Ultra-modern ´godowns´

Warehousing market is pegged at Rs 56,000 crore and is expected to grow annually at an average rate of 8 to 10 per cent over the next 5 years to reach a level of 1500 to 1600 million sq ft by 2020. In order to achieve the target, an addition of 80-110 million sq ft of capacity that entails an investment of Rs 20,000-50,000 crore per year is necessary.

The warehousing sector is witnessing a paradigm shift and high growth potential with factors like relaxation in the FDI regulation in the retail sector, the passage of Goods and Services Tax (GST) Bill, economic reforms, and infrastructure and growth in the sectors like retail and pharma.

The warehouse sector, tagged as one of the most unorganised sectors, has been endeavouring hard to redefine its status of ¨godowns¨ by adopting modern systems and technologies for better space utilisation. According to the industry players, the sector is on a growth path as the companies are trying to adapt new concepts to match up with international standards.

Warehouses with modern formats
The Indian warehousing segment has evolved significantly in recent times, resulting in metamorphosis from the traditional concept into modern formats. There has been a focus on modern ware¡housing formats in the last decade, with its share estimated to have grown from 15 per cent (62 million sq ft) in 2010 to 30 per cent (178 million sq ft) in 2015.

Warehouses, an integral part of the logistics industry, was known for poor Warehouse Management Systems (WMS), viz., cramped inadequate ventilation and improper lighting as well as lack of racking and inventory management. Now-a-days, warehousing is undergoing a sea change. Logistics companies are looking towards modern techniques and data management systems.

While taking a positive note of the transformation in the warehousing sector, Prahlad Tanwar, Director – Transport & Logistics, KPMG, says, ¨The existing landscape of fragmented, unorganised small godowns will be replaced. Large hubs in key locations, coupled with smaller spoke warehouses closer to production and consumption centres are to emerge.¨

The increased implementation of technology in warehousing is also expected to drive a strong and efficient modern warehousing system that encourages accuracy, inventory tracking, and lowered operational costs.

Kirtika Doger, Research Lead, KPMG, agrees with Tanwar and reiterates, ¨Many warehouses are building new storage models such as multi-modal logistics parks (MMLPs), mega food parks (MFPs), and Free Trade Warehousing Zones (FTWZ) in coherence with key infrastructure projects in ports, highways, and rail projects, which will facilitate cohesive network development.¨

Warehouses: Not mere storage spaces
The essence of warehousing has grown from a mere storage space to a place for value-added activities. According to industry players, the progress can add significant value to a company´s supply chain. The increasing trend of outsourcing warehousing for companies and the growing access to modern warehousing infrastructure will lead to standardisation, as more organised players will enter the market.

Vikas Anand, Managing Director, DHL Supply Chain India Pvt Ltd, says, ¨Customers today require us to provide robust solutions. Supply chain organisations are now required to go much beyond just the traditional warehousing and transportation and have a more active participation – right from planning, sourcing, production, storage, configuration, and delivery to after-sales and returns.¨ Speaking about DHL Supply Chain he says, ¨We offer value added services like packaging, secondary packaging, co-packing, promo-bundling, and kitting, and facilitate postponement logistics and reverse logistics, especially in the area of spare parts logistics.¨

Highlighting the concerns of the sector, Manish R Sharma, Partner – Capital Projects & Infrastructure, PwC India, says that the immediate challenges being faced by this sector is non-availability of land, skilled manpower, erratic power supply, and additional cost of operating diesel power gensets.

¨Monetising surplus railway land to set up warehouses, and guaranteed power supply to cold chains would go a long way in promoting private investment. Up-gradation of state warehouses, IT enabled systems for co-ordination among various warehouse agencies and Food Corporation of India (FCI), and easier access to Warehouse Depository Receipts (WDR) would be critical,¨ informs Sharma. Warehousing services are gradually progressing from just a stocking point to a sorting centre and an assembly facility for final fabrication, kitting, and bundling. The observers of logistics inform that roads, waterways, and railways fall short of meeting this daunting demand.

Enhancement of logistics necessary
Logistics sector drives the growth of the warehousing industry. However, inefficiencies in the logistics sector like poor transportation, storage infrastructure, and poor facilities and management are responsible for high levels of loss and damage.

Though India can boast of the second largest network of roads (4.24 million km), rail (63,000 km), 128 airports, 13 major ports, and 187 non-major ports, the freight services are not up to the mark.

Only 57 per cent of the freight is transported by road, 36 per cent by railways, six per cent by water, and less than one per cent by air.

¨Logistics sector continues to witness stress levels in the form of demand and supply mismatch across capacity, costs, and level of service,¨ says Sharma. Cargo logistics can be broken down into three distinct categories – transport (road, rail, and water), storage, and knowledge management (KM). He adds, ¨While the use of KM has grown significantly over the past 5-10 years, 85 per cent of total capacity remains unorganised and highly fragmented. Road transport has witnessed significant capacity addition (commercial vehicles & length of highways), but railways and waterways remain under-invested, which is partially responsible for the higher logistics cost.¨

As per Warehousing Development and Regulatory Authority (WDRA), the infrastructural bottlenecks in road, rail, and ports are a huge disadvantage for the sector.

¨A well-linked highway network with inter-state roads and congestion free city roads, which is critical for warehousing operation, is a miss. The development of some Dedicated Freight Corridors (DFCs), the Golden Quadrilateral, and the East-West highway corridors, would boost the warehouse sector,¨ an official from WRDA says.

An overall need to expedite airports and road infrastructure would allow the industry to take better advantage of opportunities. As infrastructure development projects have a long gestation period, there is a huge gap between demand and supply.

