Plato’s words “necessity is the mother of all inventions” is a proverbial truth that has been around for ages. These words are not merely philosophy but are the foundation of most dynamic businesses that have thrived and owned their markets purely because of the need for them to exist.
Especially now, in contemporary times, necessity is an established standard that has birthed a whole new generation fuelled by the desire to provide products and services for every demand imaginable. Inevitably, the rise in demand for a product or service will directly result in a competitive eco-system where each company operating in that industry must build a niche for itself by offering something distinguished or unique to appeal to its target audience.
When the balance of power widens between the buyer and the service provider, it creates a perfect opportunity for an intermediatory to thrive. As someone who has witnessed the many phases of the Indian logistics industry over 27 years, I can determine that this is a revolutionary time, conducive to new ideas and solutions that will cater to the current forerunner in the new-age market – the e-commerce sector.
When Amazon and Flipkart began their expansion journeys in India, the response was highly overwhelming. So much so that both these giants had to open separate in-house logistical enterprises. This was done to service exponential demands as existing traditional service providers were not geared up to add on growth and rapid expansion of reach. Hence, Amazon started Amazon Transportation Services (ATS) and Flipkart started e-Kart. As they say, it was just the tip of the iceberg.
The growth of eCommerce and the subsequent exponential rise in the number of small and medium scale sellers required the logistics service providers to cater to this small but fast-growing market. On the other hand, legacy logistics service providers plus niche e-comm service providers working with large and mid-sized players and were too busy to focus on growing unique needs of growing SMEs in B2C ecommerce and D2C segments. All the SMEs were a part of the long tail of bigger players and ended up getting ignored invariably, which led to an opportunity for digital aggregators to enter the market and support the small growing segment and create an opportunity for the players and for themselves.
There was an immediate need for affordable logistics providers to work with SMEs and start-ups for them to grow their business, and digital aggregators were all about it. But how did they achieve what they have today?
Essentially, digital aggregators do solve a number of problems for SME clients. They provide a range of logistics options to choose from based on preference (cost, serviceability, delivery timeline, and more). Following the tech trends, these aggregators offered easy integration with their storefronts, order management system and most importantly, a user-friendly tech platform to manage overall logistics.
Lastly, these aggregating platforms pass the benefit to their customers from the high arbitrage of rates provided by logistics companies at scale. Aggregation of demand helps them provide a significant and steady business to logistics providers, who in turn offer competetive rates to them.
Now comes the setback. Over the years, digital aggregators, backed by their technology have gathered a significant customer base and have started commanding power over the logistics provider. This is where the conflict started between these parties. The arbitrage of rates became so high that customers are now able to get better rates through aggregators as compared to directly working with the same logistics provider.
It is a dilemma for both the players involved. Aggregators push the prices down to grow faster and scale. At the same time, the average yields of logistics providers drop even though the revenue increases. Over the last few years when digital commerce grew significantly, the logistics providers have not been able to benefit from the growth as their price points are not growing while their costs are increasing.
This led to immense pressure on logistics service providers resulting in the recent increase of rates by top service providers in the range of 30-40%.
While negotiations are being made between the aggregators and logistics service providers, surely, the aggregators will have to agree on a certain rate hike this year.
This was bound to happen as Logistics service providers now must look at other metrics apart from revenue. Top players who are either looking for an IPO listing or going for larger fundraising, need to improve their average selling price points as well as customer base (number of customers directly working with a service provider). With the increase in aggregator rates, logistics service providers intend to improve these metrics and adapt to the changing industry.
To combat this situation, digital aggregators and logistics service providers must find a common ground. Undoubtedly, digital aggregators are an important member of the ecosystem of B2C, D2C, and e-commerce logistics. They provide a platform for micro, small and medium scale shippers with the ease of the latest technology and integrations. At the same time, they also understand that logistics providers are the ones who execute the actual job on the field – i.e., picking up and delivering the shipments.
For the ecosystem to thrive, both the parties must forge strategic partnerships and work out a win-win situation without causing undue pressure on one party for the growth of another.
Yogesh Dhingra founder, MD & CEO of Smartr Logistics