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Warehousing in India – Experience, Trends and Expectations

Shanmukh Singh
25th May 2020

The Indian Warehousing sector is attracting international attention – and set to see a quantum leap in investments- from ₹25,000 crores in 2019 to ₹49500 crores by 2021. As the country pushes ahead for its stated goal of a five trillion USD economy, warehousing will continue to see robust growth. In this ISCM Whitepaper on the warehousing scene in India, we take a look at the drivers of change, the trends and the user expectations.

Shanmukh Singh
Research Associate, ISCM

Introduction

Warehousing is a key pillar of any logistics value chain. Conventionally warehouses were just a rented space used for storage, but warehouses are now becoming smarter and more user-friendly. Warehouses have evolved to add value to the traditional role of storage. From inventory management to assembly and packaging, various functions are being taken up within the warehouse. Globally, this evolution of godowns into structured warehouses happened over a lengthy gestation period of modern industrial growth and the advancement of technology, whereas in the developing world it had to evolve within a much smaller time frame.

India, as one of the fastest developing economies in the world is also witnessing this evolution of warehouses. The warehousing industry in India is pegged at USD 7.8 Billion and is expected to grow at 10 % annually.[1]Government policies such as Make in India, GST and initiatives such as giving infrastructure status to logistics in the recent past have all contributed to the changing role of warehouses in India. The last two years have seen a strong build-up thanks to these policy changes. Now, the next phase is likely to see differentiated demand growth based on quality.

The warehousing industry in India is pegged at USD 7.8 Billion and is expected to grow at 10 % annually

With a growing manufacturing sector, demand for warehousing space has exceeded its supply in the recent past. Any company that relies on distribution of their product from manufacturing in factories to retail shops needs a warehouse. According to a report published by Knight Frank, in FY19 alone the warehousing sector has seen a 77% increase in leasing. Strong demand and increasing formalisation of the warehousing ecosystem has also started attracting investors. Some $10 Billion in fresh investments from marquee global players such as Warburg Pincus and Blackstone have been committed, with smaller funds such as Everstone tying up with local operators to gain an advantage. Nearly 200 mn sq ft of logistics and warehousing space is expected to be added in the next 4-5 years.[2]

The evolution in traditional warehousing is affecting both the logistics sector and the value chain as a whole. Changes in the industry have forced companies to look deep into their manufacturing processes and make them more robust. Furthermore, within crease in trade, firms are streamlining modern supply chain processes by positively disrupting the logistics industry and the complete value chain. Even though we have seen the Indian logistics sector going through a major upgrade, India still faces high level of inefficiencies in its logistics sector. This is majorly due to infrastructure bottlenecks, complex procedures and inadequate diversification of services that has held back the Indian logistics sector.

Even though we have seen the Indian logistics sector going through a major upgrade, India still faces high level of inefficiencies in its logistics sector

Does India Lack Logistics Competitiveness?

Warehousing today is a highly competitive industry. Warehouses as discussed earlier are not just about storage anymore. They double up as fulfilment centres, distribution centres and return centres. Thus warehouse floors are under immense pressure to efficiently and effectively meet the growing demand within a stipulated time and cost.

The Indian logistics sector has grown immensely in the last 10 years. Government policies have changed and new and innovative players have entered the market. But the Indian logistics sector still lags behind most of the developed world. This is evident through the Logistics Performance Index of the World Bank where India ranks 44 out of 160 countries. India’s logistics contribution to the GDP is around 13-14% where as in developed countries the logistics component accounts only for 8-9% of total GDP. Also, Indian logistics faces issues like higher inland transit time and average turnaround time as compared to developed markets like the US, the EU and China.