¨Though we have one of the largest road and rail networks in the world, it is not really operating efficiently. Our rail network has not been upgraded in a long time and the expansion of road network is a very recent phenomenon. Unless basic infrastructural issues are taken care, we shall not be able to take advantage of such a wide network,¨ said Praveen Sinha, Co-founder and Managing Director, Jabong.com.

The Logistics Service Providers (LSP) demand unified regulatory logistics body for integrated planning across shipping, road, aviation, and warehousing segments.

GST: A game changer
The roll out of Goods and Services Tax (GST) will play a critical role in the next level of growth in the warehousing sector. It will lead companies to consolidate, re-design and optimise their current networks, and move to a hub and spoke model, with primary and secondary hubs. Inter-state freight is likely to increase along with a reduction in the number of depots and stock transfers.

¨A single unified tax on both ´goods´ and ´services´ with the objective of eliminating tax cascades will bring about a transition from the existing origin-based to a destination-based taxation regime. By using network strategy, every distribution-intensive company has an opportunity to re-look at their supply chain structure and align their supply chain distribution network to customer markets, moving away from tax issues,¨ Anand informs.

Various structural changes that would be witnessed post GST would comprise – larger warehouse areas, increased spend on material handling equipment, increased spend on software, increased demand for heavier commercial vehicles, and increased investment by international players in logistics and warehousing.

Backbone of E-commerce
In the next five years, the e-commerce sales is expected to touch Rs 2.6 lakh crore in India. Warehousing is considered as one of the crucial elements of the e-commerce industry.

¨Warehouses are the backbone of the e-commerce industry. For e-commerce, the demand for warehousing sector is mainly driven by domestic trade. Jabong currently has multiple warehouses with two master warehouses and a set of packaging centres and will be opening up new warehouses in the next five years,¨ Sinha informs.

Meanwhile, Myntra has five warehouses, which are spread across five lakh sq ft and is expected to double it soon. Zivame also expects to increase storage from its current 12,000 sq ft. Amazon, America´s largest online retailer, has about 30 warehouses in India.

Cold Chain in development phase
Despite the e-commerce industry witnessing a huge boom via warehouse, the cold chain sector is still in a development phase. Since the industry requires large investment and with depreciation and quality expectations being very high, it is still taking time to develop.

Valued at USD 3.1 billion in 2013, the Indian cold chain industry is highly fragmented with over 30 million tonnes of cold storage space and over 250 transport operators that run 7000 reefer vehicles. Eighty per cent of the total storage capacity in India´s cold chain sector is unorganised.

¨Over the next five years, the cold chain storage segment is expected to grow at a CAGR of 8 per cent (by volume) and 17 per cent (by value), driven by the emergence of organised retail sector, favourable FDI policies in retail, 100 per cent duty exemption on refrigeration equipment, and development of mega food parks. Players will be able to optimise their warehousing footprint and take advantage of economies of scale,¨ Tanwar says.

The increasing penetration of quick service restaurants (QSR) and confectionery in tier II cities, 30 per cent growth in the QSR segment is further expected to drive growth. Growing exports of perishables, chilled and frozen processing raw materials, along with growth in the pharmaceuticals industry are also expected to drive growth in the industry.

The cold chain sector was accorded infrastructure status in FY2011-12 Budget with a slew of other excise & import duty cuts on import of refrigeration panels & conveyor belts used for setting up TCW (temperature controlled warehouse) and TCV (temperature controlled vehicles).

¨While these sops attract initial investments, core issues of high land cost, high energy cost, erratic power supply will have to be tackled on top priority to ensure significant private investment,¨ Sharma said.

FTWZ yet to take off
Industry experts believe that with increasing importance on infrastructure, roll out of GST, the FTWZ model would offer significant potential to save costs in the overall supply chain.

According to Frost & Sullivan, India is yet to achieve expected benefits out of FTWZ mainly due to its inability to enhance export competitiveness for warehousing intensive industries such as foods, consumer goods, and electronics, when compared with countries like China, Malaysia, and Taiwan.

The FWTZ concept offers a world-class, single-window solution for multiple logistics activities, with special focus on EXIM flow. The model offers significant potential to save costs in the overall supply chain, while offering excellent infrastructure, mechanisation, and regulatory incentives.

¨FTWZs can help save supply chain costs, while also earning and conserving foreign exchange for India. Vendor Managed and Just In Time (VMI/ JIT) inventory management concepts which are difficult to practice in India currently are easily possible from FTWZs, apart from the multi-vendor consolidations for multi-country re-exports,¨ Anand adds.

The FTWZ model in India has not taken off at the desired scale owing to regulatory challenges, including lack of clarity of operation of these zones. With GST implementation being planned, a renewed interest and political will to push the cause of FTWZs is expected.

¨FTWZs would enable efficient distribution, quicker delivery times, and better customer experience by building the entire supply ecosystem in one place. Infrastructure for logistics (road, rail, air connectivity) will be important for the success of FTWZs,¨ Sinha from jabong adds.

The industry players opine that with the introduction of various government schemes such as Gramin Bhandaran Yojana (GBY), Private Entrepreneurs Guarantee (PEG), and negotiable warehousing receipts and initiatives such as infrastructure status to cold storage facilities will propel growth of the overall warehousing segment in the coming years.

Growth in the coming years is expected to be driven by rising domestic and EXIM freight volumes, increased outsourcing to 3PL players, strengthened investment in infrastructure, organised retail, and the impending implementation of Goods and Services Tax (GST).