2009 will go down as one of the worst ever for materials handling equipment and DC automation system sales.

Beyond the recession that crimped budgets and left companies hoarding cash where they could, distribution volumes dropped for most companies, reducing the volume pressures that are often the catalyst for distribution center automation projects.

The numbers from the industry trade group, the Material Handling Industry of America (MHIA), tell the sad but true tale: new materials handling equipment orders of all kinds will drop 35-38% when the year is over, according to the group’s economists.

In the conveyor segment (which includes manufacturing and distribution), new orders are expected to decline about 25% this year versus 2008.

Hal Vandiver, MHIA’s executive vice president of business development said last month that, “We are in the middle of a contraction this year, but the worst appears to be over.”

He says the group now predicts an increase in new orders in the 2-3.5% range in 2010. However, given the lag in shipments versus orders, shipments of materials handling equipment will still shrink 5.5% next year even with an increase in orders, MHIA says.

In fact, what has saved many materials handling industry providers this year is that a number of companies did continue with new distribution center openings and projects that were planned before the recession hit full force.

To take just one example, Home Depot continued to roll out it new regional cross dock distribution centers that use a significant amount of conveying and sortation equipment, though the rollout pace slowed a bit versus the original plans. Still, it is these types of rollouts that have kept the lights on at many providers even as brand new orders slowed dramatically or even stopped cold for some in the business.

Taking the Activity Pulse of MHS Providers

Leading materials handling manufacturers seem to be bullish on current activity and many say their pipelines of potential projects are growing rapidly.

That starts with companies that are now getting around to small to mid-sized projects that have been sitting stagnant for many months but which they are deciding that its time to finally move forward on.

“There is a pent up demand for many of these smaller projects – upgrades, minor enhancements and other work that has a strong ROI, that companies are starting to get done,” says Jim McKnight, VP of Sales and Marketing at Intelligrated, which recently bought FKI Logistex.

Virtually every provider we spoke to said that their “customer service business” is seeing good activity for audits and technology upgrades such as sorter rebuilds, or in some cases a complete sorter replacement, including system controls and software upgrades.

McKnight also says he is seeing sales and proposal activity really ramp up. Our own research has found that in some cases, it is network consolidation spurred by the recession that is actually creating the new demand: companies have pushed more work into fewer DCs, lifting the ROI for investment in automation.

“Our activity in the last quarter has increased significantly in all sectors,” McKnight said. “Projects that were talked about a year or so ago, but just died on the vine are starting to resurface again. It seems like 2 to 3 opportunities a week are showing up on the radar in various sizes. We are having a very busy active quote backlog right now.”

Jim Stollberg, VP of Business Development at HK Systems, also sees a strong light at the end of the 2009 tunnel.

“After a pretty tough first half, our Q3 was strong and our pipeline is growing,” says Stollberg.

“We are seeing more activity than we saw six months ago. We are seeing a combination of distribution center consolidations, retro-fits, expansions and new facilities being designed and implemented across a variety of industries,” says Peter Counihan, President of Fortna Inc., a large materials handling systems integrator.

Some of these system providers are seeing actual sales, not just proposal activity, start to pick up.

“There have been 8 to 10 in just the last couple of months in the $500,000 to $3 million range, plus a few larger projects. We have had pretty good booking months in September, October, and continuing into November,” says Intelligrated’s McKnight. “We are optimistic because our quote pipeline for new business is filling up and that’s a good indication that companies are budgeting for next year’s projects.”

HK Systems’ Stollberg is seeing a similar positive trend.

“Not only is ur pipeline growth positive, but perhaps what’s most encouraging is that the we are starting to see the return of the mega-deals – the 8 figure size – that are critical to our industry” Stollberg told us. “Although these size deals often have a long sales cycle, the fact that they are back is an indication that we may have turned the corner.”

What Sectors Are Investing?

Across these interviews and other research conducted by Distribution Digest, there is general agreement that the greatest level of continued spend and new project activity is in the related sectors of food, beverage and consumer packaged goods.

Those are among the industry that have been least impacted by the recession in terms of volumes, and need to continuously reduce costs to maintain profit growth among single digit at best revenue gains.

Our recent report on Automated Case Picking, for example, showed the beverage sector was by far the most active in piloting and adopting these new case picking technologies, even during the slowdown (see Automated Case Picking Report).

Other sectors that are the most active in new material handling investment include:

• Pharmaceuticals
• Spare and service parts
• Food wholesale
• Companies with high small parcel volumes

Other MHS providers we spoke with said that their customer service business is seeing release of spending for audits and technology upgrades like sorter rebuilds, or in some cases a complete sorter replacement, including system controls and software upgrades. There appears to be quite a bit of activity going on in this area.

Final Thoughts

As it relates to the economy in general, it’s hard to tell whether we are near the end of the recession or just further from the beginning. One thing we can say for sure is that it’s a buyer’s market, and that most certainly applies to material handling equipment, systems, and services. It appears that many logistics companies are taking advantage of this in part by upgrading existing systems.

The natural competitive drive of top performing companies can be stymied for just so long. Based on the increased sales and proposal activity that most MHS providers are now reporting, it is very likely that 2010 will see manufacturing and logistics companies, across a broad market sector, move forward with previously shelved projects as well as new initiatives as volumes increase, cash is more readily available, and they deal with consolidation of DC facilities.

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