India’s logistics contribution to the GDP is around 13-14% where as in developed countries the logistics component accounts only for 8-9% of total GDP

The reasons for lack of logistics competitiveness are as follows:

  • High indirect costs: Direct logistics costs are those incurred in the process of moving goods, such as transportation, warehousing, and value-added services. Indirect costs include inventory carrying costs, theft, damages and losses in transit; these account for 40% of India’s total logistics costs of $270-310 billion. Indirect costs are caused by inefficiencies in the supply chain; in developed countries, they are typically less than 10% of the total.[3]
  • Fragmentation of the industry: In India, the trucking and warehousing businesses are highly unorganized and do not have any standards in regards to industry practices. Also the industries are fragmented with a lot of small players in the informal market. For example; only 10% of Indian truck operators own a fleet exceeding 25 trucks, and most drivers own single trucks and rely on third parties to handle their orders. This poses a problem to businesses entering the Indian market. There are a large number of small logistics service providers in India and there are no big players who control most of the market, which would offer economies of scale.
  • Lack of logistics infrastructure: Usually, the Indian logistics service providers have excellent reach in metro cities, but they lack proper infrastructure in Tier 2 and Tier 3 cities of the country. This is gradually changing, modern infrastructure is being built in the tier 2 and 3 cities.
  • Focus on tax incentives: Warehouses are located on the basis of creating tax advantage rather than business excellence.
  • Lack of end to end solutions: Due to the fragmented market, there is a lack of bundling of services which would allow for better coordination and lower costs.
  • Lack of availability of skilled labour: Skilled labourers are directly correlated with losses due to inefficiency. Skilled labourers improve efficiency and thus reduce costs. India lacks skilled labourers in the field of logistics and this increases costs and reduces competitiveness.
  • Lack of logistics awareness: Firms in India still look at logistics as a necessary evil in the value chain. The importance deserved is not given to the logistics side of the business. Thus no steps are taken to become competitive and increase efficiency.
  • Absence of rural warehousing: For an agriculture economy as large as that of India, its agricultural warehousing capacity is inadequate.While state-run Food Corporation of India (FCI), the Central Warehousing Corporation (CWC), and State Warehousing Corporations (SWC) together account for around 85 MMT of warehousing capacity, the private sector chips in with only about 30 MMT.

Skilled labourers improve efficiency and thus reduce costs. India lacks skilled labourers in the field of logistics and this increases costs and reduces competitiveness

The Indian logistics industry is in the middle of a technological evolution. Quite like its Western counterparts, the Indian logistics sector has been witnessing a multitude of changes ever since it woke up to the reality of e-commerce a decade back. The Indian logistics industry needs significant consolidation over the next 4-5 years with an increase in supply of logistics capacity. Right now, the market is competitive from the rate perspective, but the same cannot be said from the service side of things. The situation could change in the future, as with more capacity, the quality of services would be expected to gain centre stage, leading to a more efficient logistics ecosystem.

Warehousing Industry Enablers

Technology

Implemented optimally, technology in warehousing is an enabler for the supply chain to operate at maximum efficiency and effectiveness. Efficiency lowers costs, makes a healthier bottom line and also improves business reputation. Modern age warehousing is a hi-tech business. It’s no longer a case of simple stores with forklifts and manpower, but cutting edge technology. With consumer service demands increasing and omni-channel operations becoming the fulfilment benchmark, development in warehouse technology is on the rise.

Automatically guided robots that learn efficient routes around non-automated warehouse layouts are increasingly being used in place of traditional picking carts

Here’s a look at the warehouse technologies currently gaining traction in supply chain operations.

