DEBATE1 2 CARGOTALK O C T O B E R 2 0 1 5

Bipin KulkarniVice President – Sales & Marketing, Spear Logistics

The growth in e-commerce has spawned growth in real estate,particularly in logistics infrastructure. And e-commerce players are driving a boom in the commercial property space. It is also contributingto the growth of the physical distribution and support infrastructure,leading to a high demand in commercial storage space.

In the logistics sector, the focus has been on fulfilment centresand warehouses, parcel and liquidation centres equipped with state-of-the-art technology and modern warehousing practices. This

has resulted in a huge jump in the warehouse rentals in major metros and in smaller cities.

Correction is bound to happen but not in the immediate future, it might happen in the next two years.The bigger players are consolidating their position and trying to be as close as possible to customerswith shorter delivery times and more warehouses. Majorly the correction will take place because HyperLocal is still in nascent stage. It will pick up in the next couple of years and will be one of the reasons tostabilise the rentals. Secondly, consolidation is going to take place and lastly, rationalisation of fulfillment cost is going to happen.

When we talk about challenges to 3PL companies due to this jump, warehouse rental consists of 40 per cent of overall warehouse management cost. Due to unreasonable rentals, e-commercecompanies try to squeeze 3PL on other components like manpower and warehouse infrastructure and hit on margins.

Further, due to shortage of warehousing space, 3PL has to compromise on the quality of the ware-houses and even after paying higher rentals availability of good quality warehouse is a major constrain.

Burgeoning rents: DoesWith the rise in e-commerce, warehouse rentals across the country have suddenly gone up. Industry veteransshare their views on the reason for this sudden jump in rentals, the challenges 3PL companies are facing dueto this rise and what they feel about rental corrections in the near future.

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The correction will largely depend on the business plans of logistics companies, which will also enable projects with largerspan of time.

With such unexpected increase in the warehouse rentals, it isgoing to be tougher to have the space to make the e-commercebusiness a viable one.

This increase is quite a temporary phase and expected to turnout to be a growth module.

The high cost benefit will be considered when there is no optionavailable, but people have parallel options.

A well designed modern warehouse with slightly high rentalcosts can actually result in lower total warehousing cost.

GST is going to change the whole warehousing landscape of thecountry.

The market is in a dynamic stage and getting mature gradually,these challenges will prove as a bsuiness opportunity for 3PLcompanies.

The correction will definitely be there but in terms of gettingthe right facilities for the right amount.

The said increase in rentals shall encourage the supply of moremodern warehouses by the developers and eventually changethe dynamics of this warehousing industry for a better future.

highlights:

Naveen RawatCo-Founder, Holisol

Significant reasons for increase in rents are growth in GDP, a growing demand for high-end services and infrastructure, the rising share oforganised retail, the proposed GST implementation and of course the emergence of e-retail which alone has contributed to 25 per cent of India’s totaldemand for warehousing space in 2014.

About the corrections in rentals, I feel demand for high quality modern warehousing space will continue to increase, thereby keeping therentals stable. Further, demand for low quality warehousing space would gradually come down, resulting in rentals going down in the comingmonths. Coming to 3PL challenge, we see the strengthening of warehouse rentals more as an opportunity. In India warehousing rental has alwaysbeen considered as an unnecessary cost and the objective has always been to pay less rental. Such an attitude has resulted in a huge underinvestment in the sector and in a proliferation of low quality warehousing space.

A well designed modern warehouse with a slightly high rental cost can actually result in lower total warehousing costs. This allows the achievement of higher efficiencyand productivity. Strengthening of the rentals will offer developers a fair return on their investment without any need to compromise on construction quality.

Sunil GaubaAssociate Director Facilities & Infrastructure, Flipkart

The main contributors are obviously e-commerce. Lack of authorisedwarehouse zones has limited the supply, in turn not matching the currentdemand. Due to this mismatch the takers are not left with much choicebut to go with the flow. However, the said trend does not seem to be longterm and will change significantly in times to come.

Yes, this sudden jump will get stable but will still be progressive inthe long run, keeping in mind the way e-retail is evolving. The most visiblechallenge for the 3PL companies is obviously the increase in cost.

However, one has to see this increase in cost as an investment which is going to give returns in the longterm. With the market still in dynamic stage and getting mature gradually, these challenges will surely provean opportunity for business.

DEBATE O C T O B E R 2 0 1 5 CARGOTALK 1 3

Prashant BhatmuleVice President – Supply Chain, Hindware

The advent of e-commerce, which nowaccounts for six to 10 per cent of all sales in India,has shaken up the warehousing industry in a bigway, leading to an increase in the rentals acrossthe country. The demand of the warehouses nearthe city has increased due to the need for timelydelivery by these e-tailing companies. And as theavailability of warehouses in good condition nearthe city is limited, it leads to higher rentals.Logistics consultants believe that the existing warehouses are old fashionedand more needs to be done to make it online-friendly. We foresee a correctionin rentals in the near future but at a small level. On an aggregate level, it is notvisible that the rentals would come under control. With such an unexpectedincrease in warehouse rentals, it is going to be tough to have the space tomake the e-commerce business viable.

