E-tailing in India, fueled by better Internet access and use of smart phones, has the potential to grow to the tune of $76 billion by 2021. But as delivery time shrinks, inadequate infrastructure poses the biggest challenge.
Experts are bullish about the tremendous growth of E-commerce or E-tailing sector in India in the years to come despite doubts pertaining to valuation. It is estimated that in India E-tailing has the potential to grow more than hundredfold to reach a value of $76 billion by 2021. Studies suggest that total retail (both offline and online) is expected to reach a turnover of over $1 trillion by 2020 against $600 billion in 2015. Studies also unveiled that among 2.9 billion Internet users worldwide, 348 million were present in India in 2015. And 50 million of the 100 million online shoppers in India shall belong to tier I and tier II cities in 2016.
A recent study by Morgan Stanley shows India’s number of Internet users doubled from 50 million in 2007 to 100 million in 2010, tripled to more than 300 million by 2014. This makes India the second largest Internet market in the world, after China, even though the user penetration rate is still only around 17 per cent, compared to 46 per cent in China and more than 80 per cent in developed markets such as Japan and the US. Another study projected that E-tailing has the potential to grow more than hundredfold in the next nine years to reach a value of $76 billion by 2021.
The study also predicts over the next five years, as smart phone adoption increases, Internet users could double again to more than 600 million, nearly half its population. Increasingly, mobile access also means that many new users are from smaller towns and rural areas – bypassing the desktop/PC altogether – a trend E-commerce companies are already leveraging in China.
However, the question that now arises is on the strength of logistics services to support the E-commerce boom in the country. Are the logistics companies well equipped to cater to the demand from the E-commerce sector? Are E-commerce companies and marketplaces confident to outsource the logistics services to the traditional 3PL companies in India?
REALITY CHECK
What is the ground reality – the most crucial element in determining the success of E-commerce? While cost-effective and hassle-free ‘same day delivery’ is the success story of E-tailing across the world, E-commerce marketplaces cannot afford dealing with a weak logistics chain. E-commerce experts pointed out the importance of inventory management and the companies’ decision to reduce the size of inventories. This was made possible by managing the warehouses and distribution efficiently. For example, leading E-commerce marketplace, Amazon, made careful decisions about which products to buy from where. Then the company decided to manage distributing channels. Amazon also tried to cut down its expenses by outsourcing some of its routine activities so that it could concentrate better on its core activities. It partnered with other companies for shipping the inventory and revamped the layout of its warehouses making it easier for the company to locate and sort customers. By doing this it managed to save all the expenses related to filling and shipping orders.
It is worth mentioning that Amazon has almost doubled its total storage capacity to over half million square feet. Customers in the respective states and nearby areas can expect broader selection across categories available for immediate shipment and eligible for Amazon’s ‘next-day’ and ‘sameday’ delivery services. Globally, Amazon has 34 fulfilment centres with more than 61 million cubic feet of storage capacity.
Other leading online market places such as Flipkart, Snapdeal and eBay are also maintaining their own fulfillment centres and distribution networks, despite the fact that it is not a viable model in respect of escalation of cost burden for running and maintaining own assets.
On the other hand, most of the logistics companies are trying to grab the opportunity with the traditional model. However, the requirements of E-commerce companies are changing rapidly. The marriage is yet to take place. “As a result, as of now most of the eCommerce companies manage their logistics on their own, which is not desirable from their growth point of view,” said Tamil Rajan, former Blue Dart official and Direcor, LexCare, a leading E-commerce consultancy. Rajan, however, made it clear that new logistics companies with a new mindset can attract both E-commerce companies and investors. The new companies will have to be proficient in quick delivery, IT and COD (cash on delivery) mechanism, which are the most essential elements to make the E-commerce venture a success.
According to Rajan, with the Goods & Services Tax (GST) to roll out next year, E-commerce players may create more stock points to reduce delivery time window. But it increases inventory and costs. Hence, the importance of 3PL service providers arises. Rajan also emphasised on the external infrastructure and rules and regulations including roads, airports, cargo terminals, check posts, traffic rules, including others which are beyond the control of either E-commerce or logistics companies. “The government has to ensure an industry-friendly approach in setting up adequate physical infrastructure and bringing in legislations conducive for fast cargo movement for the greater interest of the consumers and national economy,” he added.
Malcolm Monteiro, CEO, DHL eCommerce, observed that in Asia Pacific spending is more on E-commerce purchases than those in North America and the region is currently leading the growth rate for the sector globally. The rise has been attributed to Internet access, increased credit card penetration and the burgeoning middle class with a higher spending capacity.
