India’s eCommerce Woes: Managing Logistics Challenges In India

Coca-Cola recently announced that it is jumping into the red-hot Indian online retail arena by selling directly to consumers and small businesses, a first for a FMCG (CPG) company in India. While the Indian online retail story is still being written and Forrester is bullish about the long-term prospects for this channel, the immediate challenges need to be managed effectively.

Logistics and fulfillment are the largest challenges of them all in India, with more than half of all online retail sales being done using cash on delivery (COD). While COD is essential in a nascent eCommerce market, it can have a large negative impact on business margins. This is exacerbated in a nascent market where consumers are testing this new medium of ordering goods, as the return rates can be quite high. In India, reportedly, the return rates can vary from 5% to more than 25%, depending on the category, the demographics of the online buyers, and their online tenure (experience with the Internet).

Given the challenges of high return rates and fraud, especially for COD goods, Flipkart recently announced that it was not going to be fulfilling orders of more than Rs 10,000 (approximately $175) in certain areas of Uttar Pradesh, a state in India. It has not publicly admitted whether this is due to returns or simply fraud, but a quick gut check indicates the following:

  • This high average order value is generally possible when ordering consumer electronics and mobile phones, which generally have low-single-digit margins for the retailer.
  • Consumer electronics and mobile phones are popular with a younger population.
  • Internet connectivity in the state of Uttar Pradesh is probably lower compared with metropolitan markets in India, given its lower state GDP/capita.
  • The younger age profile of online buyers and the fact that Internet penetration in Uttar Pradesh has been lower in the past indicates that the online tenure of these buyers is also lower compared with metropolitan markets.  
  • And, in a 2011 report, Uttar Pradesh had the highest number of registered police complaints.

I believe Flipkart’s decision to stop delivering goods worth more than Rs. 10,000 in certain areas of India is the right strategy for Flipkart, as it looks to manage this challenge while ramping up its top-line (revenue) growth.

Comments

I think author jumped the

I think author jumped the gun, and came to conclusion without analyzing the Indian market. Also what highest number of police cases has to do with Flipkart stopping COD on more than 10000.

Quote from one article:
"Why are prank calls only a problem with UP? In India nearly everyone must be privy to the concept, and I’m fairly sure their prank call situation occurs all over the country."

One reason could simply be that there is a competitor who’s burning them. This is not unheard of as a strategy. In one story, a large soft drink manufacturer put a competitor out of business by buying out his entire stock of bottled drinks and destroying them – the cost of manufacturing the glass bottles is recouped by recycling them many times, and the newcomer ran out of capital to manufacture more bottles.

Even if that were the case, banning deliveries to the whole state is not a solution. And the competitor can order things worth 9,000 rupees multiple times.

Flipkart is in the news recently for having cut many product categories including Flyte (their online music download store) and for having fired many employees. In the light of difficult FDI regulations, the conversion to a marketplace instead of owning inventory, and an increasingly itchy investor set, this news just adds fuel to the “E-Commerce is in trouble” story.

Looks like you came to a

Looks like you came to a conclusion too soon. Stopping orders above a limit to a state just because you got a few prank calls is probably going to bite flipkart more than anything.

Retailers around the world face issues with fraud orders, but they end up creating systems and processes to defeat fraud rather than penalize the largest customer base in the country. I think the idea is stupid, and they should have invested some time and money in creating better processes.

Sad State Of Logistics Won't Hurt Indian Ecommerce Growth

This is a very typical non-Indian way of analyzing a very typical Indian situation. While India might flounder on many basics, it somehow manages to crack a few advanced things that are both beyond the capacity and comprehension of Western nations. For example, (i) 4PL has taken root before perfecting 3PL (ii) Startups like GharPay are able to provide COD outsourced service at no higher fees than credit card Merchant Discount Fees. More in my following two blog posts:

http://gtm360.com/blog/2013/04/19/will-logistics-stunt-the-growth-of-eco...

http://sketharaman.com/blog/2013/05/22/exercise-caution-while-selecting-...

This is a narrow minded

This is a narrow minded analysis i would say. Companies and customers are looking forward to improving things and not just run away with problems. Coming to Flipkart this is a total failure i would say when compared a large demography like india and such Risks like fraud, prank calls ought to have been mitigated properly. I would say this needs to be taken as a lesson learnt and see how to improve it.

Let me clarify, I do believe

Let me clarify, I do believe that COD is a necessary model in a nascent market, with low card & online banking penetration like India. But for this to remain viable, a company has to carefully manage the COD sales process as it essentially has lower margins. Coupled that with potentially higher returns it can have an adverse impact on profitability. A merchant will have to manage this as part of the overall payment mix.

As part of their strategy to manage risk, a company will have triggers based on customer data, repeat orders, price point, category, demography and geography of orders and that’s what Flipkart has done.

And lastly, most e-commerce revenues in India still come from the metro markets. Hence, going slow in a specific sub-market while strengthening systems and processes is good for business in the long run.

hi readers, i agree with this

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