The Bumpy Ride of Logistics Startups in India (Part 1 of 3)
As recently as five years back the logistics sector was as exciting to entrepreneurs and investors as agriculture, perhaps even less. Thereafter things changed, and the rising excitement bubbled into a mad frenzy by 2015 before settling down a bit in 2016. Indian logistics industry actually owes most of its recent sex appeal to the growth boom in two other sectors and one silicon valley start-up.
1. E-tailing (mostly downstream logistics)
2. Hyper-local (mostly restaurants and grocery)
Almost all the start-ups out there want to serve no 1 or 2 or be an Uber (i.e. aggregator) of all sorts of transport from 40 feet containers rumbling on Indian highways to bike riders snaking through urban roads. Let me limit the scope of this article to the first opportunity, in the two remaining sequels we will analyse the others as well.
As e-tailing started to take off in a big way around five years ago. These start-ups quickly realised the need to outsource logistics. They considered themselves as technology companies and “infomediaries”. Logistics was non-core and an old world, brick-and-mortar chore best outsourced to someone who is an expert. While there was a case to keep the more complex supply chain functions and fulfilment centre network in-house, moving boxes over the last mile seemed a good candidate to outsource. Unfortunately outsourcing did not seem to work initially due to paucity of suitable of vendors. There is a misconception that all the existing and old logistics companies in India are bad. It is true however that they were not adapted and perhaps as excited to meet high service levels and low costs that these start-ups demanded. Now every customer who deals with a logistics company demands low cost and high service. It’s important to take a step back and understand why the e-tailing companies were desperately wanting a hell lot more of these.
E-tailing itself has been around for a long time. Amazon (in the US) has been around for more than 20 years and some e-tailing sites still survive in India from the first dotcom bust, remember Indiatimes shopping? It was established in the year 2000. Traditionally an e-tailer has provided a combination of three key value propositions in the form of convenience, assortment and price discovery/lowering. A customer would be inclined to e-shop if she/he sees the value from one or more of these propositions to outweigh the key advantages of brick-and-mortar shopping which provide tangible look, feel, trial etc. as well as a chance for an outing. Logically it would be fair to charge the customer for delivering these propositions right at the doorstep, as the customer also saves on his own transport and parking to go to a physical retail outlet. In earlier times they used to charge it upright or simply build it into a higher price.
In the last few years however the entrepreneurs and investors wanted to transform the steadily growing India e-tailing sector into an exploding market. The idea of “Winner takes It all & big” was already proven by Amazon, Facebook, Google etc. The focus was now to grow fast, defeat all competition and even alter consumer behaviour permanently in your favour. That is where free delivery with high service levels including costly value added services such as next day delivery, cash on delivery, trials, free returns etc. emerged. The problem with doorstep or last mile delivery is that it is very expensive and can account for upto 40% of the logistics cost. The established logistics companies not willing to work at a loss or low margins asked for high prices for such kind of service levels and value additions. Reluctantly some of the e-tailers thought of managing the downstream logistics themselves but realised quickly that it was tedious and costly. However, most investors are never happy with the so-called tech companies being operationally heavy or high on operations cost. The e-tailers then spun-off their own logistics or invested in logistics companies in the hope that these companies could offer low or subsidised costs due to business from other clients. Another advantage of such a move is that it capitalises your expenses. Instead of incurring a high operating cost you invest in a company that burns your investment slowly over a period of time in order to extend low costs and makes the e-tailing firm look financially tight and operationally light. A few years ago, one profitable logistics company received a large chunk of capital and business from an e-commerce player that immediately turned its P&L red never to ever regain its black colour.
Thus while the opportunity was big it was always and only available at loss making or strained unit economics. Blinded by the promise of a green-field, fast growing and potentially a huge sector many logistics start-ups sprang up or were spun-off. Entrepreneurs and investors fell back on the fashionable arguments that logistics sector being old and unorganised was “ripe for disruption” and “technology will make it eventually very profitable”.
The problems started when in reality there was no real innovation by these start-ups in terms of technology that was applied and the cost of moving boxes remained essentially the same. Even though now more data was being generated on how the boxes moved, still it was not helping them move them far cheaper and better as was required. Essentially Information Technology has been used to manage data and workflows. No logistics company has made a significant effort in what I would call Logistics Technology (LT). This would be something that uses Operations Research techniques such as vehicle routing heuristics, linear programming, queuing theory etc. to optimise logistics operations in terms of costs and efficiency. LT would also mean innovation on equipment and transport modes such as driverless commercial vehicles or drones. This is of course not easy such innovations need to be cost effective as well implementable in todays regulatory environment but I see that most are happy to just wait for such technologies to be developed elsewhere before they can be copied rather than make any pioneering efforts themselves.
Another issue is that most of the start-ups are being run by entrepreneurs with no supply chain background. Thus they struggled with the business models and operational nitty gritties. Rapid growth of customers and hence their own business meant they could never really find enough time, money and resources to keep fine-tuning their business models or pivot too often.
With continued pressure on profitability there is little chance that e-tailing companies will allow increase in prices of logistics services. In response many logistics firms have tried to push down the losses further down the food chain. In the last few months some companies have tried to shift their last mile delivery riders (field executives) to work on a variable model where they only get paid on a per delivery basis (around Rs. 15). As expected its not working out pretty well for the riders and the experiment is short-lived.
Things are however not totally bleak for e-tailing logistics companies. As they are being run by some really smart individuals and being joined by more logistics veterans the operational efficiencies are increasing on a continuous basis. Some are generating economies of scale as they keep growing while some are narrowing their focus on select geographies and services which are more profitable for them. A small band is also experimenting with more efficient and innovative business models and some of these have shown promise. An example is some companies engaging mom and pop stores to do last mile deliveries with their idle resources. I expect a small few to start generating positive cash flows by next year. The real winners will be the ones that will either innovate on the business model and/or innovate on logistics technology; and not just apply the by now standard and commoditised web, mobile and AI technologies.