In India, Ecommerce market place has grown exponentially. Its reach in deep inside the Indian cities has now reached to tier IV & V levels. People have come out of bargaining the price of product at brick & mortar stores to ride the discount wave offered by online sellers. With this boom, some challenges have appeared. Controlling the logistics is among major challenges in front of Ecommerce players.
Managing the logistics has various elements – first mile pickup, transporting a product from a seller to a warehouse, to the last-mile touch point and the final journey to a customer in a major metropolis or a tier-4 village. In between these steps, comes micro level management of inventory, warehousing, billing, packaging, labeling, shipping, cash on delivery, payment, product return & exchange etc.
Choosing reputed courier company or third party logistics is not easy. Snubbed by blue-dart and other courier service providers in 2011, Flipkart began its own subsidiary for facilitating delivery of products. But in festive season & peak demand season, Flipkart also battles with the timely deliveries to prospective customer.
Developing a reverse logistics is also very crucial for gaining rapport with customers. This comes into play when the customer requests for return of a product because it is damaged or they wish to exchange the product for its size, color and other reasons thereof.
The global average of Logistics costs accounts to roughly 4 to 5 percent in comparison with 6 to 10 percent of average Logistics cost of India, which means there is a gigantic scope of improving the margins by 3 to 5 percent by improving the supply chain and logistics processes.
As per FS Labs, following are the challenges in front of logistics startups in India –
[A] Capital Intensive Operations
Providing logistics solution to industry is a business which is capital intensive. Huge amount of funds are required for following activities –
- Setting up a new branch.
- Acquiring required work force.
- Acquiring necessary equipment- Loading & transport, tracking & immobilizers
- Acquiring customers i.e marketing capital.
- Getting the operation running i.e working capital.
- Hidden costs – Toll tax/ Fuel charges/ Traffic fines
- Insurance & licensing.
Unless the logistics startup has funds to run its business for at least 10-12 months it would be quite tough to concentrate on work only.
[B] Poor Infra Structure
With Ecommerce reaching deep into Indian consumer base, online retailers in India are under pressure to deliver within short timelines to battle out competition. Alibaba-led ecommerce boom in China was largely facilitated by the growth of state-funded infrastructure, Indian ecommerce companies have to pave their own way to their customers’ doors, and within tight wallets. Any support from government is not there as for as Infrastructure build up is concerned. Due to this logistics is not able to keep pace with the strides of Ecommerce giants.
The startup has patented technology that pulls up optimized routes for delivery boys in real time without relying on GPS. As cofounder of a logistics firm puts in “In India, it’s horizontal players (or online marketplaces) that are driving growth and volume of ecommerce, and no logistics are currently capable of providing the entire supply chain.”
[C] Difference in Billing Cycle
Another hit which the logistics companies take is difference in the billing cycle of payments from customers and payment of dues by logistics firms. Generally customer payment has a billing cycle more than 60 days and payment of dues has a billing cycle of 30 days or less. This puts extra pressure on logistics firms for getting timely funding. Without extra money on-board these companies will not be able to run even for one month. As the operations grow, in term of addition of new customers or business expansion to new area, funding pressure rises.
[D] Not a Choice for Venture Capitalists
Venture capitalists across the globe generally favor a business which could achieve quick value creation by scaling up operations. Rapid expansion brings in quick money. Logistics business is operations intensive. Rapid expansion is not the way which gels well with this industry. Due to this reason VC’s are not willing to put in good amount with logistics startups.
[E] Volatile work force
Work force that actually gets involved in delivery is very volatile. These guys generally deliver anything more than 60+ orders per day at a meager pay of 8 to 10k per month. In such scenarios even additional 500 Rs extra is a big lure for delivery guys. They can change job for even this much amount of money. Most logistics firms face challenge in keeping its workforce intact and running. Indian post which covers almost every pin code in India pays around 20k+ to every postman for daily delivery target of 25 to 30 packets.
[F] Varying Tax Structure in Indian States
Different states levy different tax structure for logistics. Absence of a single tax structure though out the nation asks for different business model for each and every state. Though GST could bail logistics players from devising separate strategy for different states, right now many players chose only selected states for delivery. Different tax structure in different states can slow down the pace of growth. For instance, ECOM Express has not expanded to eastern states and Kerala.
[G] Cash on Delivery Mode of Payment
If a consumer orders a product and then returns it, then seller will have to pay for the logistics for both of the ways, plus commission, plus tax. For a product costing as less as Rs 200, if the customer returns it, total incurred cost would be around Rs 80-100. Cancellations and returns are a big problem that all online sellers face. The risk is especially high in sales made through cash on delivery (COD) mode of payment, which has been one of the defining pillars of India’s e commerce boom. This not only puts extra pressure on the seller but on logistics firms as well due to extra care and lost opportunity.
[H] Tough to Break Monopoly of Old Players
Logistics is a deep pocket game and a major chunk (approx 90%) of the market size is dominated by established logistics players like Fed Ex, DTDC, Blue dart among several others.
While startups think about how much money they need to run their operations, existing players burn little amount to expand their market in new areas.
FS Labs Outlook
Whole E commerce sector is dependent upon the support service like logistics management and CRM. Delivery guy is seller’s representative for customer. Behavior of delivery guys, timeliness of delivery, ease in cash on delivery mode of payment etc are the factors which directly affect the bond between seller & customer. This is the sector to watch for with possibility of unparalleled growth prospects.
There are several startups which have not been able to fare better on test of time. Several companies that have sprung up in the past few years offering logistics services to e-commerce firms have shut shop, stifled by competition from established players, uninspiring margins and a dearth of funds. Among these are – Parallelway and Dialaservice in Bangalore, Earth Movers in Mumbai and Chottu in Delhi. These were logistics companies exclusively targeting the online retail sector, betting on the e-commerce sector’s exponential growth.
Sometimes too much aggression coupled with plan to make fast money and inexperienced investors – who force these logistics firms for sudden expansion, brings upon such fate to logistics startups. India, being a tough terrain and with vast potential for growth, checks the knowledge and patience at the same time.
Stay tuned with FS Labs for more updates.