  • Radio frequency identification (RFID): RFIDs have been a game changer in the warehousing industry. Making tasks easier within the warehouse operations is crucial to reducing inefficiencies. RFID uses radio tags to send messages to ‘readers’ making it easier to keep track of inventory and increase visibility without physically and manually checking. Whilst the use of RFID has seen a slow take-up due to security, cost and technical issues, the technology is constantly improving and the benefits are now starting to outweigh the negatives.
  • On-demand warehousing: Described by Fortune as the ‘airbnb’ of warehousing, on-demand warehousing is made possible by technology. With Just in Time (JIT) operations, management of seasonal business profiles and fluctuations in supply and demand, on-demand warehousing and shared warehousing are the way of the future.
  • Drones: Drones are not just focused on last mile delivery; they are also being used to make processes within warehouse operations simpler and less labour intensive. Drones are being used for barcode scanning, removing the need for forklift trucks and cage access, reducing manpower requirements. 
  • Cloud based data sharing: Using the web to streamline processes throughout the supply chain and specifically within the warehousing process, reduces waste and maximises output versus input. By using cloud storage, data can be more accurately shared, stored, and used for forecasting and accountability. Cloud-based data sharing is also an enabler of ‘Big Data’ which can facilitate major computational analysis of the warehouse operations with the aim of continuously adjusting and optimising operations to maximise performance and efficiency.
  • Omni-channel retailing: Technology has revolutionised not only how people shop, but also how they expect to be able to shop. Warehousing technology now needs to be capable of working within an omni-channel system with sales demand coming from online, onsite, and mobile apps. Warehouse Management Systems (WMS) now need a much more focused workflow foundation, fully integrated with order management systems, enabling accurate inventory visibility and improved agility to respond to customer demand across all channels.
  • E-commerce: There are few consumers today who have not bothered about Amazon or Flipkart at all. Triggered by factors like easy accessibility of cheaper data and increasing penetration of low-cost smartphones, the e-commerce industry in India is witnessing a phenomenal growth momentum over the past few years. The remarkable growth rate is also being bolstered by major drivers like the availability of high-quality products, the ease of placing orders over the internet, the convenience of doorstep delivery, and flexible payment modes, which, as a whole, are heightening customer experiences like never before.
  • Robotics: No longer does the warehouse need to be specifically configured for the use of automation and conveyors. Automatically guided robots that learn efficient routes around non-automated warehouse layouts are increasingly being used in place of traditional picking carts. This allows the picker to be completely ‘hands-free’, with significantly reduced worker walking and increasing efficiency.

A significant part of this development is these corridors are strategically and scientifically identified and are linked to creation of production and distribution clusters along with the development of well-designed multi modal parks

Technology is reshaping the warehousing industry. These technologies will largely play a vital role in boosting efficiencies of supply networks, reduce wastages and lead to supply chain optimization. The speed and scale with which we align our supply chain strategies to tackle the complexities of a changing global trade order will be key to determining our position in the global logistics ranking. As technological capability increases and the profit margins of supply chains are increasingly squeezed, the integration of technology in warehouses will continue to boom. Whilst the technological focus is centred around high velocity B2C operations at the moment, those involved in all sectors of warehousing will start to see an increase in technological applications as B2B demands start to reflect consumer demands.

In India, the excitement around technology driven warehousing is similar but logistics service providers are wary of taking the plunge. For every force pushing them to build tech savvy warehouses there are countervailing factors that suggest they should go slowly.

It is for the first time that Indian government has come out with such a draft, which will act as a guiding framework for all logistics related development

  • Lack of clarity as to which technologies are likely to survive.
  • Problems in obtaining the technology are high due to low domestic availability.
  • Asymmetry in lengths of contracts with shippers and the much longer lifetimes of automation equipment and distribution centres.
  • Lack of organised behaviour within the industry.
Infrastructure

Infrastructure plays a pivotal role in the warehousing sector. Transportation of cargo from the factory to the warehouse and from the warehouse to the retailer or the end consumer is a crucial activity in logistics management. India lacks sufficient infrastructure to encourage growth of multi modal transport solutions. This has resulted in a skewed multi modal mix with roads being the favoured means of transportation. According to Knight Frank, 60%of freight movement in India happens via road which is significantly higher than most developed countries. Globally the share of rail cargo is higher than that of roads. This is one of the primary reasons why logistics cost in India are higher in comparison to most countries.

India’s urban landscape is changing and moving beyond the metros to tier II, III and IV cities. The birth of these cities means more Indians will be living in urban India than ever before. This also means these cities will be connected by roads and other supporting infrastructure will have to be built in and around these cities. The government has reiterated its firm commitment to modernizing the functionalities of Indian logistics with a key focus on infrastructure development. With a view to improving supply chain efficiencies and enhancing connectivity to support logistics players tap the under-leveraged markets in the country’s hinterlands, key infrastructure development projects have been rolled out. Upgrading India’s infrastructure will not only boost the economy but will also provide a boost to the logistics sector. Here is the list of some of the projects that will change how India conducts its logistics functions.

