Last-mile delivery market in India – why did NGP Capital invest in Shadowfax?

Globally, the logistics sector has seen a surge of investments over the last year. These have been driven by the significant – and rapidly increasing – demand for home delivery not only of consumer goods, but also of food and grocery items.

Investments are being made across the value chain, from order-taking apps and last-mile delivery services to autonomous robots. In 2018, total investments in this category have already exceeded $2.65 (Table 1).

Table 1: Recent investments in the logistics sector

Large market opportunity in India

The global market for third-party logistics (3PL) is enormous – $800 billion in 2017 – and growing. Within India, we estimate the domestic third-party logistics market to be $5 billion in 2017 with expected growth rates in the 18-20% range until 2020. Last-mile delivery is an especially attractive and underserved opportunity.

Unlike the US and many developed economies, India’s postal service is not designed for serving on-demand ecommerce. Historically, last-mile delivery in India was provided by the unorganized retail sector, while the organized logistics industry focused on intercity deliveries by air and truck. This has created a significant opportunity for organized, professional last-mile logistics services.

We believe there are many strong drivers of last-mile demand in India.

First, demand for delivery services will increase as new consumers gain mobile internet access. Morgan Stanley estimates that there will be 475 million online shoppers in India by 2026, increasing by 8X from the 60 million in 2016 (Figure 1). For perspective, this number is 1.5X larger than the US population.

Figure 1: Indian Online Shopper Growth Projections (2017–2027)

Second, we expect increased demand for express services, as existing consumer preferences converge on same-day delivery. This growth will not be limited to forward logistics for ecommerce. Other parts of the supply chain, such as reverse logistics, and new specialty verticals, like groceries and prepared meals, stand to see outsized growth.

As we’ve seen in the US, we anticipate that consumer expectations for delivery times will shorten as consumers demand near instant gratification. We anticipate that same-day and on-demand logistics will gain market share at the expense of one-day and two-day delivery.

The newest addition in our logistics portfolio

NGP Capital has made several investments recently in the areas of logistics and last-mile delivery, including Deliveroo (food ordering and delivery in Europe), Fetch ecommerce logistics in Middle East) and Quiknos (healthcare logistics in China).

Recently, we announced a new addition to our logistics portfolio: Shadowfax, India’s leading third-party, last-mile logistics provider to food, grocery and ecommerce companies that focuses on same-day and on-demand deliveries within India.

The Shadowfax team, led by co-founders Abhishek Bansal and Vaibhav Khandelwal, combine intelligence, ambition and execution skills with an out-of-the-box mindset that has served them well, enabling them to become India’s leading last-mile logistics company within a span of three years.

Abhishek and Vaibhav, being IIT engineering majors, came at the last mile problem with fresh eyes and designed their platform from the ground up to serve the asset light model that they have now successfully rolled out. We are very much looking forward to working with the team as they scale their business over the next years.

Why did NGP Capital invest in Shadowfax?

Shadowfax uses an asset-light business model; instead of owning vehicles or employing drivers, the company uses a sophisticated technology platform and crowdsourced personnel to deliver orders with their own vehicles.

This innovative approach fits squarely within NGP Capital’s thesis on smart mobility, a thesis driven by our view that sustainable competitive advantages will accrue to companies that:

· Can acquire customers with low acquisition costs

· Utilize a capital-light model

· Use unique technology to differentiate their capabilities

· Target large market opportunities

Shadowfax has executed well on all these criteria, and we believe the company is in a strong position to grow into a large independent logistics company. Below we present four essential ways in which Shadowfax has executed on these criteria.

1. Deep strategic focus on the last mile

Unlike many logistics companies in India, which have focused on trying to provide end-to-end logistics across cities, Shadowfax has focused exclusively on last-mile delivery. By serving other logistics companies and brands, and focusing exclusively on getting goods to and from the customer’s doorstep, the company has created significant economies of scale, making it the low-cost leader in this category.

2. Efficient customer acquisition model

Unlike many branded logistics companies, Shadowfax decided to become a third-party logistics provider to the ecommerce industry, rather than directly competing with ecommerce companies for their end consumers.

By entering long-term relationships with large brands, such as Domino's and Big Basket, Shadowfax is able to aggregate demand and generate large, steady delivery volumes. Because they don’t need to reach out to individual consumers, this has eliminated the need to incur huge marketing expenses to acquire individual – and often fickle – consumers.

This B2B model also allows Shadowfax to serve multiple industries rather than having to build their brand around a single vertical, such as food or grocery delivery. By mixing delivery types, Shadowfax can blend different demand peaks and create high route density – the key ingredient for success in the last-mile delivery business.

Many global players have raised enormous capital to build direct relationships with consumers; we believe most will be challenged to become profitable, even at scale.

3. Capital-efficient and asset-light

A key differentiator from traditional logistics companies is Shadowfax’s crowdsourced driver model. Unlike other logistics providers, Shadowfax’s labor cost is variable (per delivery) and it can scale up or down extremely quickly based on current demand. Delivery staff provide their own vehicles, which eliminates the vehicle and infrastructure capital expenditures traditionally associated with scaling a logistics business. This crowdsourced, asset-light model allows Shadowfax to provide the same level of service as traditional 3PL companies, but with a much higher return on invested capital.

4. Proprietary technology

Ultimately, it is the technology behind Shadowfax’s platform that enables the company to further differentiate itself and harness the benefits of its B2B and crowdsourced models.

The Shadowfax team has built a technology platform that can centrally manage all of the key elements for last-mile delivery. Customers directly integrate their order management software with Shadowfax. Orders are pushed to the Shadowfax platform, which automatically dispatches the order for delivery.

Artificial intelligence algorithms are used to batch orders and optimize routes based on time constraints, driver location and other variables. The driver receives instructions via their smartphone that also doubles as a sensor; the GPS enables real-time tracking for both the customer and end consumer.

After delivery, the end consumer can provide feedback, and the customer has access to delivery data so that they can monitor performance. Finally, payment for drivers is fully integrated, and workers are paid quickly. The result is a robust system that intelligently integrates and allocates demand to achieve the lowest cost per delivery in the industry.

Although Shadowfax is a young company, it’s deep strategic focus on efficiently providing last mile logistics in a market with significant demand, should serve it well over the next years, as it scales across the country and product categories. We look forward to working with the company on executing their vision.

Sources:

[i] Global 3PL Market Size Estimates (Armstrong & Associates)

[ii] Third party logistics space to reach Rs 58K crore by FY20: Mahindra Logistics

[iii] Morgan Stanley Research, “India’s DigitalLeap – The Multi-Trillion Dollar Opportunity” September 26, 2017

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