The Indian e-commerce retail industry has been on an upward growth trajectory with a lot of growth potential and logistics seen as a key enabler in its growth. The e-commerce retail logistics market is valued at USD 1.35 billion in 2018, and is projected to witness a growth of 36 per cent in the coming five years. The e-commerce retail logistics sector is serviced by traditional logistics service providers (LSPs), e-commerce retail focused logistics service providers and captive logistics arms. It is largely a captive market (49 per cent share), however, a sizeable share is still dominated by new age players catering especially to e-commerce retail.
- Traditional logistics service providers: With rapid growth of e-retail sector in India, traditional LSPs have started providing e-retail focused logistics solutions in order to stay relevant. Most have branched out separate B2B and B2C operation capabilities. Their existing established network, coupled with their experience and expertise in India, have enabled them to capture roughly a quarter of the market share in the e-retail logistics sector. However, e-retail players demand certain level of capabilities and service levels in order to cater to their customers. Limited technological capabilities of incumbent traditional third-party logistics (3PL) players have given rise to e-commerce focused LSPs as well as captive logistics arms of large e-commerce retailers.
- E-commerce retail focused logistics service providers: In the past few years, dedicated LSPs for e-commerce retail have entered the market by using a technology-centric approach enabling the players to scale up, remain efficient and still provide competitive prices to customers. These players have captured roughly ~28 per cent of the sector. Individual players are growing at a rapid pace and are expanding their operations, reach and capabilities. A large influx of investments in start-ups and strategic tie-ups with e-retailers have been witnessed in the past few years.
- Captive logistics arms: In-house logistic arms of large e-retailers still execute over 70 per cent of the deliveries of their respective e-retailers. Not only are the captive arms of e-retailers assured of large in-house volumes, these captive arms have now started actively providing services to other external e-retailers. Further, when it comes to complex and/or high value shipments such as jewellery and furniture, e-retailers depend on their respective captive logistic arms for deliveries. This has led the players to capture nearly half the market share (~49 per cent). E-retailers are investing huge sums in their captive logistics arms to increase capacity, expand facilities and reach, hire more manpower and set up fulfillment centres pan-India to cater to increasing demands of both, in-house as well as external clients.
E-commerce retail logistics activities
Products bought online undergo a range of processes before they finally reach customers. Starting with first mile logistics, which involves pick-up of goods from the sellers and transporting it to the e-retailers’ fulfillment centre or directly to the mother warehouse, depending on the type of fulfillment model i.e., inventory-led or marketplace. In the inventory-led model, products are sent to the fulfillment centre without packaging/labeling whereas in the marketplace model, products are completely packed and sent to warehouse for storage. First mile logistics is followed by fulfillment, which involves picking and packaging of products once an order is placed on the website. After fulfillment, products are sent for processing/ sorting based on the delivery location at the processing centre of 3PLs and connected further in the supply chain through line haul depending upon the final delivery location. Line haul involves connecting the main supply centre with the main demand centre, via surface or air. Surface or airline haul is dependent on transit time and cost matrix. Airline haul is 3-4X costlier than the surface line haul, however, has lower transit time. Recently 3PLs have started surface express movements for dedicated movement between two points, with a shorter transit time than the normal surface line haul movement. This is followed by last mile delivery which involves dispatch and shipping of products from the mother hubs to the delivery hubs, from where they are shipped out to the customers. This leg is dependent on the manpower and infrastructure in terms of number of delivery hubs, delivery vans and bikes.
With the swift rise in scale of operations, e-commerce retail players have been strategically opting for viable operating models depending on the nature of products and operations. Broadly, there are two kinds of models prevalent among the e-commerce retail players.
The marketplace model: In the marketplace model, inventory is not stored by an e-retailer. Packaging and quality checks are carried out by the sellers and then the items are sent to storage in the mother warehouse of e-retailer or directly shipped to customers from sellers’ warehouses. The share of marketplace model has seen a declining trend due to rising issues in product quality, higher returns, pilferages and wrong products.
