Overview:
In recent times, with significant thrust on infrastructure and through multiple digitization initiatives, India has started to take several strides towards the development of logistics sector. However, India continues to have one of the highest logistics costs (as a percentage of GDP) in the world – standing at 14 compared to the global average of 8%. Nonetheless, the structural changes implemented have been a step in the direction of reducing this and have been successful in improving India’s logistics efficiency. This is especially of relevance considering the fragmented and unorganised nature of the sector.
Augmenting the efforts taken by the Government, we have seen a slew of logistics and logistics tech start-ups that have leveraged technology to address this problem. The space has also attracted significant investment over the past few years – with logistics tech funding amounting to ₹11,593 Cr. in 2022, and ₹11,625 Cr. in 2021. Today there lies a large addressable market for logistics – standing at a sizeable ₹16 lakh crore and having strong tailwinds supporting it.
Technology adoption in the sector is propelled by multiple tailwinds:
1. A significant surge in the e-commerce market, coupled with an overall rise in retail demand has necessitated that brands make the shift to digital platforms for managing their complex supply chains, and enhancing the customer experience journey overall. E-commerce market expected to grow at 25%+ CAGR for next 7 years in India
2. Digitisation of logistics – Brands and companies are willing to focus on their core value proposition as managing logistics involve investing in a significant number of resources, stopping them from concentrating on building the brand and enhancing the product – this has accelerated the adoption of SaaS products to manage these functions.
3. Prevalence of direct-to-consumer models: Most brands are now willing to expand their pan-Indian footprint, and thus take better control of inventory, providing more value-add services to consumers to improve their LTVs. This brings about the need for tools which can allow these brands to understand their workflows. According to Reedseer data horizontal e-commerce platforms command 85% of the retail which is expected to come down to 75% by 2030
4. Push from the government – The Government of India has initiated National Logistics Policy 2022 to lower the cost of logistics – the multiple initiatives under these reforms include the Unified Logistics Interface Platform (ULIP), dedicated freight corridors, and the Gati-Shakti (National Master Plan for Multi-model Connectivity).
Issues continue to plague the Sector:
While innovation and tailwinds remain positive for the sector’s development, there remains a large gap to be bridged in lowering India’s overall logistics cost. Some of these problems include:
1. Fragmented truck network – Today, only 10 per cent of operators own a fleet above 25 trucks. The average distance travelled by a truck is less than 300 km/day compared to more than 700 km/ day in Europe and the US – making the current transportation system highly inefficient.
2. High indirect costs – India incurs high indirect logistics costs, being 4x the average of those in developed countries. The reasons for this include excessive layers in distribution channels and inventory mismanagement, drawn from inadequate demand forecasting due to a lack of technology adoption.
3. Less adoption of technology – Leveraging technology can allow logistics companies to offer many more functionalities, reduce inefficiencies in inventory management, and ensure smooth coordination between the various stakeholders along the value chain.
Logistics services has 4 key areas of operation – transportation, warehousing, inventory management and order processing. In this article, we have put forth our thoughts on the transportation segment.
Key areas in transportation:
There currently exist four major areas in the space within which businesses operate:
1. Express Parcel – Express parcel refers to the delivery of parcels weighing less than 40 kilograms. These are typically e-commerce orders with a TAT of less than three to four days.
2. Part Truckload Freight (Express) – PTL/ LTL freight refers to the delivery of consignments with weights greater than 10 kg with the order delivery greater than five days.
3. Full Truckload – Truckload Freight (FTL) refers to the delivery of a full truck/trailer load of freight, the use cases are primarily in commodities.
4. Supply Chain Services (3PL) – Supply chain services refer to integrated warehousing, transportation and technology solutions created for industry-specific and customer-specific requirements.
Following from this, we see express logistics and 3PL as the two areas poised for high levels of growth in the future. A primary driver for this is the evolving consumer need, as highlighted earlier. On the other hand, there is also a shift from the suppliers’ side – where manufacturers/suppliers no longer want to deal with multiple stakeholders and prefer assigning professional logistics operators to handle their entire operations. FTL and PTL are growing at 12% whereas express logistics is growing at more than 16% given the penetration in digitization at consumer end. Finally, these sectors are attractive in that they not only experience higher growth rates as a whole but are also priced at a premium to FTL and LTL, guaranteeing these companies high ROCEs. This trend has been seen in geographies such as China, North America, Brazil etc.
Current progress and outlook for the future:
New-age shipment providers such as Delhivery, ExpressBees, EcomExpress are operating in the express logistics, have been investing in technology to improve the reliability and efficiency of their operations. While today the space is still not profitable, and on a whole margins appear to be low, a comparison to similar players in China reveals that there could be a possibility of a 8% -10% PAT margin structure when enterprises hit economies in scale. Some of the players which showcased this path ZTO express cayman, SF Holdings, Yunda Holding etc. What remains to be seen is how India’s logistics-tech sector evolves with regards to customer willingness to pay for services and enterprises showcasing profitability.