Drinks Industry Logistics in the BRIC Markets - SWOT Analysis - Part III: India

By | 12 March 2013

The penultimate part of this month's managment briefing, which looks at the logisitics landscape for drinks companies keen to get into the BRIC markets, considers the strengths, weaknesses, opportunities and threats in India.

Strengths

By 2021, 64.2% of India's projected population of 1.3bn is expected to be aged between 15 and 59; that is, largely within the working age group. This, coupled with rising income levels, will grow private consumption of consumer goods by 9.1% a year on average, according global research firm Dun & Bradstreet. This growth is reflected in the drinks sector. For instance, the Indian non-carbonated soft drinks market alone is growing at a compound annual growth rate (CAGR) of about 35% annually, according to a 2012 study by the Associated Chambers of Commerce and Industry of India (ASSOCHAM).

Generally, the branded drinks sector in India is well-established and has strong logistics networks, especially amongst the major multinationals such as Coca-Cola Co and PepsiCo and India majors such as Parle Agro. Smaller companies, especially those making both carbonated and non-carbonated soft drinks in glass and PET bottles or in Tetra Pak cartons (glass bottles are still used for the majority of soft drinks sales), have relatively well-established third party logistics systems. Small local providers help because often they have vehicles suitable for small transfers and have the local contacts able to overcome any problems, such as demands for bribes by retailers, security and other logistics partners.

This local delivery network is all the more important given the increasing penetration of television into rural areas, which has been widening demand for branded soft drinks. Aware that they are competing in a price sensitive market, companies have been improving the speed and flexibility of their logistics to ensure fresh product reaches the customer on time. This has prompted drinks companies to set up more manufacturing bases and associated logistics networks countrywide. High fuel costs have also driven this change - forcing companies to look for more local bottling and distribution.

Also, compared to some other developing countries, India is relatively stable politically and enjoys relative peace and stability. True, there are remote pockets where Maoist Naxalites wage war on the state, but these have not seriously impeded drinks logistics countrywide.

Weaknesses

The movement of alcoholic drinks (rather than non-alcoholic drinks) across India is fraught with challenges. Every Indian state has its own rules and regulations and, since India has 28 states and seven union territories, companies wanting national market share face a Herculean task of understanding and organising logistics around so many rules.

Managing director of Mumbai-based Veritas Logistics M T Koshy tells just-drinks: “Alcohol is defined as food by the Food Safety and Standards Authority of India, and a representative sample has to be tested by an authorised laboratory for every import. Imagine a brand like Chivas Regal, imported by brand owner's Indian subsidiary, being tested every time!”

To dispatch finished goods, manufacturers and importers need an excise permit, which is hard to secure. The expiry of permits, either due to the non-availability of SKUs or transportation, and the resulting requirement to re-validate these permits, is a tedious task. Each spirits bottle must carry a band roll label carrying excise number details. “Logistics is easy; the paperwork involved is cumbersome,” says Yohan Rub, executive director of Mumbai-based Mansha Agencies Pvt Ltd, which distributes beer and imported liquor.

India has 5,400 cold storage facilities, of which 4,875 are in the private sector, 400 in the co-operative sector and 125 in the public sector. Although the combined capacity of its cold storage facilities is 23.66m tonnes, India can store less than 11% of what is produced, according to business advisors Corporate Catalyst India. Most of this cold chain infrastructure uses outdated technology and is dedicated to single commodities, according to research from the US Commercial Service (part of the US’s Department of Commerce).

Import procedures are slow. According to Indian unified supply chain and infrastructure group Arshiya International it takes an average of four days to clear cargo in Singapore, while in India it takes 19 days. And, while imported wine and spirits enter India by sea, inland transportation is generally through the state-owned Indian Railways, which is not very reliable. The delivery of the 65% of all goods travelling by road in India is also often slowed by bad road conditions, especially in rural or semi-urban areas, often causing vehicle breakdowns, that could potentially spoil drinks.

Opportunities

Companies are increasingly outsourcing logistics to concentrate on manufacturing and marketing. Currently, 80% of India’s 30,000 temperature-controlled vehicles are used for transport of milk and milk-based products, according to the ASSOCHAM science and technology department. It believes that the revenue generated by these vehicles could jump four times from 2009 levels to INR16bn (US$294m) by 2017, while the number of vehicles could reach 52,000 in the same year. The growing wine and beer segments in India could offer good opportunities for those wanting to invest in this side of logistics.

According to Arshiya International Pvt Ltd group chairman Ajay S Mittal, India’s logistics sector overall commands 14% of the country’s US$1.8 trillion GDP (World Bank figures), compared to 9% to 10% in developed countries. This would value the total Indian logistics sector at USD252bn – which is no mean amount. Logistics space players such as Arshiya, Geo Logistics and TCI see huge potential in India. Arshiya has developed a trade and warehousing complex sprawling over 165 acres at the Jawaharlal Nehru Port Trust (JNPT) container terminal, south of Mumbai. Technology is gradually being adopted by major logistics operators to enhance handling efficiency and speed, while cutting costs. Warehouse management systems are being developed employed to guarantee FIFO (first in first out) services. While others, such as Veritas, use FEFO (first expiry first out) software for handling products with a limited shelf life. 

Threats

Regardless of these technological and management developments, the fact remains that India retains a bureaucracy culture that can generate significant logistics delays, with deliveries being held up by paperwork. Multinational companies selling into India without operating a local manufacturing plant beware – it may make sense to ensure imported products have a long shelf life.

Add to that a complicated taxation system and a battery of lower level checks manned by officials prone to demanding bribes, and logistics services do not just face delays, but additional illicit costs.

What particularly infuriates logistics providers is the overnight change of rules by regulators, often with no prior warning, notes Veritas’ Koshy. And the Indian government can be unpredictable: In 2011 and 2012, there were a series of policy shifts over the rights of foreign companies to own retail holdings in India that impacted on logistics policies. And, of course the Indian government famously banned Coca-Cola in 1977, only allowing the company to re-enter in 1993. 

The biggest threat facing beverage manufacturers working in India is misbranding, where products are sold with similar appearing names or counterfeit drink products are sold under the name of the established company – and these issues can complicate logistics, misleading third party service providers.

By the same logic, drinks logistics in India may be impacted by global market conditions should international trade decline and restrict the ability of foreign majors to invest in Indian logistics. Also, Indian logistics providers worry about the rising cost of diesel, which has so far been subsidised by the government. They also worry about a slowly declining supply of cheap labour, as the country gets richer.

To read the SWOT analyses of the other three BRIC markets, click here.

Expert analysis

FMCG Industry Logistics Spending in India to 2014

This databook assesses the prospects for logistics in FMCG industry. It provides information on total logistics (by value) with respect to nature of sourcing and logistics activity. The databook also splits transport logistics by mode of transport, destination, and shipment. It concludes with a snapshot of logistics and transport spending in Asia-Pacific (covering the 7 key Asia-Pacific markets).

Sectors: Beer & cider, Emerging markets – BRIC, Soft drinks, Spirits, Water, Wine

Companies: Coca-Cola Co, PepsiCo, Chivas Regal

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