The logistics challenge and how India can profit from Amazon’s model
Indeed, recent allegations of bribery in India by Amazon need to be investigated impartially, and action, as found necessary, should be taken against both the bribe giver and bribe taker. But Amazon’s global growth in recent years, and its ability to strike gold in adjacent businesses or spawn entirely new businesses at scale out of its own operations, hold valuable lessons. Amazon 2021 is a digital company valued at £1.7 trillion, with revenue of £350 billion and employs more than one million people globally.
It offers 350 million products from over 2 million sellers. What is not widely known is that 60% of its GMV comes from Amazon Marketplace, which is dominated by many Chinese firms trying to sell directly to the US. Less than half the products sold on Amazon now are sold by Amazon.
The company is quietly moving to a grand wholesaler model. Now consider the scale it’s able to achieve in adjacent businesses. This year, Amazon is making about £7 billion in advertising revenue per quarter and could end up making roughly half as much as what advertisers spend on all of the US television industry put together.
Amazon is now taking over the logistics business and delivers a third of all parcels in the US. This number is just slightly below the US Postal Service and more than that of FedEx and UPS combined. In India, too, it is slowly getting there, with a significant share of deliveries being done by the company itself.
Amazon develops a competency, goes after its rivals, and then turns it into a service to offer to the world–Marketplace, AWS and Prime Delivery are all examples of this, and Pay could well be the next. So why is Amazon’s success with scale relevant to India? Partly because India’s problems are at scale and the governance delivery systems needed to solve them also need scale.
Consider this: Today, Amazon can reach 96% of India’s pin codes. Why can’t various governments use Amazon (as also Udaan, Flipkart and others who have achieved scale) to pick up grain stocks from the Food Corp. of India (FCI)’s godowns where it is often wasting away as feed for rats (and cash feed for human rats), and deliver across the country directly to every village panchayat? In mid-2020, FCI had 26.6 million tonnes of rice and 55 million tonnes of wheat.
On average, about 45 million tonnes of foodgrains are transported by FCI across the country in a year. FCI undertakes this massive movement operation of foodgrains all over the country, encompassing around 2,297 FCI-owned and hired godowns, largely via rail and road. Is it possible to explore designing a bid wherein large logistics companies pick up grains and deliver to every pin code (every panchayat office), and down the line maybe to every household?
Would it be seriously more expensive than the current system (after deducting the cost of leakages and middlemen?) For example, Udaan charges below INR0.80/kg (in metros) to INR3/kg (Tier 3 cities) for B2B food (~200kg orders). Perhaps a pilot with a few wheat or rice surplus states to Tier 3 and 4 cities can be attempted to start with? Broadly speaking, based on conversations with industry sources and research, the following appears to be Amazon’s likely rates for a shipment of 30 kg of food grains: Local (50km hub to hub): INR120-130, Regional (150km hub to hub): INR130-140; Regional (300km hub to hub): INR150-160 (the assumption being from existing FCI hub).
These are costs of delivery direct to customers, scattered across the cities (Tiers 1,2,3 and 4) in the radius mentioned above. The transportation cost for FCI is roughly INR1.15 per kg for wheat and INR1.40 for rice. But these are not direct to homes and are based on huge volumes.
The private sector costs are to households, and there may be further significant savings from far reduced leakages and much better pricing through volumes and economies of scale. It is almost certain that between Amazon, Flipkart, Snapdeal, Jio and Udaan, there will be a pipe or access into almost every habitation and home in India. Maybe it will work, or maybe it won’t work out in terms of the economics, but it is certainly worth studying the costs of delivery of FCI vs private companies.
FCI can bid out the tonnage, routes and habitations or bid out the pot of money kept aside for logistics to the provider offering the best value for money (VFM) and maximum coverage, after considering the various explicit and implicit costs to it. Since this only affects distribution and not the politically sensitive grain procurement, it’s well worth a try. UPI did 3 billion transactions crossing INR6 trillion in value recently and offers many synergies, which can ride atop it.
Why can’t we leverage the power of digital payment offerings by Google, WhatsApp, Amazon, Paytm, PhonePe and others to disrupt the government-to-consumer payments market? For example, direct tax collections last year were about INR9.45 trillion (£125 billion), and various private payment services can offer speed and convenience for the customer and close to zero-float for the authorities through instant transfer. The grand finale for a player like Amazon would be the coming together of retail, entertainment, healthcare, payments, and delivery–all seamless to the end customer.
India, with its unique stack-based digital infrastructure–Aadhaar, eKYC and UPI–offers the perfect playground for Amazon to test it out here. India is the world’s largest supplier of problems and a complex ecosystem, and if Amazon can win here, it can win anywhere. Its road to becoming the world’s first £3 trillion company begins from India and Asia.
The writer is an Indian Administrative Service officer. The views expressed here are personal.
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