The sun is shining on the materials handling equipment (MHE) market. Buoyed by an increasingly positive macro environment, growth in key end-sectors, and a number of disruptive technological trends, there is reason to believe investment sentiment may be increasing. This article further illuminates the market by exploring its growth drivers, key trends, and highlighting its attractiveness for private equity (PE).
How is the materials handling market defined?
Materials handling equipment can be defined as the array of equipment, tools and systems involved in the transportation and storage of goods throughout their lifecycle. As such, the market is large, estimated to be c.£4.1bn in 2023 in the UK alone1, and has many interesting segments and sub-segments. Whilst there are different ways to break down the MHE market, one relatively simple way is to segment by product category, for example, having elevators & conveyors as one segment, and winches & hoists as another. Figure 1 below illustrates this market segmentation along with the respective sizes of each segment.
Fig. 1: The UK Materials Handling Equipment Market 2023
What drives growth in the MHE market?
Given its exposure to major industrial sectors, it is unsurprising that the MHE market is correlated with GDP. However, whilst the market overall is certainly cyclical, speaking at anything above the sub-sector level masks variation, as different types of MHE rely on different end-sectors. For example, forklift truck sales are heavily influenced by demand from the warehousing sector. This sector is currently experiencing strong growth fuelled partially by the expansion of e-commerce and 3PL, and bolstered by trends such as omni-channel retail and the onshoring of supply chains in the face of a turbulent geopolitical environment. In contrast, cranes are more dependent on the construction sector, which is in the middle of a contraction in the UK, with output not expected to return to 2023 levels until 2026. As a result, the fortunes of forklifts and cranes are likely to differ significantly this year.
Still, looking at the macro-level is a helpful indicator of the overall health of the materials handling market. Taking this broad view, the outlook is increasingly positive. The UK economy appears to be turning a corner, with interest rates expected to fall further this year and stabilise at c.3% in late 20252, and GDP growth beginning to accelerate. This, combined with legislation such as full-expensing (made permanent last October), the Labour government’s focus on ‘getting Britain building’, and continued demand from warehousing, suggests there are some tailwinds in the MHE market.
Automation in the materials handling market
Discussing the future of MHE inevitably involves addressing automation, which is a rapidly growing portion of the market. This growth is being partially driven by a shortage of skilled workers (e.g. equipment operators), which is forcing employers to seek automated solutions. In the UK and Western Europe, this shortage is, in part, due to an aging population, a sector-specific skills gap and stricter immigration policies. These factors are reducing labour supply, leading to higher wages – which are substantial costs to businesses – as bargaining power swings further to employees. With the UK’s population aged over 65 projected to rise from 19% in 2022 to 27% by 2072, and manufacturers citing labour shortages as their primary internal growth barrier, it seems a sensible bet that this trend will continue.
Different sectors in the materials handling market are experiencing varying levels of automation. MHE end-sectors can broadly be categorised into warehouse management, shop-floor operations, and field operations. Warehouses, due to the predictability and recurrence of their processes, are seeing the highest levels of automation. Shop-floor operations (e.g. manufacturing) follow in second, while field operations (e.g. construction) are the least automated segment. According to LogisticsIQ, global warehouse automation is growing at an annual rate of 15% and is expected to reach a market size of £34 billion by 2028. This rapid growth underscores the importance of awareness of automation for investors, either as a promising investment area or as a disruptor to existing portfolios.
