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December 4, 2014

E-tailing market size in India stood at US$2.3 billion1 as of 2013 and is expected to reach US$17 billion2 by 2018. While the overall retail market continues to grow at close to 6 percent3 (year-over-year), compounded annual growth rate estimated for e-tailing in India is approximately 50 percent over the next five years. What sets e-tailing apart from the traditional retail market is the convenience of getting the product delivered to your doorstep and the access to a variety of products not easily accessible to many customers. All this is facilitated by logistics – the backbone of the online industry.

While logistics is the biggest challenge in e-tailing, it is also the key differentiator between “e-tailers.” This industry is in the midst of emerging macro trends, and adapting logistics to accommodate these trends will determine any future success.

Here are key issues to consider when determining a suitable strategy:

The rising relevance of Tier 2 and Tier 3 cities necessitates a wider network presence of logistics

Tier 2 and 3 cities are expected to contribute to more than 350 million2 e-tailing shipments in 2018, exceeding the demand from traditional retailers. In order to take advantage of this demand, it is essential to develop a network of branches and delivery points that will be able to service high-growth cities.

The sheer volume of CoD orders will require fundamentally different cash handling capabilities

Cash-on-Delivery (CoD) orders will continue to dominate the Indian market – suggesting that logistics providers would need to handle approximately US$8 billion2 of cash in 2018. Therefore, one of the biggest differentiators for any logistics service provider will be its ability to effectively manage cash flow and address challenges such as theft, the use of cash for working capital and reconciliation issues. This requires fundamentally different systems compared to those that currently exist in the market.

Offline retailers moving to online channels will require significant fulfillment capabilities

Logistics service providers will need to develop fulfillment capabilities to gain access to the small, but growing market of offline retailers moving online. They need to go beyond the traditional express delivery model to a higher level in the value-chain – managing inventory, handling invoicing, providing consumer insights and other value-added services.

A shift of focus to surface movement will create a need to develop strong multi-modal mix

E-tailing businesses are moving to a managed marketplace model and have started expanding fulfillment center footprints across multiple locations to accommodate faster ground delivery and better customer service. Apart from this, air capacity constraints appear to exist, especially during festive periods such as Diwali when orders tend to peak. Given this background, logistics service providers would need to augment surface transportation (road and rail) capabilities across various geographies.

Emergence of new categories will increase complexity, requiring accurate weight reconciliation systems

Categories such as apparel, baby products, sports goods and furniture (with different dimensions and volumes) have already added significant challenges to logistics. Besides capturing dead-weights and volumetric-weights, it is essential to develop accurate reconciliation systems and create transparency among sellers and e-tailers.

Both e-tailers and logistics service providers realize the importance of these trends and are starting to adapt accordingly. For example, a leading e-tailer is piloting CoD with India Post to accommodate demand from rural areas, and a few large e-tailers are partnering with coffee shops, kirana stores and petrol pumps to increase delivery reach. Logistics service providers have also taken steps to address emerging trends in e-commerce. Some of their initiatives include:

  • A global logistics player significantly enhancing its surface capability to cater to increase in e-commerce volumes
  • A domestic logistics service provider providing specialized services such as delivery staff wearing uniforms of the ecommerce site and at-home apparel trials
  • Delhivery, an e-tailing focused logistics service provider, acquiring Gharpay in 2013 to enhance cash-handling capabilities
  • Domestic logistics service providers experimenting with road and rail transportation on select new routes due to air capacity constraints

While these developments represent increased efforts by e-tailers and logistics service providers to adapt to a high-growth market, further potential for innovation exists as e-tailers constantly strive to improve service levels for customers without significantly impacting logistical costs.

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1 Based on estimates from Accel Partners.
2 According to A&M estimates.
3 Based on IBEF estimates and article in The Hindu Business Line.