With increased investments in the Indian retail logistics industry, the sector is going to see consolidation soon, says Rachna Nath, Executive Director, PwC India.
I learnt early on during the modern retail boom that as a retailer, one can go for a mad rush to open stores and have the best zoning, brands, and IT systems, but what is most important for consumers is to get things they need on the shelves. Most of us who have seen the early days of modern retail will remember great stores and empty shelves, largely because of the lack of coordination between the manufacturer, distributor, retailer, and the transportation team.
A lot has happened in the retail industry since and we have all analyzed the statistics to death. But if there is one factor that has impacted the evolution of logistics in India, it is consumer behavior, the level of service and the “instant gratification” that today’s customers expect.
This has ensured that the mere transportation management of yesteryears is replaced by specialized operations, warehousing, and transportation management – in other words, an integrated supply chain that helps manage different product categories such as food, apparel, and general merchandise. The degree of specialization does not stop at this level; even food would have its own sub-categorization and requirements of logistics management such as cold chain and taking care of fresh fruits and vegetables.
Logistics is a component of integrated supply chain and is a significant contributor to the price of goods on the shelf. In India, logistics contributes 14-15 percent of the country’s GDP, while in the developed geographies this percentage tends to be much lower, 7-9 percent. Here lies the challenge for Indian retailers, specifically discount retailers, for whom logistics management is a potential area to optimize cost.
The typical components of retail logistics would include:
•• Reverse logistics
Warehousing, which forms 20 percent of the logistics market, has for long been associated with godowns in India. However, with globalization and changing customer demands, this field has undergone many changes.
Retail warehouses today support multiple SKUs, seasonality of products as well as demand and spikes in sales to support fulfilment. At the same time, they also provide various valueadded services such as packaging, re-packaging, and quality testing, and could well be a part of services provided by 3 PL and 4 PL logistics organizations.
With changes in tax policies, creation of hot spots for warehouses, and changes in the Warehouse Act 2007, the retail warehousing segment has seen increased investments. It is now being seen as the sector of the future and many companies are investing in creating large warehouses to provide economy of scale. For running operations, they are investing in Warehouse Management Systems (WMS), including wireless operations supported by technology like RFID.
The challenge however is to get skilled staff for managing these warehouses. The market is highly fragmented due to the large number of small and unorganized players. Apart from this, the availability of uninterrupted power is another issue that the warehouse industry needs to contend with in India.
Transportation services in India are largely unorganized. They form one of the weakest links in the entire logistics story. Poor infrastructure and geographical constraints add to the misery of Indian transporters. Due to this, a few large retailers choose to own the entire value chain to better control the dispatch and movement of goods within their organization. Having learnt from their own operations, they are today also providing these services to other companies. The emergence of 3 PL and 4 PL companies in the Indian market has now empowered retailers to outsource their entire transportation needs to such players.
The availability of latest technology such as GPS and GPRS has made it possible for transport companies in India to track vehicle movement anywhere in the country. It enables them to get and give visibility to their customers on where a particular consignment of goods currently resides in their network. This helps bring enormous efficiency and control in the movement of goods worldwide.
To service their clients better, retailers usually provide the facility of return of goods within a particular time frame. Some domestic logistics companies not only offer reverse logistics services to retailers but also refurbishment services which enables them to resell their goods in the market.
Most logistics companies today provide customers real-time visibility regarding the coordinates of products in the supply chain. This is made possible by the use of technology like GPS/GPRS. The use of handheld devices for inventory control is also picking up in the industry. This helps retailers count their inventory faster and more efficiently. In some cases, a retailer’s systems integrate with those of their 3 PL and 4 PL provider to enable smooth exchange of information on both sides.
In November 2011, the Committee of Secretaries of the Government of India approved up to 51 percent FDI in multi-brand retail, with a few conditions, before backtracking in the face of stiff opposition. One of the conditions was that half of FDI in multi-brand retail should go into creating back-end infrastructure like cold chains and warehouses. Also, the minimum FDI was mandated to be US$100 mn (around Rs 450 crore).
While there are innumerable views around this provision, if it gets approved – and this a big if – that would be good news for retail logistics. The move will not only allow retailers to get funds but also acquire the domain knowledge to build a much more robust back-end.
We are already seeing many PE invest in Indian logistics firms. Though most of these tend to be transportation companies with aspirations to move into the logistics sector, the investment helps them raise the funds needed to move up the value chain. With the PE as their partner, there is increased emphasis on corporatization.
With the global logistics giants already investing in India, it is only a matter of time before we start seeing consolidation happening across the entire logistics value chain. With the government planning to spend close to one trillion dollars on infrastructure development, the stage is set for this industry to take the next big jump. Though this investment would not be restricted to retail logistics, none can deny that the ultimate beneficiary would be the consumer.
*This article was originally published in February 2012 issue of Images Retail.