India’s e-retail logistics sector seeing rapid growth

Increased competition, growing demand from remote locations and a shift in focus from standard to specialized delivery have amplified the need for an efficient logistics system

September 12, 2018

The ecommerce logistics market has been valued at US$35 billion in 2018 and is expected to grow at a CAGR of 36 per cent over the next five years

Ecommerce is the major force driving the growth of the national retail industry and online retail is estimated to touch US$70 billion by 2020

The Economic Survey of 2018 has estimated the Indian logistics industry to reach a valuation of US$215 billion by 2020 owing to the GST rollout

Technologies such as artificial intelligence, machine learning and analytics can be boosters in improving efficiency and have already attracted dialogues

The fast-pace of growth in the Indian online retail space has brought into sharp focus activities in the logistics sector and other ancillary services. Logistics is regarded as the key differentiation for online retail businesses in terms of customer satisfaction and service. About half the ecommerce logistics market is dominated by in-house or captive logistics divisions, with the rest being traditional logistics service providers, ecommerce focused logistics service providers, and of course, the India Post.

 

Increased competition, growing demand from tier-III towns and beyond, a shift in focus from standard to specialized delivery and air to surface movement have amplified the need for an efficient logistics system. Access to remote areas, which remains a challenge, is expected to get easier from the ongoing connectivity projects. As of April 2018, there were around 740 roadways infrastructure projects underway on a public-private partnership (PPP) model, which will greatly boost the sector.

 

The need for quantum jumps in logistics services cannot be overemphasised. Today, a quarter of the Indian population are digital shoppers and the figure is expected to touch close to 42 per cent by 2022, according to a market research. Ecommerce is the major force driving the growth of the retail industry and online retail is estimated to touch US$70 billion by 2020, shows projections by the Confederation of Indian Industry (CII). The prospects have come up as a major economy driver.

 

According to a joint report by KPMG and CII, the ecommerce logistics market has been valued at US$35 billion in 2018 and is expected to grow at a CAGR of 36 per cent over the next five years. The Economic Survey of 2018 has estimated the logistics industry to reach US$215 billion by 2020 owing to the GST rollout. The logistics industry has been a significant job generator, employing more than 22 million people. Over the last five years, the sector has grown at a CAGR of close to 8 per cent.

 

Heightened logistics investments

 

Recognizing the key role of logistics in overall customer experience, e-retail companies are increasing their investments in in-house logistics divisions or are tying up with local players through investments or acquisitions. Omni channel retailing and delivery through local retailers are the newest trends in the logistics sector. For example, private equity fund Samara Capital, which is in talks with the Aditya Birla group to buy the More supermarket chain, has acquired Spoton, the express logistics company.

 

The Department of Commerce has created a new logistics division for the sector’s integrated development, improvisation of existing processes, identification of bottlenecks, and introduction of technology-based interventions

 

The industry has seen a lot of investor interest. In March 2017, Delhivery, one of the early movers in third-party logistics, received a funding of US$100 million from Carlyle Asia Partners IV jointly with existing investor Tiger Global. More recently, in June 2018, Mumbai-based Wow Express raised around US$4.5 million in funding from Tamarind Family Private Trust and other investors, while Rocketship.vc, pi Ventures, Recruit Strategic Partners, Hemendra Kothari of the DSP Group and others invested US$4 million in in Locus, a logistics start-up with operations in India, Singapore and Canada.

 

Among major global investors, New York-based Warbug Pincus is betting big in this space. Together with China’s  SAIF Partners, it has invested US$50 million earlier this year in Rivigo, a Grugram-based surface transport and logistics company. Warbug Pincus had already invested US$75 million in Rivigio in 2016. In September 2017, the fund, which is an active investor in third-party logistics firm Stellar Value Chain, upped its exposure in Ecom Express with another funding of US$27.45 million.

 

Apart from private equity players, Canadian Pension Plan Investment Board (CPPIB), which manages one of the largest pension fund corpus globally, has invested in logistics and modern warehousing platform IndoSpace, an industrial real estate and logistics parks developer which is in expansion mode. Cumulatively, the warehousing industry is expected to witness an investment of about US$450 billion by 2020. The variety and intensity of investor interest has also driven innovation in the space.

 

Policy push to drive growth

 

Demand apart, there have been a clutch of policy initiatives that have given a fillip to the growth of ecommerce with a direct impact on the logistics industry. Some of the more significant moves are:

  1. 100 per cent FDI in online retail under ‘marketplace model’ through automatic route
  2. State initiatives such as ‘Digital India’, ‘Startup India’, ‘Skill India’ and ‘Make in India’
  3. The proposed consumer protection policy for regulating the e-commerce sector
  4. Drafting of norms for licensing of online food startups by the the regulator FSSAI
  5. Relaxation of registration processes for starting new online businesses
  6. Push for nation-wide cashless transactions and improved internet connectivity

 

The logistics sector has been included in the Harmonised Master List of Infrastructure Sub-sector to address the sector’s inefficiencies. The list defines infrastructure sectors comprehensively to facilitate a coordinated approach among support agencies, like financial institutions. As per the Economic Survey of 2018, the Department of Commerce has created a new logistics division for the sector’s integrated development, improvisation of existing processes, identification of bottlenecks, and introduction of technology-based interventions. This is touted to further drive investor confidence.

 

The road ahead

 

Surface transit is slowly gaining importance due to better surface connectivity and stricter cost controls. Hence, it is touted to gain the majority share in the revenues of e-retail logistics businesses. The customer base for ecommerce retail from tier II and tier III towns is expected to be around half of the total customer base by 2022. This calls for technological innovations and increased spread of logistics service providers. At a more advanced level, use of drones, pick-up towers, secure lockers, digitization of postal address, and driverless vehicles are some of the innovations being undertaken for last mile delivery. New technologies such as artificial intelligence, machine learning and analytics can be crucial boosters in improving efficiency in the space and have already attracted dialogues.

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