Eight years ago, Amazon* made what we have previously characterised as one of its best deals so far – buying Kiva Systems, now called Amazon Robotics, for $775 million. Buying this robotics expertise for its warehouses helped Amazon massively boost its delivery capacity and thereby solidify the appeal of its Prime service.
On 2 November, Ocado* put some more robotics companies into its own basket, acquiring Kindred Systems for approximately $262 million, and Haddington Dynamics for an estimated $25 million.
Kindred designs, supplies and services sophisticated item-picking robots for ecommerce and order fulfilment, and it was one of the first in the industry to successfully develop robot pickers with AI-powered vision and motion control. Haddington, on the other hand, specialises in the design and manufacture of low-cost, lightweight, and highly dexterous robotic arms that can be 3D printed; its clients include NASA.
In setting out the strategic rationale for these acquisitions, Ocado highlighted the high costs associated with sorting and selecting goods in its giant warehouses – up to £7 million annually per centre. Anything that can make this process more efficient is therefore welcome for ecommerce providers.
Coincidentally, we recently hosted a webinar with Raffaello D’Andrea, co-founder of Kiva Systems and now a strategic adviser to ROBO Global. This made clear the business case for retailers investing in logistics.
Raffaello noted that Amazon has now deployed hundreds of thousands of mobile robots that depend on artificial intelligence (AI), believing this technology can save it billions of dollars every year. Running each robot 24 hours per day, seven days a week costs only 25 cents a day in electricity, Raffaello told us; so after the initial capital outlay, the operating costs are incredibly low. One of Raffaello’s current interests is in warehouse drones. His conservative expectation is that these will cost just $1 to keep in the air for 24 hours within the next seven to 10 years.
In these and other applications, embracing robotics and AI is cost-effective, safer, autonomous (as the technology works continuously in the background once switched on), limits human errors, and its marginal costs are minimal, so it can be scaled-up rapidly and applied frequently.
In our view, pursuing greater operational efficiency can only support the already strong growth of the ecommerce logistics market, which according to Transport Intelligence is expected to enjoy a compounded annual growth rate of 12.2% from 2019-2024. This would be in line with the double-digit annual growth already achieved over the past five years.
The growth is being driven by consumers’ preference for online retail amid not just this year’s lockdowns (the trend predates the acceleration witnessed in 2020) and not just in developed markets. It is increasingly apparent in emerging markets too as they become wealthier; the annual growth rate of ecommerce logistics in Asia Pacific is expected to be 19.3% over the next five years.
The shift to online retailing is creating a high-value opportunity for logistics companies, not least because ecommerce requires the distribution of items to many more locations than in the traditional retail model of delivery to an established network of stores. Logistics costs as a percentage of sales for traditional grocery retailing are around 5%, but are thus as high as 25% for online retail. Every sale that moves from traditional retail to ecommerce can in turn create as much as five to 10 times more value for logistics companies.
So, given the value that can be created both by automating warehouses and by tapping the growth of ecommerce logistics, we were not surprised to see a leading company like Ocado – which is already a technology partner to many international supermarkets – stock up on innovative pioneers like Kindred Systems and Haddington Dynamics.
We believe the combination of robotics, AI, and ecommerce logistics is a powerful proposition for businesses and customers alike.
*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.