The coronavirus pandemic disrupted delicate global supply chains, dragging companies down with new costs, risks and challenges overnight. But smart technology — in the form of wired warehouses — is turbocharging online retail's ability to keep goods flowing to consumers.
XSophisticated and digital industrial warehouses are booting up fast across the country. Many serve giant companies like Amazon (AMZN) and Walmart (WMT) that ship to consumers. Smaller merchants like Shopify (SHOP) also are building or overhauling warehouses to use software and robotics, rather than just sweat and muscle.
And it's clear smart warehouses are the way forward as global supply chains need to be reimagined and automated in a coronavirus-rattled economy. Investors, too, are profiting from the important shift that's only accelerating.
Online Retail Needs An Upgrade
Powerful global economic forces, such as the rise of online retail and e-commerce business, put smart warehouses in motion a decade ago. The coronavirus pandemic, highlighting worker safety issues and new demands for one-day shipping, is speeding it up.
Consumers are suddenly leery of exposing themselves to strangers in brick-and-mortar stores, malls and parking lots. Governors closed down entire sectors of business. And many workers aren't thrilled about being on the front lines.
Companies also saw how the flow of goods around the world, especially products from China, is easily disrupted. Firms are shifting to new distribution networks to safeguard themselves and their revenue.
"As warehouse tenants diversify away from their reliance on China, they will likely need new warehouses," said Blaine Heck, a Wells Fargo senior equities research analyst, who covers real estate. "They'll need more smart warehouses, because smart means more efficient, less costly to operate."
Wired Warehouses Take Off In Online Retail
A year ago Deloitte and MHI, a logistics trade group, found only 20% of materials handling and logistics professionals considered wired supply chains the norm. But 80% said it would be the norm within five years.
Further, they intend to put their money where their mouths are. Half planned to spend more than $1 million on smart warehouse technologies in the next 24 months. Another 25% planned to spend more than $5 million. And 5% planned to spend more than $50 million on this aspect of online retail.
Over the past 20 years, demand for overall industrial warehouse space grew by about 160 million to 180 million square feet a year, says David Rodgers, a senior research analyst for Robert W. Baird.
And the growth in that demand is seen climbing to the top of that range between now and 2023, professional services firm Deloitte forecast late last year. Much of the new space is going to wired warehouses.
What Makes A Warehouse Smart?
Enter the wired warehouse in the supply chain and online retail.
A smart warehouse is much more than a building filled with bins and conveyor belts. Wired warehouses are populated with robots and smart machines. Floors, walls, ceilings and ID tags on merchandise tell driverless carts where to go.
Conveyor belts, carts, shelves and fork lifts talk to each other — and their human overseers. Each item of merchandise has a way of signaling where it is and where it's going. Bar codes, sensors and radio ID tags are on everything headed out the door.
Warehouses Become Robot Buildings
Products head to shelves, then to customers, speeding along conveyor belts that know when to sidetrack items through off ramps. Self-propelled automated guided vehicles called AGVs replace motorized carts.
Even people are integrated into the whizzing traffic. Some workers wear smart eyeglasses that show them where to place packages in a cart. The maestro orchestrating the movement of goods is often integrated warehouse management software (WMS).
"Two years ago we wanted robots that could find and move a carton of toothpaste," said Thomas Boykin, an expert in supply chain logistics and network operations for Deloitte Consulting. "Now we want robots that can find that carton, pick out just two tubes of toothpaste and ship it to an individual who probably expects same-day delivery."
Wired Warehouses: Who The Online Retail Business Players Are
Who is powering the wired warehouse revolution? First, the businesses using the warehouses. Those include companies like Amazon, Walmart, FedEx (FDX) and Shopify.
Those occupants rent or buy from landlords and developers, including REITs like Prologis (PLD), which Amazon relies on. Other publicly traded real estate investment trusts in that group are Duke Realty (DRE) and Stag Industrial (STAG).
Then there are the companies that trick out the warehouses with smart warehouse technology. Privately owned Boston Dynamics makes robots. DHL, whose parent is Deutsche Post, and XPO Logistics (XPO) are third-party logistics firms that advise tenants on what smart warehouse technology to use or choose it for them.
What Wall Street Says About Smart Warehouses
Investors clearly see the future in wired warehouses in online retail.
Prologis, the company that owns the most industrial space on Earth, has seen its shares skyrocket more than 16% over the past 12 months. Shares rallied strongly from their March lows as investors anticipated the economy reopening. That far surpasses the 5% rise in the S&P 500 the past 12 months. Prologis was among 50 Best ESG Companies recognized by IBD in 2019.
Prologis is the top holding in the Pacer Benchmark Industrial Real Estate Sector ETF (INDS), which represents smart warehouses. That ETF is up 2% in 12 months. That outpaces the 12% drop in companies in the broad commercial real-estate market. The U.S. Diversified Real Estate ETF (PPTY), a broad real-estate ETF, is down 15% in 12 months.
