Indian Logistics Industry REVISED

7/28/2019 Indian Logistics Industry REVISED

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The report enumerates a research that was undertaken on the logistics industry in the FMCG

market and commodities [vegetables and fruits] to elucidate how large cost savings can be

incorporated by adopting the new comprehensive model that has been proposed by the

research team. The new model tries to tackle the issue of cumbersome multi- step supply

process in the FMCG sector also the huge wastages and unreasonable prices of the

commodities.

The research team undertook a survey where many retailers in the organised and the

unorganised sector were interviewed. Primary data was collected regarding the margins

lapped up by the intermediaries in the supply chain. The report elaborates how the new

proposed model will reduce cost of distribution of FMCG and hence benefitting the

consumers. Also it will enable the fair priced fresh vegetable (without wastage) to people

located in different areas.

The logistics industry in India is evolving rapidly and it is the interplay of infrastructure,

technology and new types of service providers that will define whether the industry is able to

help its customers reduce their logistics costs

and provide effective services (which are also

growing).

The annual logistics cost in India is estimated to

be 14% of the GDP, which translates into USD140 billion assuming the GDP of India to be

slightly over USD 1 trillion. Out of this USD

140 billion logistics cost, almost 99% is

accounted for by the unorganized sector (such

as owners of less than 5 trucks, affiliated to a

broker or a transport company, small warehouse

operators, customs brokers, freight forwarders,

etc.), and slightly more than 1%, i.e.

approximately USD 1.5 billion, is contributedby the organized sector. So, one can see that the logistics industry in India is in a nascent

stage.

However, the industry is growing at a fast pace and if India can bring down its logistics cost

from 14% to 9% of the GDP (level in the US), savings to the tune of USD 50 billion will be

realized at the current GDP level, making Indian goods more competitive in the global

market.

The Indian logistics industry is growing at 20% vis--vis the average world logistics industry

growth of 10%. Since the organized sector accounts for merely 1% of the annual logistics

1 Logistics in FMCG and Commodities: Effectiveness and Solutions

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EXECUTIVE SUMMARY

1.1 INDIAN LOGISTICS INDUSTRY:


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cost, there is immense potential for growth of the sector. The major opportunities are

highlighted below.

For domestic transportation and warehousing, they have tie-ups with Indian companies. As

the Indian logistics scenario looks promising, these MNCs are expected to play a bigger role,

probably forming wholly-owned subsidiaries or taking the acquisition route.

The land which opens up wide array of opportunities for the logistics service providers across

the world is India. The high demand for the logistics services is due to the significant growth

of economy. A few years back the value of the India logistics market was is $14 billion and

will grow at a rate of 7-8 per cent. The logistics companies in India cater to millions of

retailers and meet the requirements of about a billion people. The list below gives the name

of the best logistics companies in India.

INTRODUCTION:

Products which have a quick turnover, and relatively low cost are known as Fast Moving

Consumer Goods (FMCG). FMCG products are those that get replaced within a year.

Examples of FMCG generally include a wide range of frequently purchased consumer

products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and

detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products,

and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged

food products, soft drinks, tissue paper, and chocolate bars.


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S. NO. Companies

1. TNT Express

2. AFL

3. DHL & blue Dart

4. GCMMF (AMUL)

5. Gati

6. Safexepress

7. Ashok Leyland8. Agrawal Packers and Movers

9. DTDC

10. First Flight

1.2 TOP Logistics Companies of India:

1.3 INDIAN FMCG


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India s FMCG sector is the fourth largest sector in the economy and creates employment for

more than three million people in downstream activities. Its principal constituents are

Household Care, Personal Care and Food & Beverages.

The total FMCG market is in excess of Rs. 110,000 crores as per CNBC TV18 December. Itis currently growing at double digit growth rate and is expected to maintain a high growth

rate. FMCG Industry is characterized by a well established distribution network, low

penetration levels, low operating cost, lower per capita consumption and intense competition

between the organized and unorganized segments.

The Rs 85,000-crore Indian FMCG industry is expected to register a healthy growth in the

third quarter of 2008-09 despite the economic downturn. The industry is expected to register

a 15% growth in Q3 2008-09 as compared to the corresponding period last year.

The Indian FMCG market has been divided for a long time between the organized sector andthe unorganized sector. While the latter has been crowded by a large number of local players,

competing on margins, the former has varied between a two-player-scenario to a multi-player

one.

