Warehouse automation market grew 28% in 2021 but will the good times last?

by Rowan Stott, Research Analyst, Interact Analysis

The warehouse automation market grew by a phenomenal 28% in 2021, with revenues reaching $36 billion, up from $28.5 billion in 2020. The growth of automation revenues in 2021 was driven mainly by the e-commerce spike caused by the pandemic.

According to FRED, US E-commerce penetration peaked at 16.4% in 2020, rising from 10% in Q1 2019. To service this increase in e-commerce demand, we saw several retailers bolstering out their fulfillment capacity. For example, Amazon’s total warehouse square footage ballooned from 272 million at the end of 2019 to 525 million at the end of 2021, according to its annual reports.

Because automation is often used in fulfillment centres due to the complexity of the operation, we saw warehouse automation investments spike during the pandemics as retailers rapidly expanded their fulfillment capacity. Amazon led the charge in terms of automation investments, accounting for more than 30% of total automation investments in the US in 2021.

The pandemic also had a significant impact on commodity prices which skyrocketed in 2020. Steel prices, for example, had more than tripled by the end of 2021 compared to pre-pandemic levels, while the cost of electronic components also increased significantly due to supply-chain constraints and poor demand forecasting. The cost of steel can make up to 80% of the value of some automated systems like unit-load AS/RS which meant that the cost of automation increased significantly during the pandemic.

Lastly, the early lockdowns resulted in many companies having artificially low revenues in 2020 as project completion dates were pushed back into 2021. Knapp, for example, suffered a -1.8% decrease in revenues in 2020, despite a 55% increase in order intake. This revenue ‘push-back’ led to somewhat artificially high revenues in 2021 and we expect completion timing will recalibrate by 2023.

Good times don’t last forever

Since its peak of 16.4%, US e-commerce penetration dropped slightly in 2021. This was largely due to a shift back to brick-and-mortar retail which is going through somewhat of a renaissance. This caught many retailers off-guard as they expected the pandemic would permanently change buying habits. In response to the slowdown in e-commerce sales, many e-commerce retailers announced a pullback in their fulfillment network expansions.

For example, Amazon announced it would be slowing down its fulfillment expansion after posting a loss in Q1 2022. This will have a significant impact on its investments in warehouse automation which we expect will be cut by 30% in 2022 with a further 15% reduction in 2023. Ocado also announced it would be reducing its expansion plans as it ponders how it will fully utilize its new facilities in Bicester and Luton in England.

Given that Amazon accounted for more than 30% of total US warehouse automation investments in 2021, this will have a significant impact on the overall warehouse automation market. Furthermore, the automation vendors most exposed to Amazon will likely now be looking elsewhere for projects which may erode margins as competition heats up.

In addition to the slowdown in e-commerce sales growth, there’s also been several other geopolitical and economic factors that have affected the market. For example, the Russia-Ukraine war has led to a rise in economic uncertainty in Europe. Coupled with soaring energy prices, some retailers and manufacturers are postponing large capital investments according to our research interviews.

Furthermore, we’ve also seen many central banks raise interest rates in order to tackle high inflation. This will increase the cost of capital and may result in companies looking to postpone investments in automation financed using debt. High interest rates, inflation and low consumer confidence will also slow retail growth and reduce appetite for warehouse automation.

2024 onwards

Long-term, however, we expect a return to steady growth. Between 2024 and 2027, we forecast revenues to grow at a CAGR of 19%, driven by improving macro-economic conditions. From 2024 onwards, we expect e-commerce growth will pick up as the geopolitical and economic environment strengthens. Furthermore, as economic conditions improve, we expect a renewed focus on shorter delivery windows from consumers which hasn’t been a top priority in recent months due to the cost of living crisis in many countries.

Our latest Warehouse Building Stock Database shows that just 18% of warehouses have some form of physical automation in them, which is expected to grow to 26% by 2027. With such a large opportunity, short-term challenges shouldn’t take away from the long-term growth potential this market faces.

Published with permission from Interact Analysis.