Disruptions always bring about change. And,the present pandemic is no different. The country, today, faces a fundamentallack of Grade A warehousing. But, that also offers an opportunity for futuregrowth. As we emerge from the chaos, warehousing will become a necessity, giventhat India could emerge a preferred destination for manufacturing.

TheIndian economy was already showing signs of stress in 2019 and early 2020, evenas larger economies were undergoing turbulence, be it elevated debts, tradewars, or overall slowing GDP growth. And, then, came COVID-19, a pandemic that furthercompounded the economic situation in the country, as the government announceddrastic steps to contain the spread.

Indiawasone of the early adopters of complete lockdown – by some accounts, thestrictest in the world – barring certain services which were identified as beingessential to fight the situation. The economy witnessed a setback, and there has notbeen a single industry, sector or company that has not witnessed a change in itsbusiness strategy or operations.

The lockdown brought to light the lacunaein the Indian economy. For instance, India faces a fundamental lack of Grade A warehousing withonly 88mm sq. ft. of modern (Grade A) warehousing stock. Compare this with Chinawhich, in the last 15 years, has grown to 750mm sq. ft. of Grade A warehousingstock directly corresponding to the increase in per capita income.

Industry experts already peg Grade A supply to grow at (pre-COVID)a Y-o-Y growth of ~25 per cent. According to a report by Welspun One LogisticsPark, with the impact of COVID-19, the Y-o-Y growth rate will need to increaseby ~10 per cent to meet additional unmet demands.

Some industry sources prospect the warehousing and logisticssector to be one of the fastest, most strategic asset classes to recover fromthe pandemic, attributed to the sharp increase in domestic demand and a possiblemajor manufacturing shift, making India ‘the preferred destination’ for globalmanufacturers. Warehousing in India, hence, stands as an obvious beneficiary,thanks in part to rapid acceleration of e-commerce demands as well as theaccelerated behaviour shift of its commercial business ecosystem that hasurgently pivoted to expand a footprint online, simply in order to survive.

The government has been quick – some would dispute the fact – tonote that the supply chain has completely broken down and needs quick fixingfor the economy to survive. Says Anshul Singhal, Managing Director, Welspun OneLogistics Parks, “Our Prime Minister has mentioned that the supply chain is oneof the five poillars India is standing on currently. The much-needed booster shotsto agri-logistics and storage is a great move aimed at empowering businesses tocreate storage facilities that will improve the overall food supply chain. The `1.0-lakh-croreagriculture fund announced for farm gate infrastructure will not only enable afaster movement of goods but also help in price stabilization. Further, theEase of Doing Business reforms will fuel up growth in the Warehousing andLogistics sector, with India already being seen as a good option for setting upmanufacturing units.”

Critical Demand Drivers andSector readiness

Welspun One Logistics Park has identified two areas that woulddrive demand further:

1. The rising consumption of the growing population, and

2. A robust storage system for agricultural produce (in termsof cold storage to meet basic needs).

Warehousing has overnight become the backbone for online grocersand other e-commerce businesses who struggle to service an unprecedented 3-5xrise in demand for essentials and are under pressure to scale operationsfollowing a massive fundraising. The above drivers would expedite demand forquality warehousing across the country.

However, is the sector ready? With a 100 per cent FDI permitted inwarehousing and logistics, the sector has now become a hotbed for attractingfunds and incentivising domestic investors, which in turn can make warehousingsingle-handedly tip India’s scale towards positive growth, the report by WOLPnotes.

Insulated from credit risks when compared to the other real estateclasses, the fully implemented GST and the government impetus on truckinfrastructure has now primed the warehousing sector to respond and capitaliseon the demand upswing. Moreover, most warehousing state policies are matureenough, thus making warehousing a viable and lucrative industry, ready forimminent scale.

Further, with major road networks, freight corridors, andinfrastructure spends on logistics already underway, Singhal feels that thesector is ripe to fulfil the burgeoning demand.

But, not all agree with Singhal. Industry experts assert that roadtransport, in its current form, will perhaps not exist, and with the advent ofthe Dedicated Freight Corridor (DFC), road transportation could be relegated tofirst mile/last mile distribution only. Moreover, established players with longhistory of relationships with SFOs have a better chance of surviving andgrowing in this changed environment of cost headwinds introduced by migratedlabour force.

The crux of the matter is the lack of availability of labour,albeit migrant, what was once the key cost competitiveness for road deliverymodel. It has now become a constraint, a liability, say industry experts. Oneindustry analyst says, “Costs are increasing across the board through increasedformalisation of labour policies, including safety policies.

Start-ups werealready having an inflated labour cost and would now have to deal with an addedcost headwind. As the erstwhile low-cost migrant labour becomes a costheadwind, only an existing long-term relationship with SFOs can help organisedplayers to weather the storm.

Moreover, while cost headwinds are increasing, there are appealsto the corporate sector to release timely payments for the survival of theecosystem in these difficult times. Cash flow management has become more of apriority given the current environment.

