E-tailers growth ensnared in India's logistics jungle

MUMBAI Tue Jun 10, 2014 7:58am IST

1 of 3. Workers collect items at Amazon's logistics centre in Graben near Augsburg December 16, 2013.

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MUMBAI (Reuters) - Online retailers jostling for a chunk of India's $13 billion e-commerce trade are so desperate to avoid snarled roads and inefficient railways that they fly their packages in the passenger cabin of costly commercial flights. The cargo, however, often gets bumped off.

India's largest domestic e-tailer Flipkart as well as bigger global rivals like Amazon (AMZN.O) and eBay Inc (EBAY.O) are widening their supplier networks or racing to build multi-million dollar logistics networks to circumvent crumbling infrastructure, keen to attract customers by shrinking delivery times to same-day or even as short as nine hours.

In the meantime, they remain at the mercy of commercial airlines, which frequently remove their parcels to make room for passengers, highlighting one of the challenges to expanding in an e-commerce market that consultants say is growing at a compound rate of 34 percent a year, and which saw online retail sales of $1.6 billion last year.

"It is unfortunate, but offloading does happen and we have to make sure our delivery promises take that into consideration," Rahul Chari, vice-president, supply chain technologies at Flipkart, told Reuters.

Up to 90 percent of goods ordered online in India are moved by air, which pushes up delivery costs by around half, according to several online retailers and logistics companies. Road and rail transport networks remain woefully underdeveloped and entangled in graft and bureaucracy.

With a population exceeding 1.1 billion, a burgeoning middle class and better Internet access, India's e-commerce potential is huge. Online retail sales are expected to surge to $76 billion by 2021, according to consultants Forrester, and the segment is growing at a much slower pace than other emerging markets, including China.

E-commerce is poised to get a boost as early as next month, when the government is expected to allow online retailers to sell directly to consumers.

Logistics, however, remains the biggest barrier to growth and transport troubles are just the tip of the iceberg.

Most e-tailers use sometime unreliable third-party delivery firms, more than half of sales are paid for with cash-on-delivery, return rates are high and orders made to fake addresses are all too common.

"The biggest advantage of e-commerce is the instant nationwide reach it enables sellers of all sizes, however, it is the delivery of that opportunity that requires significant focus and investment from the industry," Amit Agarwal, Amazon's vice president and country manager, told Reuters in an e-mail.

MOVING IN-HOUSE

With India's perennial infrastructure failings far from being resolved, most e-tailers are focusing their investment on setting up their own capital-intensive logistics businesses.

Flipkart, founded by two former Amazon executives in 2007 is aggressively growing its logistics arm E-Kart. Amazon, the world's biggest online retailer, is pumping up the capacities at Amazon Logistics. That's in addition to existing partnerships with third-party logistics firms including GATI (GATI.NS), Blue Dart (BLDT.NS) and FedEx Corp. (FDX.N)

"Having a control over what customers want is a big driver because now we are able to have a channel through which we can gather a lot of feedback and tailor our services accordingly," said Flipkart's Chari. The company counts South Africa's Naspers Ltd (NPNJn.J) as an investor.

To reduce air shipments, Flipkart is setting up regional warehouses and signing up more suppliers across the country to ensure customers get orders delivered by the nearest supplier, he said.

Having its own network now means Flipkart can handle delivery rescheduling requests better, manage product returns faster and help customers exchange products, services that are time-consuming when handled by a third-party operator.

Amazon is using a similar strategy. In addition to building its own warehouses, it is trialing using neighbourhood grocery stores and petrol stations as delivery points.

It also struck agreements with the Indian Postal Service to reach far-flung places in the country, Agrawal said.

eBay, by contrast, is working with external logistics firms to cut back on multiple state taxes for products shipped by road and the excessive documentation required to move every parcel.

It is also intensively training its 45,000-strong supplier base, which holds all the inventory eBay sells on its platforms, to improve efficiency.

"In this business, it is important we do what we are good at and let our logistics partners do what they are good at," said Latif Nathani, eBay India's managing director.

FROM LAPTOPS TO REFRIGERATORS

The anticipated boom in online retail is encouraging logistics firms to better their services, but it will take several years before India gets an efficient network, said Bablu Tewari, chief operating officer for e-commerce and international business with Gati. The company is one of India's largest logistics firms, delivering for Amazon and eBay.

"Nobody shipped products which weighed more than two kilos like say laptops and now suddenly people are moving refrigerators," Tewari said.

For the many Indian e-tailers that lack the deep pockets of Amazon and Flipkart, air freight and couriers are not an option. Instead, they are altering their packaging and product lines to ensure they can reach customers via road and rail.

Pepperfry, one of India's largest online furniture and home products retailer, is training suppliers to make knock-down, foldable products, similar to IKEA furnishings.

Flat-packaged goods reduce shipping costs, said founder and Chief Executive Officer Ambareesh Murty. The company also provides carpenters to assemble the items once delivered.

Industry consultants say companies like Pepperfry that are able to adapt their business to the ailing infrastructure are better placed to take advantage of the expected e-commerce boom. India's roads and railways are not going to get better any time soon, and commercial airlines can only carry so much cargo.

"The roads are where the action is going to move to as volumes start surging," said Ashish Jhalani of consultants e-tailing India. "Anyone innovating and building capacities to deal with that challenge will benefit in the long term."

(Editing by Miral Fahmy)

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