Unlike the U.S. market for fast moving consumer goods (FMCG), which is dominated by a

handful of global players, India's Rs.460 billion FMCG market remains highly fragmented

with roughly half the market going to unbranded, unpackaged home made products. This

presents a tremendous opportunity for makers of branded products who can convert

consumers to branded products. However, successfully launching and growing market sharearound a branded product in India presents tremendous challenges. Take distribution as an

example. India is home to six million retail outlets and super markets virtually do not exist.

This makes logistics particularly for new players extremely difficult. Other challenges of

similar magnitude exist across the FMCG supply chain. The fact is that FMCG is a

structurally unattractive industry in which to participate. Even so, the opportunity keeps

FMCG makers trying.


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1.4 THE TOP 10 COMPANIES IN FMCG SECTOR:


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India is 2nd largest producer of Fruits & Vegetable in the world.

India is the 2nd largest vegetable Exporter.

It is notable to see that there is great amount of wastage happening post Harvest. This

wastage is being estimated at 25% of total produce or approx Rs.50000 Cr US $ 10

Billion.

Indian Agriculture sector accounts for 17% of countrys GDP, produces 64%

employment and 18% of country's export.


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S.

NO.

Companies

1. Hindustan Unilever Ltd.

2. ITC (Indian Tobacco Company)

3. Nestl India

4. GCMMF (AMUL)

5. Dabur India

6. Asian Paints (India)

7. Cadbury India

8. Britannia Industries

9. Procter & Gamble Hygiene and

Health Care

10. Marico Industries1.5 INDIAN VEGETABLE AND FRUITS INDUSTRY


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Indias share is only 1% of World trade.

It is also observed that Vegetables and fruits are the highly unevenly priced goods

whereas price can vary upto 400% or even more between different cities1.

Hence this shows mismanagement in perishable vegetables which degrades the

quality and increase price variation.

1.6 Objective: To study the role of logistics and its effectiveness in FMCG and commodities

(perishable vegetables and fruits).

1.7 Scope of the study: Based on the study done on retailers and wholesalers of Bangalore

(5-6 in number), a super stockist of Dabur and Unilever in Begusarai, Bihar. Commodity

prices (vegetables and fruits collected from people interviewed on phone as on 5th January of

Sources 1: Times of India 17th December, prices from farm to mandi up by 400%

Lucknow, Agra, Delhi.

1.8 Significance of the study: Of high importance to study all the sector and how a managed

logistics can better off manufacturers and consumers in FMCG and farmers and consumers in

commodities market.

1.9 Research Methodology:

Study is based on primary as well as secondary data.

1.10. Sources of primary data:

5 retailers and a wholesaler interviewed in Kormangla area.

Interviewed a super stockist of Dabur and Unilever in Begusarai, Bihar.

Consumers interviewed on phone reporting the prices of vegetables in Lucknow, Agra and

Delhi.

1.11 Sources of Secondary data:

Sites of FMCG companies and logistics companies.

Reports on FMCG and logistics sector

Prices of vegetables from web sites.


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1.12 Data Collection:

The retailers in Kormangala were interviewed personally by our team on 8 th Jan in the

evening.

Information of the percentage division and other details were given by super stockistin Begusarai, Bihar through a phonic interview.

Rates of vegetables were given by two consumers from each city on phone.

All the other secondary data was collected through internet from various companies

sites.

2.1 Channel Structure (HUL as an example):

Typically, the goods produced in each of the HUL's 40 factories are sent to a depot with the

help of a carrying and forwarding agent (C&FA). The company has its depot in every state of

the country. The C&FA is a third party and gets servicing fee for stock and delivery of the

products. In each town, there is at least a redistribution stockist (RS) who takes the goods

from the C&FA and sells them to retail outlets.

2.2 Super stockist or Redistribution Stockists:

This is going to be reduced to only one with effect from next month of this year.

Sales Margin: 4.76% which includes cash discount, unloading expenses from

depot, distribution expenses to retailers, incentive schemes & other incidental

expenses (3% if company covers the cost of transport).

Modes of transport used: Rickshaw, tempo.

Areas of Operations: Marked for each of the RS.

