As small town shoppers go online, it’s not only e-commerce firms that are celebrating

Logistics unicorns Ecom Express Pvt. Ltd and Xpressbees (BusyBees Logistics Solutions Pvt. Ltd), and delivery startups including Shadowfax Technologies Ltd, Delhivery and Shiprocket are now earning a significant chunk of their revenue from tier 2 cities and beyond as more people in those markets start shopping online.

India's e-commerce market is projected to grow to $300 billion by 2030, according to an October report by Redseer Strategy Consultants. Much of this growth is expected to be driven by a rapid adoption of e-commerce in tier-2 cities and beyond, and improved third-party logistics.

Varun Laul, a partner at private-equity firm Investcorp, said that with more than 60% of growth coming from smaller towns, “e-commerce has been penetrating downwards, and with that, you need the infrastructure to cater to those deliveries". Investcorp is an investor in Xpressbees and Laul is on the board of the company.

Since Investcorp's investment in 2020, Xpressbees has more than doubled the number of pin codes it services to about 20,000. The company receives more than half its revenue from outside the top 10 cities. Xpressbees is well distributed across the country, Laul said, adding that each region has a distinct purchasing power and attitude.

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Another example is Ecom Express, which gets 65% of its parcel volumes from tier-2 markets and beyond. The surge is driven by two kinds of consumers, its chief strategy officer Ashish Sikka said. 

The first is the value-conscious customer, who shops on social-commerce platforms and typically buys clothes and footwear. The second is the brand-conscious consumer, who buys a wide variety of products primarily from large e-commerce platforms such as Amazon and Flipkart.

Several industry executives also emphasised two factors that are crucial for delivery in tier-2 markets and beyond – speed and quality of delivery. While there are concerns about broken and defective products in all markets, ensuring speedy and accurate deliveries in tier-2 markets and beyond has been tricky for logistics firms.

Need for speed

With nearly 75% of e-commerce products paid for in cash, the companies understand that the faster the delivery, the higher the chance of acceptance. "With every passing day, the probability of the customer accepting a cash-on-delivery order drops by almost 7%, so there is this consistent challenge of a high number of rejects," said Atul Mehta, CEO of domestic shipping at Shiprocket.

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To be sure, these firms have reduced delivery times from six days to about three in tier-2 markets and beyond. Logistics companies have broadened their presence to be closer to buyers, Mehta said, adding that Shiprocket has seen most of its growth from tier-3 markets.

However, Shadowfax is an outlier as it continues to get most of its demand from the metros. While it receives over 60% of its parcel volumes from tier-1 cities, it sees only about a 10-15% year-on-year growth there, against 30% growth in tier-2 markets and beyond.

"Currently, overall demand is skewed towards metros but that could change over the next two to three years," said Deepak Goel, chief of operations for last mile at Shadowfax, adding that growth has been moderating in the metros since the pandemic highs. Like other firms, Shadowfax is also dedicating resources to reduce delivery times in tier-2 market and beyond by 12 hours to a day.

NSE-listed Delhivery is another example of a company that has seen sustained growth from the metros. While the levers of growth are different in metros and tier-2 towns, the comany has seen a steady increase in order frequency.

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"I think on the tier-2 and tier-3 side, the driver of growth is a combination of increased frequency, of course, but a lot of it is also people exploring e-commerce for the first time," CEO Sahil Barua said in a post-earnings call with analysts in February. Since the start of the year, Delhivery's shares have risen about 18% to ₹454 (as of close on 3 May).

Addressing the issue 

Ambiguous addresses are another challenge that logistics players grapple with in smaller markets. Consumers in these areas often enter incorrect addresses or poor landmarks that make it hard to find them.

Despite the advent of a geospatial tools and apps such as Google Maps, delivery workers often end up a kilometre or more from their destination in tier-3 markets and beyond. To curb this, logistics providers and aggregators have devised sophisticated technologies to map the correct address, and also have huge troves of data with addresses of repeat buyers.

For instance, Ecom Express uses artificial intelligence and machine learning to correct misrouted deliveries. It also nudges customers to manually correct their addresses. Shiprocket has a process called 'address enrichment' that uses e-commerce tools such as address-scoring and buyer-profiling to add missing details to an address the company has serviced previously, Mehta said.