Questioned about the logistics challenges Malcolm pointed out that E-commerce logistics is different from conventional logistics as all the action is outside the Web. The aim is to maintain zero inventories, ensure higher delivery speed, achieve maximum reach and create a great customer experience.
The important thing in E-commerce is that every growing urban, semi-urban or rural market has to be viewed differently, as every place has varying demands for goods and services and differing logistics infrastructure. This calls for regular scrutiny of the market and addressing it accordingly.
Inadequate infrastructure poses the biggest challenge to ecommerce logistics as the delivery time has been shrinking and has become a major service differentiator. In his opinion, with a population exceeding 1.2 billion, a large middle class population, better Internet access and penetration of smart phones, India’s e-commerce potential is huge. “Through our subsidiary, Blue Dart, we already have strong capabilities in value added last mile deliveries in India, our focus is now on creating a seamless bridge between E-commerce businesses, global and regional and their customers – wherever they may be - domestic or cross border,” he asserted.
Subhashish Chakraborty, CMD, DTDC, a leading domestic courier and express logistics company, maintained that thanks to the revolution of E-commerce the new game will be completely different. Acquisition of customers and B2B model will not be enough for the new eco system and challenge from the fast growing E-commerce sector. Hence, for express logistics companies, the smart move would be to read the writing on the wall in time.
Currently, logistics in the E-commerce sector comprises about 10 per cent of the entire logistics industry. “In an environment like ‘E-commerce is the only commerce’ we should not grow with the traditional model. Accordingly, we are changing our strategy. We are going to offer end-to-end services, to be the part of the entire value change of e-commerce business, which includes our pick up and dropping points,” said Chakraborty.
In 2016 the company will create 10,000 such pick up and dropping points. The company has just included 100 districts of the country which are hundred per cent serviceable. “To provide full support services to E-commerce companies express players have a big role to play,” he stressed.
“Infra challenges exist but post GST things will change for better for the companies that run their trucks across the country and point to point. This will be beneficial to us as well as E-commerce companies as they shall be able to easily transfer their products from one warehouse to another, one fulfillment centre to another centre in speed and better cost,” he said. “Every investor will ask for profit, no investor will be willing to see artificial valuation,” he pointed out.
In the days to come DTDC will be heavily focused on the surface network and its fleet services thanks to better road infrastructure and impending GST. According to him, air cargo is yet to tap the E-commerce market because of terminal issues and cost factor.
VITAL LINKS
Interestingly, postal departments in all major countries have scripted the success story of E-commerce.
Amazon’s tie up with the US Postal Service is a glaring example in this regard. Reports suggest, in cities such as San Francisco and New York, letter carriers have been showing up on people’s doorsteps as early as 3 a.m. bearing milk, eggs and other perishable items. The US Postal Service has been delivering groceries to customers of Amazon.com in selected areas since October 2014. In India, Amazon has a tie-up with the postal department for particular sectors.
E-commerce giant Alibaba tied up the state-owned China Post two years ago to strengthen its logistics arm, with an ambition of delivering online purchases to any place in the country within 24 hours. The two companies share warehouses, processing centres and delivery resources, aiming to build a smart logistics network providing easier and faster delivery services to online sellers. Alibaba is now eying a similar tie-up with the Postal Department of India. The government is also keen that the Chinese company harnesses the wide reach that the postal department provides across the length and breadth of the country.
“In view of the tremendous potential from the E-commerce market in terms of job opportunities and growth of the national economy, the government agencies and E-commerce marketplaces should have a strong tie-up. The E-commerce companies can utilise India Post’s huge infrastructure and manpower even in the far-flung areas across the country. In addition, the department’s recent endeavour on strengthening its IT infrastructure can be better utilised by the companies,” said John Samuel, former Board Member, Department of Post.
E-commerce is the main driver today of domestic air cargo. “We have witnessed a significant growth in E-commerce shipment this year compared to last year, when we did not have adequate infrastructure to handle the volume,” said Ramesh Mamidala, CEO, Celebi Delhi Cargo Terminal Management India. According to him, currently most of the airport does not have the terminal capacity to handle current demand for domestic cargo and especially E-commerce shipments.
“We have recognised the opportunity and requirements and decided to strengthen the domestic cargo terminal infrastructure. Very soon we will be launching our dedicated domestic cargo terminal with a capacity to handle 550 tonne cargo a day. Accordingly more airlines can be accommodated for cargo handling. At the same time we are going for significant automation at this new terminal. Also, tracking and tracing procedures will be strengthened for better visibility of the shipments at the terminal,” Mamidala informed.
Like India Post, there are other avenues that can be the silver lining for the E-commerce revolution in respect to addressing issues pertaining to infrastructure capacity.