Selling Operations: RSs sells the goods to:

Wholesaler (gets 1.5 % max. discount from RS)

Retailers (gets 1.0% max. discount from RS)

2.3 Wholesaler:

Gets cash discounts and other schemes promoted by HUL (gets points under Vijeta Scheme).

2.4 Retailers:

Total retailer base in Jamshedpur: Approximately 1070.

Sales Margin: Depends on the product

Soap, detergents 8% on MRP

Cosmetics 10% on MR

Table1: Distribution of profit shared by the channel members in Dabur products:


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Product

name

CNF(2%)+transportation

reimbursed

invoice+2% =super

stockist invoice

Super

stockist

His billing +

3%

=wholesaler

Wholesaler

or sub

stockist

+3%=retailer

Retailer

+7-

15%=consumer

Mrp

Dabur-lal

dant manjan

10.34 10.56 10.92+vat

12.5%

12.71 14

Vatika oil

150 ml

33.28 33.96 35.1+vat

12.5%

40.84 45

Dabur

chawanprash

160.40 163.68 168.59 173.65 200

Source: Super stockist Dabur Begusarai, Bihar (Sanjay Kumar Roy)

Exhibit 1: Distribution Expenses as percentage of Sales

Distribution Expenses as % to

0

1

2

3

4

5

6

7

HUL Dabur Reckit

Benckiser

Godrej P&G

Hygiene

ITC

%of sales in distribution

Source: PWC report on Indian FMCG.

It is noticeable that a huge amount of companies sales is gone as expenses in logistics for

distribution. In India logistic expense is 14% as compared to 9% in foreign countries

(developed nations) and here we see even after manufacturing on average 5% of sales are

incurred in transportation.

2.4 Motive behind having so many channel partners:

Just to reach out to the customers in a better way.


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Let us see what the cost is and profit share distribution of a FMCG product.

Exhibit 2:split up components of MRP of an average FMCG product

Companies Cost

and Profit 65%

Distribution Cost5%

CNF +SuperStockist +Wholesaler 8%

Retailer 10%

VAT 12.5%

Almost one third of the total effort is wasted in making the products available to the

customer. Hence a better and more effective distribution channel is required so as to facilitate

the under privileges section of the society who are yet not in a position to use these products

and to better off the current users.

Focussing Agra and Delhi

1st day: Fresh vegetables from farms reaches the nearby town and cities where the farmers

sell their vegetables through auctions.

1st day continued: Hence first day vegetables from the nearby villages, Runukta, Achnera will

reach Agra in the morning and may reach second day if coming through some small town. In

Agra vegetables will be divided into two parts one which will be sold in the city and others

which will fill up the demand of the nearby bigger cities, hence they leave for that city.

Major demand comes from Delhi which is situated 200 km away from Agra and connected

by NH-2.Almost taking 6 hours to reach. Hence is available for sale in Delhi on second day

evening or morning.

How a price multiplies because of channel members and transportation cost:

Table 2: prices varying in places close to each other(6.5+53% of 6.5=10 and so on)

Vegetable

name

Farmers price Agra price Delhi price Percentage

split(increase)

Potato 6.5 10 20 53%+153%=206%

Tomato 7 12 21 71%+128%=199%


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3.1 Commodities logistics (vegetable and fruits)present model:


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Spinach 2 4 9 100%+250%=350%

Onion 3.75 6 10 73%+106%=179%

Sources: Two people from each cities giving rates and person interviewed at Agra sabzi

mandi.

This may look startling but it is true prices shoot up in just two hundred kilometres. What can

be the probable reason?

Transportation cost of potato for two hundred kilometres is on average for a truck carrying 15

ton (Rs10,500 fare1) is Re.1 per kg but it doubles and increases by almost Rs.9. Vegetables

like spinach which are highly perishable almost becomes life less but sells for more than 250

percent.

Hence this price disparity and logistics should be look into in order to enable more and more

#Sources: Maruti transport, Firozabad.

consumer to have reached to fresh vegetables at moderate prices so that we can have a

healthy India.This is not just the problem in Delhi other big cities like metros Hyderabad,

Bangalore, Ahmedabad, Lucknow face similar situations. Hence there is a strong need of a

managed logistics focussed on this 40billion dollar industry.

4.1Who says logistics expenses are worry some?

This new model can revolutionise the distribution of FMCG products:

HUL's products are distributed through a network of 4,000 redistribution stockists, covering

6.3 million retail outlets reaching the entire urban population, and about 250 million rural

consumers. There are 35 C&FAs in the country who feed these redistribution stockists

regularly.2000 supplier and associate supply material for its 40 plants.