With the growing Indian economy and changing business outlook, the scope of the logistics industry has broadened from the rudimentary transportation of goods to include end-to-end supply chain solutions, including warehousing and express delivery

  • Bharatmala: This is a road and highway project which will start from Gujarat moving northwards into Rajasthan, Punjab and Haryana. It will cover the Himalayan territories of Kashmir, Uttarakhand and Himachal Pradesh and then border parts of UP and Bihar and further into West Bengal, Sikkim, Assam, Arunachal Pradesh right up to the Indo-Myanamar border in Mizoram and Manipur. This mega project will change the landscape of highway connectivity. The project will increase number of corridors from six today to 50. The movement of freight on highways will increase from 40 to 55%. Number of districts connected by highways will also go up from 330 to 500. 34,800 roads will be taken up in the first phase. A significant part of this development is these corridors are strategically and scientifically identified and are linked to creation of production and distribution clusters along with the development of well-designed multi modal parks.
  • Sagarmala: Sagarmala is an initiative floated by the Government of India to evolve a model of port led development which will transform India’s coastline as gateways of India’s prosperity. The project is distributed over eight states. The project will also develop waterways along major rivers of the Indian peninsula.
  • Dedicated Freight Corridors: The dedicated freight corridor is a project of development of broad gauge freight corridors. Two freight corridors are planned along the western and eastern parts of India. The western corridor will stretch from Mumbai to Delhi and the eastern corridor will be developed from Delhi to Kolkata. Rail freight as a share of total freight movements in India is very low compared to the developed nations as discussed before. This project will boost freight movements through rail corridors.
  • Delhi Mumbai Industrial Corridor: The Delhi–Mumbai Industrial Corridor Project (DMIC) is a planned industrial development project between India’s capital, Delhi and its financial hub, Mumbai. The DMIC project was launched in pursuance of an MOU signed between the Government of India and the Government of Japan in December 2006. It is one of the world’s largest infrastructure projects with an estimated investment of US$90 billion and is planned as a high-tech industrial zone spread across six states, as well as Delhi, the national capital and itself a Union Territory. The investments will be spread across the 1,500 km along WDFC which will serve as the industrial corridor’s transportation backbone. It includes 24 industrial regions, eight smart cities, two international airports, five power projects, two mass rapid transit systems, and two logistical hubs.[3] The eight investment regions proposed to be developed in Phase I of DMIC are Dadri-Noida-Ghaziabad (in UP), Manesar-Bawal (in Haryana), Khushkhera-Bhiwadi-Neemrana and Jodhpur-Pali-Marwar (in Rajasthan), Pithampur-Dhar-Mhow (in MP), Ahmedabad-Dholera Special Investment Region (SIR) in Gujarat, and Aurangabad Industrial Corridor (AURIC) and Dighi Port Industrial Area in Maharashtra.
  • Logistics Parks: In 2017, the Government of India launched a program to develop 35 multi-modal logistics parks across the country. The government defines an MMLP as a freight-handling facility encompassing a minimum area of 100 acres (40.5 hectares), with various modes of transport access, and comprising mechanized warehouses, specialized storage solutions such as cold storage, facilities for mechanized material handling and inter-modal transfer container terminals, and bulk and break-bulk cargo terminals. These parks once functional will improve the country’s logistics sector by lowering overall freight costs, reducing vehicular pollution and congestion, and cutting warehousing costs. According to MoRTH, these MMLPs are expected to serve five key functions: freight aggregation and distribution, multi-modal freight transport, integrated storage and warehousing, information technology support, and value-added services.

Since most of the India’s logistics infrastructure is to be built, the country has a chance to build infrastructure optimally, to meet the growing demand. Doing so would need an integrated and coordinated approach in which development of – railways, waterways and roads- is matched to the needs and the existing assets are better utilized. In particular, India needs to increase its use of railways and realize the potential of its waterways.

