New research has forecast double-digit growth in the warehouse automation market over the next five years. The report, by market research firm Interact Analysis, reveals how the rise of e-commerce and omni-channel retail has been a catalyst for automation applications in warehouses globally. Growing consumer demand for faster and cheaper online delivery options has seen many retailers investing in warehouse automation to reduce order processing times and to cope with the increasingly complex network of distribution channels. 

The news is tempered by the forecast of a temporary dip in year-on-year growth in the short term. Among the reasons attributed to this slowdown, predicted between 2020 and 2021, are growing tensions between the US and China, along with slowing demand in Europe, leading to uncertainty within the global economy. This has resulted in many firms delaying capital expenditure projects until business conditions are more settled.

The longer-term growth outlook, however, gives reason to be positive. In addition to the logistical complexities of online order fulfilment, labour 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. This especially affects 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. 

Elsewhere, the report provides insight into emerging areas of opportunity within warehouse automation. With forecasts demonstrating the potential to slow in 2020 and in particular 2021, service, maintenance and aftermarket sales will become an increasingly important part of system integrators’ business models. 

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 also increase over time. This alleviates 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 has 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. The propensity for customers to take out service and maintenance contracts is typically linked to a number of key factors.

Geographically, German and US-based companies are more likely to service equipment themselves, and not look for external support, while in the UK there is a preference for the instant convenience of taking out full service contracts. The type of company will also have an effect on its likelihood to utilise service contracts. Manufacturing industries, and particularly larger organisations within those industries, tend to have dedicated on-site technicians. Retailers, on the other hand, would require more service from the integrator. 

Also of note is the business model employed by the end-user. The growing demand for e-commerce has resulted in the proliferation of online retailers. The competitive and dynamic nature of the online marketplace means 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 three years. Furthermore, online retailers tend to have higher order throughputs and invest more in servicing and maintenance to limit system downtime.  

Looking at the wider picture, there is reason to be optimistic. 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.

Rueben Scriven, Research Analyst, Interact Analysis