Smart Warehouse Technology Capitalizes On Online Retail
What are investors getting in ahead of? The biggest force currently driving wired warehouses is the sustained jump in e-commerce and online retail due to the coronavirus pandemic.
"The (coronavirus) crisis is likely forcing some late adopters to embrace e-commerce, demand that we expect to be sticky coming out of the crisis," said an April 1 report by Wells Fargo's Heck.
"Customers want quicker delivery times, shorter turnaround, better response," said Deloitte Consulting expert Brock Oswald. "The digital revolution is an important part of delivering on those demands."
Meanwhile, pressure from end consumers for increasingly fast delivery is taking off. Warehouse occupants seek ways to put facilities as close as possible to populations who clamor for next-day and same-day delivery.
"If you're going to spend extra money acquiring prime locations, building new facilities or adapting existing facilities, that's added cost," said Beth Gutelius, research director at the University of Illinois' Center for Urban Development. Efficiency becomes imperative. "You do that by automating it as much as possible. You find the right mix of robots and people," she said.
Smart Warehouses Evolve At Right Time
Warehouse occupants also need different warehouses as online retail and other companies diversify sourcing away from China.
"Supply chains will continue to be reconfigured with a focus on geographical diversification — decreased reliance on China," Heck said. "As warehouse tenants diversify away from their reliance on China, they will likely need to occupy warehouses in different markets than they had been."
And as distributors seek additional warehouses, they aim to offset those new costs by demanding smart warehouse technology that will enable distributors to run those warehouses more efficiently and less expensively.
"Our job is to find ways to make that happen for them," said Will O'Donnell, managing partner of Prologis Ventures, the venture capital arm of Prologis.
Wired Warehouse Trend Is Lighting Up Fast
The coronavirus pandemic is pushing the wired warehouse for more immediate reasons, too. Employees calling in sick can't fill orders. And employees must stand far apart when they return to work.
Some workers at an Amazon warehouse in the Pocono Mountains of northeastern Pennsylvania reportedly walked off their jobs March 27 when they learned an employee tested positive for coronavirus. More than 900 of the online retail colossus's 400,000 blue-collar workers have had Covid-19, the disease caused by coronavirus, one analysis suggests.
"Will workers show up if going to work means risking your life?" said Gutelius. "Operators don't know. So they've got to factor that into their decisions about what types of warehouses they want."
Worth The Upfront Supply Chain Cost
Wired warehouses may cost more to build and furnish than old-fashioned warehouses. But new supply chain technology makes smart warehouses cheaper to run than pre-digital distribution facilities. And robots and software nearly always show up for work.
"There is rising demand," Gutelius said. "It is uneven across the industry. But it's forcing warehouse operators to figure out the right mix of robots, software and people."
Suddenly smart arms, carts and shelves are must-haves in online retail to keep a supply chain humming.
"The Covid-19 crisis has given us a preview of what e-commerce and grocery and hardware and medical warehouses will look like in three to five years," said Vince Martinelli, head of product and marketing for RightHand Robotics, a Somerville, Mass., maker of robotic handlike grippers. RightHand's grippers combine interactive-touch sensors, computer vision and machine learning to pick up and move things they have never handled before.
Rick Faulk, CEO of Locus Robotics in Wilmington, Mass., says amid the coronavirus crisis, his company's smart warehouse carts have moved an astounding 15% to 20% more items — shoes and apparel, cosmetics, automotive parts, medical devices, pharmaceuticals, technology components and more — at customers' warehouses every single week for months.
Berkshire Grey, a Lexington, Mass., provider of smart warehouse infrastructure, says its robotics systems can drop an industrial warehouse's operating costs by up to 70%.
Expect More From The Robot Supply Chain
Smart warehouses will only grow as old warehouses outlive their utility. One U.S. parts manufacturer could not find workers to take jobs in a large warehouse, says a Deloitte study. Why not? Workers had to walk up to 30 minutes to reach infrequently sold items stored in the back of the distribution center. Then the workers had to lug ordered merchandise back to the other end of the warehouse for shipping.
The work was time-consuming, demoralizing and exhausting. No one would take those jobs.
Carts were considered. But rather than take human workers away from what they were already working on, smart warehouse technology was the solution. The retrieval task was given to robots made by Waypoint Robotics, of Nashua, N.H. Waypoint's Vector robots fetched the faraway parts and brought them to human workers for final packing. The people felt empowered by in effect becoming the robots' supervisors.
"Workers have more energy at the end of the day and feel proud and happy to work with robots that may help advance and extend their careers," Deloitte reported.
And the implementation of smart warehouse technology — in this case, in the form of robotic retrievers — provides a view of the future of online retail.
Smart Warehouses: Do Humans Fit In The Supply Chain?
And what about people? Are smart warehouses going to put workers out of their jobs?
Boykin shoots that idea down. "There is always a role for people inside warehouses," Boykin said. "The monotonous, unsafe, stressful tasks can be done by robots. But the more automated things get ... it frees the humans to make judgments and decide how to put more robots to work."
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best mutual funds.
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