers, retail chains and retailers, it has been observed through interactions with retailers and warehouse users that often hybrid models of distribution are preferred. As said before, a retail chain may choose to manage transportation of its goods while warehousing may be outsourced to a 3PL provider.

The hub-and-spoke model
There has been an increase in demand for distribution warehousing. The aggregate demand growth is projected to be over 300 per cent between 2008 and 2010, with the survey having captured responses from around two-thirds of large format anchors operational across the country. In order to give an indication of the kind of absolute demand numbers for the anchors surveyed, the total distribution warehousing stock is projected to increase from the current stock of around 5.5 million sqft to around 23 million sqft by 2010.

With an eye on expanding into new marketing territories, all LSPs in the warehousing sector are increasingly shifting to the hub-and-spoke model of distribution. This is basically due to the phasing out of the central sales tax (CST) regime and shift to value-added tax (VAT). In the new regime, customers are increasingly looking for consolidation in a regionally centralised warehouse, from where regional distribution can be launched. Previously, in order to avoid taxation on CST, manufactures had to maintain multiple warehouses. But now with the phasing out of CST, occupiers need not manage their own warehouse and can comfortably outsource it to a third party. While, currently, tier 1 and tier 2 cities are the focal point of regional warehousing and distribution operations, there is a growing need for moving warehousing to smaller cities. Near Mumbai, Bhiwandi has become a hotspot where major LSPs have warehouses servicing the western region.

Challenges facing developers
Challenges in land procurement in terms of clear title, contiguous land, transparency, approval-related delays and available infrastructure. Land classification is very clearly defined in developed markets abroad. In Indian cities, this does not exist and reclassification of land is a major concern as far as development of warehouse zones is concerned. Lack of affordable land can also emerge as a major impediment in the development of warehouses. However, there has been a clear indication on reduction of land prices in districts on the periphery of all major cities, which is encouraging.

Major players in warehousing, such as Transmart, Om logistics, DRS, Sical, Reliance Logistics, Apeejay Infra Logistics, Adani Logistics, Realterm FCH, and the CWC, have plans to build additional storage capacities. However, Bansal says, "Most of us are awaiting a correction in current real estate prices."

According to sources, the shift in investment from residential real estate to warehousing real estate is only temporary. When housing prices rebound, the existing warehousing acreage may well be diverted to building more residences again. As the warehousing sector tries frantically to cope with the galloping demand, clearly there is an urgent need to expand floor space for warehousing.
Also, considering the fact that warehousing is a 24X7 industry that can cause traffic disruptions in urban areas during peak hours, there is indeed an urgent need to integrate warehousing in urban planning.

At present, fresh demand for warehousing is depressed, as most companies are reluctant to add to operating costs by outsourcing warehousing amid the ongoing recession.

However, when the economy begins to recover, LSPs that are now developing warehousing assets will be in a position to capitalise on them in the post-depression boom in demand for warehousing. 

 

Regional warehousing hotspots
Some of the new geographical hotspots for warehousing are;

Western Region
Ahmedabad, Tarapur, Mumbai, Bhiwandi, and Pune.

Southern region
Hyderabad, Chennai, Bangalore, Coimbatore, Trichi, and Kochi.

Nothern region
Srinagar,  Dehradun, Rourkee, Delhi, Noida, Gurgaon, Lucknow, and Jaipur.

Eastern region
Kolkata.



Warehouses are going hi-tech
The new warehouses being built are now leveraging technology to ensure seamless intergrated warehousing and increase operational efficincies. Advances in technology and warehouse design are redifining overall supply-chain strategies. The focus is on paletisation, binning, multi level racking,   RFID, and material handling equipment, to enable automated storage and retrieval. In warehouse construction, the emerging trend is of pre-engineered buildings (PEB), which can be built  faster, and taller (high roofs), enabling multiple level racking to increase storage space exponentially, giving more throughput per square foot of space leased.

While earlier warehouses maintained inventories based on a 'push' model, now IT and tracking software are enabling these operation to be based on a 'pull' model. Some of the important advances in warehousing  technology include;

RFID tags and bar coding, to better manage multiple standard keeping units (SKU). The tag can hold various data; including a serial number, configuration instructions, activity history (e.g., date of last maintenance, when the tag passed a specific location, etc.), or even temperature and other data provided by sensors.

Warehouse management systems (WMS), to automate product flow throughout the entire warehouse to optimise space usage through effective picking methodologies. Typical components of a WMS include real-time receiving, putaway, slotting, web visibility, order management, shipping, event management, packing and managing returns.

Automated Storage and Retrieval Systems (AS/RS), have changed the ways in which goods are stored, and distributed. AS/RS enables controlling the movement of materials, providing a critical link in the chain of information systems that control work-in-progress, manufacturing schedules, and distribution. AS/RS warehouses are designed for maximum storage and minimum personnel on site.

Pick-to-Light, technology enables an order picker to quickly locate a product using lights attached to shelving units in the warehouse. The lights display the exact amount to be picked and require confirmation to update inventory lists. In addition to speed and accuracy in the order processing, this minimizes time spent searching for the correct stock-keeping unit (SKU).



Infra, transport segments to grow strongly
The infrastructure segments (CFS/ICD, warehousing and cold storages) are expected to grow from an estimated Rs 312 billion in 2008-09 to around Rs 498 billion (at a CAGR of 9.8 per cent) till 2013-14, according to Crisil Research.

It pointed out that the growth in the CFS/ICD segment would largely be fuelled by buoyant growth in exim trade and increasing acceptance of containerisation in port logistics. On the other hand, the warehousing segment is expected to grow due to increase in trade (both domestic and exim) and increasing share of organized players across various sectors.

Additionally, growth in cold storages segment is expected to be propelled by the growth in the food processing, organized retailing and food service industries.

Transport modes (road, rail, coastal and pipeline), which constitute around 89 per cent of the overall logistics market, are expected to grow at a healthy rate in the next few years. The total value of transport modes, which is estimated to be around Rs 2,450 billion in 2008-09, is expected to grow at CAGR of 11.1%to reach Rs 4,144 billion by 2013-14.