Dabur supplies through a channel of 25 CNF.

What is interesting to see is that companies which are smaller cannot afford to have hefty

infrastructure like 35 CNF. Even 4000 redistribution stockist are not able to make sure that

every city has a redistribution stockist.

This new model will remove the entire intermediary channel between company and retailer.

There shall be only on distributor who will work for several companies simultaneously. The

distribution company will have a large warehouse in all the states and small warehouse in all

the smaller cities. They will collect products from different companies and then can transfer it

to their city warehouse as and when required. For very small town where there is no city


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4 Recommendations


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warehouse the company can transport all the demanded products of different companies.

Hence full payload capacity of the truck will be used, as of now different companies will

reach their retailer through different independent source thus increasing the total expense in

transportation.

From the city warehouse all the demand of the local city will be met and transportation will

be done with the help of Tempos and Lorries.

4.2Sales force of the company: They will be efficiently used and will now answer just to the

distributor.

4.3Profit to Companies: Total of thirteen percent cost of the total cost was spent on

transportation and channel members margin(2+3+5+3). If company is able to make extra 2%

of profit that there performance will increase drastically. For example net sales of HUL were

870379 lakhs and profit was 971721 lakhs hence profit comes to 11% of the total sales. Extra

1HUL balance sheet NSE-india.com (first half April to Sept 09)

two percent will increase the profits by 20 percent.

4.4 Profit to consumers: FMCG sector is a highly competitive sector and hence companies

will eventually pass on the added benefit to the consumers and hence they will also get better

off.

4.5 Vegetables can they be more nutritious and fresh and yet cheap?

Yes, it can be.

Table 2 exhibits: How vegetables go costly by over 200% in just 200km where in

actually the transport cost is just 15 to 25 percent.

200 kilometres can be covered in 6-7 hours but yet it almost takes 24-36 hours toreach to the big cities.

Where the wastage in developed nation is 2-4% in India it is as much as 25%

(international firm concurs report )

Food inflation in India reached to stunning levels of 20% hence if wastages avoided

we can be the biggest exporters of vegetables in the world.

4.6 How will it be achieved?


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The model which has already been discussed can work as the infrastructure for vegetable

distribution model. This model will be effectively solve all the problems which are faced by

the current system.

Transportation cost on the extreme higher side can be 25% but then also the price

rises by 200%.

Solution:Hence to solve this problem the local warehouse will collect the vegetables

(perishable and others) in the morning when they are brought from the farms and

there by loaded into the trucks and they will reach the destination in average 6-7 hours

and hence available for the distribution in the destination city by the evening (this is

the time when most of the people go to collect the vegetables from the market.

Second problem was of the extensive middleman margins which inflates the price to

200%.

Solution:Hence probably with the managed supply of vegetables fresher vegetables

can be packed and priced. Hence branding the commodity like vegetables will

inculcate the trust among the consumers and hence it will be very profitable for the

company which is distributing all the products.

The major reason for the wastages in this particular industry is that they perish very

quickly with time hence once they are supplied in time a considerable amount of

wastages will be saved.

Now the biggest question that can come to anyone mind is that why anyone would preferto sale vegetables to us (farmers) and then sell our vegetables(distribute) and consumers

to consume our product.

Hence to answer all this if a vegetable are being sold for three times the price which

farmers get hence we have got a huge margin to distribute and make them sell our

products.When consumers will get a better value for money they will surely buy that

packed vegetable(commodity branding)

4.7 Financial aspect of the model:

The whole model is very lucrative as if we just distribute products of three companies

than also the total product distributed through our channel will be almost 30,000 crore (70

percent of what is sold by top 3 companies in an year-70 percent is traded through

modern trade mechanism) and removing the expenses, distributing company can easily

save 5-6 percent. Hence total potential for a company to earn through distribution of

FMCG is close to about 1500 crores almost equal to the profit earned by the Hindustan

Unilever in the financial year 2008-09.


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Now the contribution by distributing vegetables and fruits: This industry will command a

margin of close to 30-40% and turnover of this sector is bound to be high as total industry

is worth 40 billion dollars and 98% of it is unorganised and very unevenly priced.


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Indian Logistics Industry REVISED

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