When valuations of e-commerce companies skyrocket, can those providing warehouse, packaging and delivery services be far behind? Just as e-tail goods rode on express delivery trucks, share prices of logistics service providers, such as Blue Dart and Gati, rode the e-commerce wave to new highs. Gati’s stock price is up 60 per cent in the last year. Blue Dart trades at 115 times its 2014-15 earnings.
Many investors view the logistics sector as a proxy for e-commerce, given that there are no listed players in the latter segment. In the private equity and venture capital world too, investors who were late to the e-commerce party are hoping to catch up by betting on logistics players.
Service providers from local food delivery to last mile connectivity providers are attracting huge funding. For instance, grofers.com, currently operational in Ahmedabad, Bangalore, Chennai, Delhi/NCR, Hyderabad, Jaipur, Lucknow, Mumbai and Pune, lets customers buy products available at local markets and delivers it at their doorstep within 90 minutes. It raised $10 million in Series A and $35 million Series B in February and April 2015.
But can the well-packaged story of e-tail boom really help these logistics companies to deliver returns?
Phenomenal growth
There is no denying that e-tailing has boosted revenues for logistics players. India's e-commerce market is valued at $15 billion currently and logistics costs are estimated at around 10 per cent of the e-tailing cost. The e-commerce logistics market was valued at around $1.2 billion in 2014-15.
E-tailing has been growing at over 50 per cent rate and the logistics service providers are reaping the gains. Gati, for instance, saw a 125 per cent average annual growth in its e-commerce segment in the last four years. Blue Dart’s revenue from the e-commerce segment increased from nearly 3 per cent in 2009 to over 18 per cent currently.
Rise in packages delivered
The growth was on the back of increase in packages delivered. Gati for example delivered nearly 10 million packages in 2014-15 and is adding capacity to double this. For the industry, handling product returns – known as reverse logistics – is also helping revenues. The industry average rate of customer returning their purchases is high — about 20 percent; segments such as apparel have a 60 per cent return rate.
E-tail uses more warehouse space compared to retail. A study by Prologis shows that e-tail requires three times as much warehouse space compared to retail. PricewaterhouseCoopers estimates that 15 million sq ft of warehouse space will be needed by e-commerce firms by 2017, up from about 1.7 million sq ft in 2014.
Logistics providers are adding more space and offering value added services such as e-fulfilment centres to handle cataloguing, storing and packaging. These are higher margin business compared to delivery, boosting profits.
Cautious outlook
While these factors make the growth story seem air tight, caution is however called for due to three reasons.
One, the e-commerce boom may not translate into gains to existing logistics players. Many larger ones such as Flipkart and Amazon have their own integrated logistics division. Others are tying up with an unlikely player – India Post. Revenue from e-commerce delivery has been gaining steam thanks to the postal department’s vast network. It tied up with Amazon in 2013 and with Flipkart and Snapdeal in 2014.
Two, given the high cost of delivery, e-tailers are starting to adopt new methods to deliver efficiently. For instance, click and collect – wherein purchase is done online but pick-up is at the local store – is increasingly becoming popular in more mature markets. For example, in the UK, about 26 per cent of all online retail sales was collected from stores this year and is expected to increase to 35 per cent by 2018, according to Barclays. This would reduce last mile delivery charges for e-tailers and dent revenues for logistics providers.
Reverse logistics
Technology is also used to help reduce returns and the cost of reverse logistics. Data from the Transport Corporation of India shows that in about 70 percent of cases, the cost of pick-up and return is greater than the value of the item. So solutions such as finding the best fit for apparel and shoes are now being tried by e-tailers to reduce returns.
Three, e-commerce is a growing segment for many logistics providers but its share of revenue is still low. For example, this segment currently contributes only 8 per cent of Gati’s total revenue and is expected to grow to 10 per cent in the next two years.
To justify the high valuation, the other 90 per cent of the business has to pick up pace. While the rollout of GST and growth in the auto segment are expected to boost growth, the positives seem to be priced in.
Any delay in GST implementation or a slowdown in the economy may lead to a negative re-rating.