Regulation and Policy

The government under the Aegis of Ministry of commerce has recently set up a Logistics department, Headed by a special secretary. The government has brought out a draft of new logistics policy in order to streamline logistics cost and help increase the nation’s competitiveness. The primary aim of the policy is to improve India’s logistics performance, cut logistics cost from 13 percent of the GDP to 10 percent, and creating a national logistics e-marketplace. Creating a single point of reference for all logistics and trade facilitation, optimising the current modal mix to international standard where rail will have a share of 55 percent, improving the first and last mile connectivity to expand market access for farmers, enhancing value along the chain by creating vertical towers through digitisation and strong use of data analytics.

It is for the first time that Indian government has come out with such a draft, which will act as a guiding framework for all logistics related development. The inter-ministerial committee will reduce the silos with ministries and provide seamless decision making and thus help India improve its ranking in LPI.

Industry Trends

India’s logistics sector has been a favoured investment avenue for both domestic and foreign private equity (PE) firms. Increasing demand from e-commerce, fast moving consumer goods, third-party logistics, consumer durables and manufacturing sectors along with a need for larger-sized warehouses have opened up the segment for organised, institutional players. The sector has been on the radar of institutional investors due to policy game changers such as the Make in India initiative, implementation of the Goods and Services Tax (GST), and grant of infrastructure status to the logistics sector. Rising incomes and internet penetration resulting in an e-commerce boom are also driving the growth of the logistics industry, particularly the warehousing market and express delivery services. While the warehousing segment has received an investment of over $3.4 billion in the past three-four years, there has been growing PE interest in the transportation segment as well. Meanwhile, technology-focused logistics ventures have also become lucrative propositions for investors.

Within the logistics sector, things started moving in favour of the warehousing industry as initiatives such as Make in India gained ground and the GST was implemented. Developers today are focusing on the development of large-scale, technologically advanced warehouses, unlike earlier when small warehouses were set up in various states. Large warehouse assets are attracting PE firms as they can deploy larger amounts in fewer assets, thus making asset monitoring easier. Moreover, well-performing assets fetch a better valuation when monetised through real estate investment trusts. PE players, including Brookfield Asset Management and Warburg Pincus, have been among the most active investors in the warehousing space.

With the growing Indian economy and changing business outlook, the scope of the logistics industry has broadened from the rudimentary transportation of goods to include end-to-end supply chain solutions, including warehousing and express delivery. Warehousing has emerged as an attractive asset class for investors. Joint ventures, and mergers and acquisitions are abundant in the segment. The development of the Delhi-Mumbai industrial corridor and dedicated freight corridors and the expansion of the road network have improved the prospects for the segment.

The Make in India initiative and increased infrastructure spends will give an impetus to the manufacturing and allied sectors. This will automatically translate into a higher demand for logistics and warehousing. With the implementation of GST, the logistics sector will move towards becoming more organised. This will certainly see PE interest in logistics going up. The government’s stimulus to formalise the sector by granting it infrastructure status will also drive investments as companies in the logistics and warehousing segments will be able to access funds at lower cost, longer tenors and enhanced limits. As a result, the logistics industry is on the path of unprecedented growth and this is resulting in heightened investor confidence.

Conclusion

From godowns to warehouses was a big step for the logistics industry. Yet, a large number of warehouse operators and users view warehouses as storage places where they can hold inventory to balance demand supply mismatch. Undeniably, a warehouse has a role to play in matching demand with supply, but this narrow view of a warehouse prevents businesses from realizing the potential of warehouses.

The modern warehousing industry is seeing multiple new trends emerging. The penetration of technology in operations, new and innovative business models and strategies, increasing supply chain efficiencies, increased warehousing demands, varied funding avenues, favourable government policies and geographical expansion in tier II and III cities are together playing an instrumental role in preparing the sector for the next phase of development.

Since the introduction of GST, we have seen increase in warehousing requirements in some industries and consolidation in others. At one end there is an increasing need for technology and on the other we are seeing a slow and gradual adoption of technology. These conflicting trends have a single underlying theme- the necessity to remain a sustainable business. All said it is time the warehousing industry reflects on their business model and focuses on business excellence.


[1] How customised warehousing and logistics is adding value to modern manufacturing, Deccan Chronicle, 26/09/2019

[2] What’s behind the sudden surge in demand for warehouse capacity, Economic times, 21/04/2019.

[3] Debunking India’s logistics myths, Mint, 23/03/2018

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