Retail boost for logistics, warehousing: Investment rises by $7 bn in 2 yrs

The logistics and warehousing sector in the country has attracted $7.2-billion investment in the past two years, thanks to the emergence of global online retail giants and widespread expansion across value chains.

The largest of these is the $3-billion corpus set aside by the National Investment Infrastructure Fund to buy or sponsor a port and logistics-related projects in India through DP World (DPW). Allianz has also allocated $1 billion in e-Shang Redwood (ESR) to develop warehousing space in eight major cities across the country, according to data compiled by the CARE Ratings.

These investments are planned mainly to cater to services such as single- or multi-brand retail. Online giants such as Walmart, Amazon, Flipkart, IKEA, and other large-retail format stores have set up their warehousing facilities near ports or markets to facilitate quick delivery of goods to consumers. These warehouses have modern infrastructure and amenities to service both agricultural and non-agricultural sectors.

“The government has identified cold storage as a thrust area for development and has recommended the creation of cold-chain infrastructure. Through the Pradhan Mantri Kisan Sampada Yojana (PMKSY), the government is also following a transparent selection process and online filing of claims for the infrastructure development projects of mega food parks and cold chain,” said Madan Sabnavis, chief economist, CARE Ratings.

He added that one of the key demand drivers for the logistics industry has been the emergence of multinational companies (MNCs). “Most of the MNCs prefer low-cost manufacturing locations connecting the consuming market at the lowest possible cost and through a highly efficient supply chain.”

Apart from that there were a number of demand enablers which prompted many global private equity (PE) firms to invest in the domestic warehousing and logistics sector.

The sector has seen a massive investment in third-party or 3PL (a concept where a single logistics service provider manages the entire logistics function for a company) and fourth party or 4PL (controlled by a service provider that does not own the assets to carry out logistics activities but outsources to subcontractors) services.

Both types of services in the logistics sector have proved effective and efficient business system.

“Information technology (IT) plays a key role in supporting transportation and logistics industry. Today, technology is present in all the areas for a logistics service provider. Technology helps organised logistics companies score over the unorganised ones, and will be key to their operations going ahead given the competition,” said Sabnavis.

E-commerce is probably creating the biggest revolution in the retail industry, and this trend is to continue in the years to come. Online retail business is the next generation format which has high potential for growth in the near future. After conquering physical stores, retailers are now foraying into the domain of e-retailing to leverage the digital retail channels (e-commerce), which would enable them to spend less money on real estate (shops) while reaching out to more customers in tier-II and tier-III cities.

“The Indian warehousing sector has been growing primarily from non-agri businesses because of flat to a moderate decline in commodities prices in the last few years. The sentiment, however, has turned bullish in the last two weeks in agri commodities prices due to crop damage in seasonal and late-seasonal rainfalls. Owing to the long gestation period of at least eight-nine years for break-even against investment in warehouse development, the investors stay away from fresh allocation in this sector,” said Sanjay Kaul, managing director, National Collateral Management Service.

The government’s ambitious plan to bring down and logistics cost from the present 14 per cent of gross domestic product (GDP) to less than 10 per cent by 2022 poses a big challenge.

With the unorganised sector still controling 90 per cent of the warehousing capacity in India, the small and medium players look for consolidation either to sell their stake to multinationals or upgrade to meet global scale to remain afloat in the competition.