John Thomas Associate Director, Realistic Realtors

It is true that warehouse rentals and other related costs haveincreased since last year. With the evolution of e-retail, it can be primarilydue to the increase in demand of warehouse along with the lack of modern warehouse which is slowly becoming the need of the hour.These demands are quickly given with the dynamic nature of business.And the requirements being quite specific, this limits the availability.

Undoubtedly, as with every other sudden hike, this jump is surelyexpected to settle down. With the e-commerce industry getting moremature and the dynamics expected to get more stable, the demands are expected to be more planned.Further, the industry experts visualising the need of more organised warehouses for more profitable andsustainable business, the number of organised and modern warehouses is bound to increase. This in turnwill fill the demand and supply gap to quite an extent. The conventional warehouses are the ones whichare going to be correct the most in terms of its rentals. The infrastructure developments and other govern-ment initiatives to be taken at the state and central level will also play a role.

3PL companies are expected to struggle due to the side effects of the increase along with the com-petitive business. However, the impact of such increase in the warehouse rental is expected to be minimalto the 3PL companies since in most of the cases the cost is eventually borne by the product companies.In nutshell, though unexpected the said increase in rentals shall encourage the supply of more modernwarehouses by the developers and change the dynamics of the warehousing industry for a better future.

Syed Sohel AzmatDeputy General Manager – LogisticsDB Schenker

I believe that e-commerce is just one part of thesudden jump in warehouse rentals. Other factorswhich brought this sudden jump are strong demandfor modern warehouses across the country but thesupply is low and there are no designated locationsfor warehousing which results in few developersinvesting in the projects. I believe the industry willcome out of this more strengthened and will harnessthe benefits of overall increased efficiency.

Due to shortage of facilities there is a momentary increase in the rentals but lateron it will be back on track with justified rentals. It would, of course, depend upon thelocation and quality. There is no big challenge for big 3PL companies because of theireconomies of scale and they can easily sustain their business. Being a big 3PL playerour focus is to provide overall quality services and experience to our customers ratherthan compromising on the quality of the warehouse.

Mahinder AggarwalVice President –CommercialLuminous Power Technologies

Currently, there is a space crunch everywhere in Delhiand NCR because e-commerce companies are seekinglarge warehouses everywhere. The scenario is not going tobe same in times to come because there is a definite devel-opment of eastern and western periphery around NCR.Many properties are being developed around this area andthe large warehouses are being constructed. Even in Delhithere are many warehouses which are lying vacant. Though

people are asking for high rents but they are not in a position to absorb. So, I don’t see thatthere will be a very steep increase in rentals. Similarly in places like Bhiwandi and Mumbai,there are large warehouses lying vacant and unoccupied.

There are many logistics companies which have picked up large space but they arenot in a position to sell it due to rentals.

Secondly, the high cost benefit will be considered when there is no option available,and people have parallel options. With the introduction of GST, the complete logistics sce-nario will change. People will move from the smaller places with a large area and where .Cities like Nagpur and Indore are being developed as logistics hub because in both theplace rentals are low as compared to Delhi and Mumbai.

Rehan AlamHead Network Operations – ExpressLogistics Division, Gojavas

This sudden jump in warehouse rentals acrossthe country has been experienced recently due to theincreased demand by the e-commerce industry. In ageneral scenario, where real estate industry demandsfour to six months lead time, these industries demanda faster conversion and are willing to pay the premium.Moreover, the demand for location is always strategic,concentrated on city centres, airports and highway

junctions where supply in real estate is limited. This price rise is not expected to last long.The correction will largely depend on the business plans of logistics companies whichwill also enable projects with larger span of time. A large role here will be played by consumer demand.

Ajay KhoslaDGM– Sales (NCR)Jaipur Golden Transport

The sudden growth in the e-commerce sectorhas triggered the demand for warehousing space, onlyfirst half of the last year witnessed the requirement ofadditional space of six lakh sq ft. Changing the modeof operation from traditional to transaction is affectingthe size and working of warehouses. Traditional megashed warehouses are not viable to handle such massvolumes and movements. Another supporting devel-

opment is that e-commerce companies are opening physical centres and shops in primeareas of cities. Such multi- channel retailing is becoming a new standard but it is a harshstep for planned costs, as these are planned for prime locations of major cities.

Sanjeev KhannaHead – North, Big Basket

Firstly, there are no defined warehousing areas in most of thecities like Delhi-NCR. So most companies have to go either to industrialareas which are not commercially viable options, or to agriculturalareas for warehousing, which don’t have even the basic infrastructureto match the basic requirements.

Secondly, GST is going to change the whole warehousing land-scape of the country. With more organised facilities in certain geo-graphically identified areas, the demand will go up but in most of the

current agricultural areas, the demand is bound to reduce. These two reasons cause high rentals.

Most of the e-commerce companies themselves don't have a sustainable business model from a long-term perspective. In a couple of years, many of these players won't be able to survive in the market withthe kind of losses they are making. The day they pack-off, this overly portrayed demand will normalise andit will be back on track in terms of pricing as the space being built will surely overshoot the demand.

Once the rentals are reduced and the industry starts settling down, only then the 3PL companieswill acquire their space to get involved, contribute and grow as an integral part of e-commerce industry.

modern warehousing justify it?