Inventory-led model: Within this model, inventory is purchased by the in-house buying arm of an e-retailer and stored by them in their fulfilment centres. The model ensures better quality control and service level for the customers, since the online retailers have control and visibility on all the processes, from inventory management to order management to fulfilment. While this is a capital intensive model, with high overheads and substantial inventory risks, it is nonetheless helpful in creating trust and service credibility among users leading to a better customer experience and enhanced brand value and recall. However, this model has become less prevalent amongst e-retailers as it is capital intensive and difficult for scalability.
Fulfilled by e-retailer: Another variant of the inventory-led model is the ‘Fulfilled by e-retailer’ model, wherein inventory is not purchased by them, rather it is purchased by the sellers and stored in the fulfilment centres of e-retailers. Quality checks, packaging and labelling are carried out by the e-retailer. It is the most prevalent model as it ensures better quality and reliability of products. Returns Another important aspect of e-commerce retail is high number of return shipments.
Three primary reasons for returns are:
- Customer initiated returns after acceptance
- Returns due to order cancellation before first delivery attempt
- 3PL returns (delivery failure of 3PLs)
The returned goods are cycled back into inventory, restocked and relisted or sent back to sellers. These can however lead to complications like refund, exchange and replacement, which increases the overall supply chain cost. E-retailers are introducing innovative mechanisms to minimise returns such as size recommendation features to help shoppers make informed choices, reconfirmation via e-mail and option of cancelling the order before the shipment is processed. Return shipments in e-commerce retail constitutes 18-20 per cent of total shipments.
Recent trends in returns:
- Increase in local and zonal shipments may potentially increase speed to customer which in turn is expected to reduce the returns due to reduction in delivery failures
- Better operational processes and reliability may also reduce returns
- Change in category mix and implementation of stricter return policies may reduce customer initiated returns.
Challenges in returns:
Technology: 3PL providers use the same airway bill/tracking ID for reverse shipments as used in the forward leg. This reduces the sorting efficiency and leads to incorrect delivery
First mile capability: 3PL providers have built their capacity, infrastructure and resource for the forward leg. This set-up is not suitable to handle reverse leg efficiently; therefore 3PLs need to build separate capabilities to handle reverse shipments.
Cost structure – E-Commerce retail transportation cost
Transportation cost for e-retailers can be split across components of first mile, processing, line-haul and last mile delivery. The line haul and last mile delivery comprises a major chunk of the transportation cost. Return charges are additional to forward charges. Logistics cost is further a function of being local, regional or national deliveries. These cost functions may however vary by scale and use of technology.
Further, a high percentage of returns (~20 per cent) in the sector, and other incidental expenses such as mis-routing and lost shipments further add to the costs. Also, other special deliveries such as time-bound delivery and slotted delivery commitments along with the prevalence of the cash-on-delivery model escalate costs.
Generally, all the standard delivery costs, including COD and returns, are borne by the e-retailers. However, the cost for special deliveries or value added services are borne by the customers.
Recent shifts in e-commerce retail logistics
E-commerce retail industry is continually changing, thereby impacting the e-commerce retail supply chain. Some of the key shifts in the e-commerce retail logistics have been summarised below.
E-commerce retail logistics have seen a dominant shift towards surface mode. Surface transit is the preferred mode of transport, resulting in slow growth of air express market. Further, in e-commerce retail, lowering down logistics cost has become the prime focus rather than transit time, which was the key differentiator earlier. The pressure to reduce logistics cost has led to a switch to surface transportation, which is comparatively inexpensive.
Traditionally, e-retailers established Fulfilment Centres (FCs) in locations where they enjoyed tax benefits resulting in larger number of national shipments. Now, with the implementation of GST, e-retailers no longer enjoy the same tax benefits, and are spreading their footprint of FCs pan-India. Big e-retailers are planning to expand their FC base to have better speed to customer which in turn will increase local and zonal shipments. Further, large shipments (share of which is growing) are also expected to have predominantly zonal movement
Shift in demand centres (Reach expansion)
Currently more than ~60 per cent demand comes from metro and tier I cities. However, by 2022 this share is expected to come down, as we foresee emerging demand centres in tier II and lesser cities driven by increased internet penetration. Presently, internet penetration in metros such as NCR, Bengaluru and Mumbai is already high leading to major demand coming from metros and tier I cities. In the next five years, a high proportion of demand is expected to come from tier II and below cities primarily due to higher internet penetration, increase in number of smart phone users, rise in per capita income and increasing propensity to purchase online in rural areas.
