Is the industrial sector positioned for even stronger growth after Covid-19?

The Covid-19 crisis has resulted in winners and losers within retailing as consumer habits have been forced to adapt to the “new normal”. Retailers and supermarkets offering online services have recorded huge increases in demand. Other sectors, such as restaurants and department stores, haven’t fared so well, and many companies have announced that some of their stores will not reopen when the lockdowns end.  

Lockdowns have accelerated the uptake of online shopping

With non-essential shops forced to close during the pandemic, the uptake of online shopping has accelerated dramatically across all age groups. We believe that even when physical shops are fully reopened many people will continue to shop online as users (many of whom were first-time e-shoppers) have realised how simple and convenient it can be.

E-commerce has been expanding for a number of years and Covid-19 is unlikely to quell this growth. In fact, the pandemic may increase the speed of its adoption around the world and the number of consumers who shop online. In the hardest-hit markets, e-commerce may become even more important to the basic functioning of everyday life.

Strong demand for storage due to higher inventory levels

We also expect a sharp increase in logistics demand for “safety stock” as many retailers were caught out by the dramatic increase in demand during the early stages of lockdown. This was a result of the widespread use of just-in-time inventory strategies which have been prevalent in retailing for the past 10 years. Inventories could increase by between 5% and 10% as businesses and retailers transition from a just-in-time to a just-in-case strategy.

Manufacturing could move closer to consumption

Another dramatic consequence of the disruption caused by Covid-19 could be the potential for companies to move operations back to their original location (on shoring) to bring manufacturing closer to consumption, as businesses seek to avoid future disruption to supply chains.

China will remain the dominant manufacturing hub because of its experience, size and cost advantages. However, a number of businesses in areas such as healthcare and semiconductors are now looking at moving their production back onshore.

Urbanization will continue despite the Covid-19 crisis

Although Covid-19 is leading some people to relocate from cities to rural or suburban areas, we believe that this is a temporary phenomenon with limited short-term implications for global cities. While there may be a switch from city living to suburban living, the world’s top consumption markets are unlikely to shift materially.  

Network effect

As levels of e-commerce penetration increases, the data harvested by both manufacturers and distributors increases, this results in more efficient distribution networks.  This can be seen from companies such as Amazon, which are now able to offer some consumers delivery of goods within four hours, something that would have been inconceivable 10 years ago.

When you consider the increased e-commerce volumes since the Covid-19 pandemic started it is easy to see why this larger data set will improve supply chains further.

Analogue or digital?

It is clear that the digitalization of the economy has taken another dramatic leap forward due to Covid-19.  Although these trends were already in motion before the pandemic, they have now been accelerated.  When we assess the long-term demand drivers for distribution warehouses it is easy to see why we are optimistic. In contrast we would view other parts of the real estate market, such as retail and office assets, as analogue products which are not fit for a digital world.

For us, the picture is clear, distribution warehouses are an essential component of the digital economy.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.