Logic in Logistics Space

Café Coffee Day (CCD), the largest coffee retail chain in India. Recently, he sprung a surprise with a foray into the logistics space by acquiring Chennai based Sical Logistics for a deal estimated at Rs 400 crore.

Coffee and logistics do not look like a great mix, but Siddhartha is known to be an astute entrepreneur. A logistics arm will help him in his CCD venture, which is spread across the country. But more that he says logistics is expected to contribute 12% to India’s GDP of $ 5 trillion in the next ten years. That means we have an addressable market of $600 million.

Logistics industry insiders are not surprised by Siddartha’s move. The sector is now witnessing new entrants with specialized services and growing private equity interest. In the last couple of years there have been several mergers and acquisitions and stake sales in the space. According to industry estimates there have been 17 small ticket acquisitions, worth over $ 500 million in 2009 alone.

It is clearly an effort to consolidate an otherwise highly fragmented industry and bring greater efficiencies into logistics for India’s manufacturing sector, which is now beginning to seek a new trajectory as global capital sees India as a good alternative manufacturing location to China

LG was looking massively to scale up operations in India. But the biggest challenge is logistics. The fact is that it is fragmented and there are all these complexities of octroi, taxes etc.

These are probably the reasons that made Mukesh Ambani take stake in Gopinath’s logistics venture.

High cost

The cost of logistics in India is very high compared to that in nature markets. KPMG estimates the logistics business at round 13-14% GDP, compared to 9.5% in the US and 7.15% in Europe. The cost of logistics accounts for around 21-23% of the production expenses in India as compared to 3-6% in developed Western markets.

One important element of the high infrastructure cost is power. The firms require 400 KB of power for one warehouse and power accounts for 22% of the total costs. Adoption of technology has also been slow in the sector. Farmers are averse to cold chain facilities even though they stand to benefit from it through reduction in wastage.

Railways, roads, ports airlines and warehouses are the major players in the $125 billion logistics space. The unorganized sector accounts for a majority of the business comprising truck owners, warehouse operators and freight forwarders.

Road transport is dominated by fleets with less than five trucks that account for over two thirds of the trucks operating in India and constitute 80% of the revenues according to a Deloitte report. Increasing synergies between all these operators can bring down costs significantly.

Indian railways is the dominant player in the rail segment spanning 63,332 route Km. Though the existing railway network is crippled by capacity constraints there are signs of the sector liberalizing with licenses being awarded to private players for container transportation. India’s port infrastructure consists of 12 major ports and around 180 non major ports. Several of them have drawn foreign and private equity investments. These include Gujarat, Pipavav, Mundra Port and Gangavaram Port. As for air transport again private sector participants has enabled infrastructure improvement. The civil aviation ministry has set a target of getting around 500 airports operational in the country by 2020. This will include renovation of used airports and developing green field airports.

Industry experts feel that the warehousing segment will have a huge potential once the GST regime replaces the differential state tax structures. Now, companies set up small warehouse in different states to adhere to various tax codes. But with GST, companies are expected to set up large IT enabled centralized warehouses that could provide huge economies of scale.

Enabling one stop logistic shopping is another major drive. This is the primary objective of Deccan 360 since the company owns a lot of assets and resources. Some others are attempting to achieve the same goal, but by bringing different operators together and keeping their own assets and resources low.