Despite the rapid growth of automation, it is not going to render every investment in traditional MHE obsolete. In some use-cases, the equipment is still in its infancy and hence the near-term risk for lots of traditional MHE is limited. To demonstrate this nuance, let’s zoom-in on the forklift truck (FLT) market. Automated Guided Vehicles (AGVs) i.e., driverless forklifts, and Automated Storage / Retrieval Systems (AS/RS) can reduce the size of the labour force in warehouses, and pose a substitution risk for traditional forklifts. On the face of it, this may seem to spell bad news for forklifts. However, in at least the medium-term, these technologies are only expected to become common place in mega-scale warehouses, where almost 24/7 utilisation can justify the high capital investment. Even then, given the amount of warehouse customisation required, automation is better suited to new-build owner-operated warehouses, further hampering the uptake of these technologies. Given this, in the medium-term, it appears unlikely that automation poses a significant risk to traditional forklifts, which have a much wider variety of use cases outside of warehouses and fixed paths, for which automation is still yet able to handle. Certainly, the majority of forklift dealers, who typically serve smaller customers, have little to worry about. Large forklift OEMs, on the other hand, have already moved into the high-growth automated segment and compete fiercely for large warehouse projects. This highlights the importance of understanding the impact of automation on market participants across the value chain, within subsectors or even at the use-case level.
Electrification
The other key trend worth addressing is electrification of MHE. Driven by businesses’ sustainability goals, stricter environmental regulation, and improvements in battery technology, MHE is increasingly being powered by batteries, rather than internal combustion engines (ICE).
Of course, this is having a varying impact on different market segments. Again, using forklifts as an example, electrification has probably been the most significant trend in that segment over the last few years, and electric forklift trucks are now sold more frequently than ICE forklifts across Western Europe. This trend has been supercharged by the transition from lead-acid to lithium-ion batteries, which have a longer lifespan, lower and safer maintenance requirements and an 8x quicker charging time. The emergence of lithium batteries is having different impacts on different market participants. For manufacturers, this has led to pressure to quickly roll-out lithium products to satisfy demand and avoid losing share. For forklift dealerships, the trend towards lithium has been good news. As forklift maintenance is almost always built into contracts upon the sale of the truck, and maintenance schedules and hence prices, as of yet, do not differ between lithium and lead-acid trucks, the lower workload associated with lithium trucks can lead to higher margins for dealers.
Contrastingly, electrification is yet to have such an impact on large MHE involved with very heavy loads. In much the same way that electric cars are now widely used, but electric lorries are yet to become commonplace, there are challenges with making large pieces of MHE electric. Being aware of how electrification is impacting different market segments is hence crucial for investors and other industry figures.
MHE & PE
There is reason to believe that the MHE market is generating interest from PE. YFM’s acquisition of Stacatruc*, a national forklift truck dealership, in September 2024, alongside IK Partners investment into A-Safe in April 2024, LDC’s investment into IWS Group in August 2022, and Elysian’s investment in SCX in January 2020, suggest some enthusiasm for the sector. The positive economic outlook, high growth segments, and alignment with disruptive technology trends mean there is the potential for high returns in the MHE market, if trends and subsector-specific demands can be navigated successfully. For example, acquiring businesses with solid fundamentals which are poised to take advantage of high growth trends in electrification or automation, or looking for fragmented segments where a buy-and-build can help achieve economies of scale, are just two ways PE could look to generate returns in this market.
Conclusion
Understanding the MHE market requires a nuanced view of its segments and the specific end-sectors driving demand. With the UK economy on a path to recovery, the outlook for the MHE market is optimistic, and is a worthy area of exploration for private equity. Nonetheless, diligence is required to make sure potential assets are shielded or on the right side of trends. Beyond the fundamentals, key issues for investigation will be around the subsector-specific impact of automation or electrification, and companies’ abilities to retain or increase their workforce to support growth plans.
Our Experience
Fairgrove has a wealth of experience in the Industrials sector. If you would like to discuss this article or are considering investing in the materials handling market, or any other areas in which Fairgrove has experience, please contact Patrick Woodrow, Oli Lestner or Alex Bridle.
Footnotes:
- Estimated value of the MHE market based on sales by manufacturers. If including sales and hire by distributors the market is significantly larger.
- Based on Jan 2024 forecasts from ING and Capita Economics.
*Supported by Fairgrove
