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Growth of In-city warehousing in India and Learnings from the West

Growth of In-city warehousing in India and Learnings from the West

by Manish Saigal, Managing Director, Alvarez & Marsal and Sudeep Mehrotra, Managing Director, Alvarez & Marsal

Indian e-commerce, which contributes to about four per cent of the total retail pie of the country, is set to more than double to 10 percent in the next four to five years. As e-commerce continues to grow at an exponential rate, so does the challenge of efficient last-mile deliveries and reverse logistics. Last-mile deliveries, accounting for just 10-15 percent of total kilometers traveled, account for nearly half of the delivery costs in the industry.

To make these deliveries more cost-effective, industry experts are exploring distribution patterns based on the unique characteristics of each city and are beginning to pay greater attention to a segment that has seen rapid growth in recent years – in-city warehousing.

Establishing fulfillment centers closer to customers has helped enable quick commerce, reduced delivery times, and substituted front-end real estate required for retail. In-city warehousing is fast becoming a game-changer for urban development, infrastructure, and the ever-increasing trend of e-commerce penetration.

Emerging trends in Indian In-city warehousing

In-city warehouses are often repurposed from existing commercial spaces. As large national developers enter the in-city warehousing space, it is expected that they will introduce higher product specification to these facilities, with warehouses that are closer to Grade A-equivalent in terms of height, floor size, loading bays, etc, being constructed. The majority of these Grade A facilities are expected to be used for dark stores, which are designed to serve end-consumers with a high degree of speed and efficiency.

One key factor driving the increase in adoption of in-city warehousing in India is the hyperlocal demand for unorganized retail. Unlike in the US and the UK, where micro-fulfillment centers are primarily used by large grocery chains, in India these centers could cater to the needs of local kiranas, leading to a smaller delivery radius. In addition, the rise of food aggregating platforms with an around 15-minute delivery promise is likely to lead to a surge in ghost kitchens, designed to prepare and deliver food quickly.

As demand for in-city warehousing continues to grow, it is expected that these facilities will become more sophisticated in design and construction. While most dark stores and fulfillment centers are located on the ground floor, there is a growing trend toward G+2 and G+3 structures in metros and Tier 1 cities. Rental costs for in-city warehouses currently vary widely from city to city, with estimates currently ranging from INR 60-85 per square foot. These costs are higher compared to traditional Grade A warehouses, which are located on the outskirts of the city and are closer to major national highways.

In India, dark stores have gained significant traction in the grocery sector, with a total of 61% of dark stores dedicated to grocery slot deliveries. In addition, 24% of dark stores in the country are used for grocery quick commerce, allowing customers to receive their orders in as little as 15 minutes.

Aside from groceries, other end-use industries that utilize dark stores in India include milk and morning deliveries, accounting for 6% of total usage. Other D2C brands make up 4% of the usage. E-pharmacy and online meat delivery hold the remaining 3% each. As of 2021, the National Capital Region, Bengaluru and Mumbai accounted for more than 50% of dark store usage in the country.

Developments in the West

With a burgeoning network of e-commerce and large grocery chains in the West, in-city warehousing has evolved rapidly in countries like the US and the UK. Developers in the US and the UK have shown that repurposing unused commercial spaces such as defunct supermarkets, unused parking lots, and even closed restaurants can be a highly effective way to create new warehouse space.

Developers from the US and the UK are also building custom-made warehouses in major urban demand centers. Companies such as British Land are using their land bank to create bespoke small dark stores and micro fulfillment centers, which can be strategically located to meet the needs of retailers and consumers alike. TAT sensitivity is a key consideration in the development of such facilities, and Indian developers must prioritize speed and flexibility to remain competitive in this space.

In addition, companies such as Mapbox in the US are now using their existing data analytics capabilities to aggregate repurposed land for developers, creating new opportunities for in-city warehousing. By leveraging these tools, Indian developers can gain a deeper understanding of market demand and identify the most promising sites for new warehouse development.

There are other disruptors in the last-mile delivery space too. Nuro, a US-based robotics company, specializes in autonomous delivery vehicles that are designed to operate on public roads, delivering goods directly to consumers. One of Nuro's key innovations is its use of custom-designed delivery vehicles that are smaller and more nimble than traditional delivery trucks. Nuro has partnered with several major retailers in the US, including Walmart and Kroger, to provide on-demand delivery services.

While we are still some time away from introducing self-driving delivery vehicles on Indian streets, the country’s in-city warehouse developers have much to gain from studying the best practices of their US and UK counterparts to help drive growth and innovation in last-mile delivery.

Problems plaguing Indian In-City Warehousing

There are several challenges that need to be addressed to ensure the successful adoption of in-city warehousing in the country.

Many times, dark stores are poorly located – usually in areas where the majority of the population does not make digital purchases, leading to traffic congestion and poor delivery TAT. Additionally, G+2 and G+3 structures are not ideal for dark stores as they add to the overall delivery time.  To address this, several factors need to be assessed, including the analysis of location demand footprint, expected demand evolution across product categories, typical stores available, population density, demographics, and income trends.

The second problem facing in-city warehousing in India is the lack of custom-built spaces. National developers are entering the market, leading to boxes that may be as large as 10,000 sq ft and require adequate loading bays. The solution to this problem is for national developers to define Grade A specifications for dark stores that can evolve with time.

The third problem facing in-city warehousing is the challenge of stockouts due to a large number of SKU holdings. Dark stores and micro-fulfillment centers offer approximately 1,500-2,000 SKUs, making stockout situations a key challenge. The solution to this problem is to get the SKU mix right. This requires an assessment of SKUs for the catchment, inventory planning, demand forecasting, periodic SKU rationalization, among others.

Finally, optimization of delivery routes and orders must be done to improve operational efficiency. One must conduct an initial analysis of the location, along with an assessment of trade-offs and a technology-backed real-time analysis of demand patterns to achieve this.

As with any nascent sector, in-city warehousing encounters its own set of unique challenges. Nonetheless, with the entry of new players and implementation of innovative solutions, this sector is poised for significant growth that will help enhance the efficiency of last-mile deliveries.


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