Shift in product categories
With ever-evolving customer needs and preferences, e-commerce retail supply chains have also evolved in the process. One major development in product categories that has been witnessed in the recent years is large size shipments. Recent trends have shown an increase in large size shipment categories like large appliances and furniture.03 E-retailers are focusing on growth in large shipments, which is expected to increase average weight per parcel.
Challenges in e-commerce retail logistics
Even though the e-commerce retail logistics industry is expected to grow, its intrinsic challenges remain. This sector is up against numerous challenges including cost pressures, high returns and poor infrastructure to name a few.
India faces high logistics cost as compared to developed countries like USA, Japan and many of the European countries. In addition to the infrastructural inefficiencies, cost of deliveries is driven up by factors like high return rate, high share of Cash on Delivery (COD) orders. Cost pressures are driving e-commerce retail logistics firms to switch to surface transit for deliveries.
High rate of returns
Currently, return shipments constitute roughly 20 per cent of total shipments. Return shipments come with their own set of challenges and drive up logistics cost. E-commerce platforms are taking measures to contain the percentage of returns. Returns are expected to come down, driven by improvement in operational processes, technological innovation, customer analytics, among other things. Further, change in category mix, shift to consumption-driven categories and implementation of stricter return policies may reduce customer initiated returns. Finally, increase in local and zonal shipments will increase speed to customer, which in turn is expected to reduce the returns due to reduction in delivery failures.
The Indian logistics industry is plagued by lack of proper infrastructure for both air and surface transit. Poor infrastructure has led to inefficiency, longer transit times, higher logistics costs and higher returns. Since a majority of demand is expected to come from tier II and below cities, infrastructure will play a major role in e-commerce retail. Good infrastructure is expected to improve operational efficiency, reduce transit times, control costs and result in better utilisation of assets.
Readiness for rapidly growing cross border e-commerce industry
Globally, there has been a rise in international shipments driven by increase in online retail stores and growing cross border e-commerce market. India serves as a transfer hub for various intercontinental routes like Europe-Australia and Europe-South East Asia. Even though Indian airports have geographical advantage due to suitable location, they lack the required infrastructure to cater to growing international volumes. Further, this segment is still fragmented. There are insufficient facilities at smaller airports and lack of connectivity for Tier II and III cities with major cities for air transportation. Need of the hour is development of transshipment hubs to cater to growing intercontinental traffic, upgradation of existing airports and improving regional connectivity.
Impact of GST implementation
The implementation and roll-out of GST has simplified indirect tax and jurisdictional laws. However, for e-commerce players, GST law has increased the compliance requirement with the introduction of a separate chapter on electronic commerce with special emphasis on Tax Collection at Source (TCS) provisions. TCS is required to be collected and deposited with the Government where the consideration with respect to the supplies made by the suppliers on the e-commerce operator platform are collected by the e-commerce operator. With the suspension of TCS provisions till 30 June 2018, the industry players can however, heave a sigh of relief. Once, the TCS provisions become applicable, it will lead to increase in compliances for the e-commerce operator and the suppliers on the platform. The GST law has also introduced the definition of electronic commerce, electronic commerce operator and also mandated compulsory registration for e-commerce operators, which implies that the focus of the Government is now shifting to the e-commerce industry. With the introduction of GST, the focus will shift more on commercial viability instead of tax savings for analysing the need for setting up facilitation centres/warehouses in various states by the e-commerce operator/seller. Lastly, the Government with a view to plug the loopholes in tax evasion, has introduced the concept of e-way bill provisions. Accordingly, applicability of e-way bill provisions for inter-state transactions has been made compulsory from 1 April 2018 for prescribed transactions exceeding a prescribed limit. Further, the Government has given an outer limit of 1 June 2018 to various states for implementing e-way bill provisions for intra-state transactions. Thus, various states have already started implementing intra-state e-way bill provisions. Therefore, e-way bill shall be required to be generated by e-commerce companies/logistics service provider/seller in the case of sale of consignment or return of consignment as may be mutually agreed between the parties.