Consolidation is inevitable

Small medium enterprises (SME) and small fleetoperators (SFO) are under immense stress. Economic stress on SFOs with fleetsstranded, drivers/casual labourers migrated, and trucks incurring ~`2,000/day loss can lead to sector consolidation and formalisation,perhaps better pricing power, and increase in the organised sector’s marketshare.

Whether new-age start-ups can be a part of theecosystem is still not clear, but experts believe that technology andinnovative business models with cashflow generation can survive the currentonslaught. Yet, it appears that the scales have tipped towards:

1. Organised rail transport – with the onset of DFC – perhapsmore and more road transport can be relegated to first mile pickup and lastmile distribution. Even ecommerce players like Amazon have started using goodstrain facilities in this shutdown, and

2. Established business houses with long history oftransporter relationship have better chance to survive in this scenario ofdisruption with migrated labour.

To note here, the experience of developed nationshighlight how technology ensured sector fragmentation. Unwinding of labour costarbitrage for Indian migrant labour force is something new to the equation andtypical to India. Consolidation can happen under such a setting.

Controlled disruption from startups

‘Path to profitability’ motive in an alreadyfund-constrained external environment was leading to profit measures beingadopted by the road transport players. The current disruption will furtherstrengthen the cash flow/profit motive of the start-up ecosystem rather thanchasing unsustainable growth.

Correspondingly, winners may evolve with pivot ontechnology:

1. with focus on SMEs, as the cash flow managementissue cannot be addressed by channels created for government or big corporates;

2. to facilitate end-user access to brick-and-mortarretail and, thus, perhaps create an alternative to regular e-commerce channels;and

3. to help address merchant SKU modelling byestimating demand funnels. Clearly, asset-heavy and price-disrupting ways ofoperations will cease.  

Railway transportation can emerge as a key winner

With dwindling labour cost arbitrage of migrantlabour force, implementation of a Dedicated Freight Corridor (DFC) and animpending consolidation in road logistics, railway freight can be an eventualwinner. More and more, road logistics can be dispensed into first-mile andlast-mile delivery mechanisms. We have already seen some established e-commercedelivery models (e.g. Amazon) being tested via rail freight logistics.

Short-term trends visible in thesector

Businesses are pivoting towards essentialcommodities as significant challenges to movement of non-essential commodities continueto exist.

Majority of the current effort and communication isto ensure driver availability through communicated and publicised safetymeasures (both health and operational). The idea is to maintain utilisation. Clearly,long-term relationships with SFOs/delivery partners will reflect onutilisation.

Supply-side disruptions are still hampering 50 percent demand fulfilment and majority of the industry effort is to facilitatestock transfer and help maintain critical SKUs at the merchant level. Can someof the short-term pivots help in the industry’s cash flow/profit motive?Perhaps, the trend will be visible in the short term itself, e.g. FMCG remainsone of the major industries that continue to retain respectable working capitalcycle for vendors.

With railways emerging as key player, railwayfreight traffic is clearing fast, given uncongested passenger freight. The sameis allowing experiments from the likes of Amazon to try out the network,perhaps as a precursor to DFC implementation.

Disruption is expected not only in road logistics butalso among asset-heavy infrastructure players dependent on container exim +domestic freight. Many CFSs, ICDs and PFTs with leveraged balance sheet and notmany suitors are left to aggressively consolidate.

Exim container freight will show a sharp upsurge inthe next 2-3 months, say industry experts, mostly driven by activity fromChina.

Conclusion

There is no doubt that the country will see anincreased demand for warehousing. While land buying and supply creation is atime-consuming process, the timing couldn’t have been more perfect to cater tothe demand upswing. The questions to ask are: Is the sector prepared and readywith suitable policy? Is the infrastructure ready? Lastly, are the credit linesin place? 

• Anshul Singhal, Managing Director, Welspun One LogisticsParks.

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The crux of the matter is the lack of availability of labour,albeit migrant, what was once the key cost competitiveness for road deliverymodel. It has now become a constraint, a liability.

With railways emerging as key player, railwayfreight traffic is clearing fast, given uncongested passenger freight. The sameis allowing experiments from the likes of Amazon to try out the network,perhaps as a precursor to DFC implementation.

Given the present scenario, withconsumer/customer behavioural changes in process, what are the potentialchanges in industries’ operating environments?

According to industry experts, toplong-term trends being seen in logistics are:

1. Consolidation of roadtransport logistics driven by near-term solvency risks faced by small fleetoperators (SFOs),

2. Unwinding of labour costarbitrage driven by low-cost migrant workforce in the road transport industry,

3. Formalisation of the roadtransport industry with higher pricing power for established players withlonger-term SFO relationships,

4. Increasing affinity ofthe fund flows towards 'path to profitability' for start-up ecosystemensuring limited disruption,

5. Rail can be the eventualwinner, especially post the commissioning of DFC, as road consolidates amidstfading cost advantage. Disruption is expected not only in the road transportsegment but also among asset-heavy leveraged infra players dependent oncontainer exim/domestic freight.