Flipkart’s Expansion in Rural India: Will it be Successful?

Introduction:

Home to 1.4 billion people, India is one of the largest and fastest-growing e-commerce markets in the world. As of January 2022, the country has 658 million internet users. In 2020, 95.3% of internet users in the country, aged between 16 and 64, visited e-commerce websites. More than 70% of users looked up products online, and a similar percentage made an online purchase. Nearly 60 percent of internet users bought products from their smartphones. According to Kearney, online retail accounts for 4%, valued at $4 billion at present, but that would reach 19% by 2030 with a value of $40 billion. 

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The pandemic definitely spurred the growth of online shopping in India, but e-commerce companies are now facing a new challenge. Big cities reached saturation point. In order to grow their businesses, local e-commerce companies must expand in semi-urban and rural areas, but this is a major uphill battle. In this assignment, we shall look into the logistics operation of Flipkart, one of the top Indian e-commerce companies, to try and understand if there is any limitation that is hindering its expansion.

Rural India: The New Frontier for e-Commerce Companies

Before talking about Flipkart logistics, we need to talk a bit about rural India to understand why it is important for the future growth of Indian e-commerce companies.

At present, around 65% of India’s population lives either in rural or semi-urban areas, which will come down to 53.5% by 2040. Currently, rural India plays a pivotal role by contributing 25-30% of the country’s GDP. According to a Bizom report, in the FMCG market, rural consumption increased by 58% YoY, twice the rate of urban consumption.

Despite facing numerous challenges, rural India is growing rapidly. With proper policy implementation, improved infrastructure and better internet infrastructure, the government can overcome many of these challenges, thus unlocking the true potential of the rural economy.

Mobile internet is now more or less available in Tier I and Tier II level Indian cities. Still, a large portion of the country’s rural areas has insufficient internet coverage.

Since 2011, the Government of India (GoI) has been implementing Bharatnet, a megaproject that will bring all the villages in India under broadband internet coverage. The project took off in 2011, and the first phase has been completed, connecting 300,000 villages. The second phase is ongoing, and upon completion, an additional 150,000 villages will be connected.

Along with improved Internet infrastructure, the rising literacy rate will also drive internet penetration and upward economic movement. Both government and non-government organizations are working to educate the rural youth. As of 2021, the literacy rate in rural India reached almost 73.5%, of which 81% were male and 65% were female. As more and more people become well-educated, they will also become tech-savvy. They will increasingly rely on mobile internet to perform daily tasks, such as online shopping, bill payment etc. According to a statement given by the Internet and Mobile Association of India (IAMAI) and consulting firm Kantar, the number of internet users in rural India will probably increase more than in urban India by 2025.

All these are indicative of the fact that rural India is the way for the future growth of e-commerce companies.

Flipkart: A Brief Overview

Founded in 2007 by two IIT Delhi graduates, Sachin Bansal and Binny Bansal, Flipkart is one of the top e-commerce companies in India at present. As per the October 2021 report, the online marketplace supported 375,000 sellers. It wanted to increase that number to 420,000 by the end of 2021. According to news reports, on average, the company fulfills two million orders every day. In FY 2020, the company had a Gross Merchandise Value (GMV) of $15 million.

Flipkart Logistics:

The success and future growth of an e-commerce company depend on the range of quality products it can offer to customers at an affordable price and deliver those products on promised time. Realizing this, Flipkart started its own logistics operation in 2010. Over the years, its logistics capabilities have grown. Thanks to all the investment and planning, the company now has a highly sophisticated supply chain that is end-to-end managed. Aside from developing its own logistics, the company also partners with other logistics service providers. Through its logistics, Flipkart delivers products to customers as well as procures products from suppliers and merchants. Flipkart’s operations team works on supply chain, procurement, warehouse management and customer support.

·         Flipkart’s in house logistics capability:

·         Flipkart operates more than 100 warehouses and about 2600 delivery hubs all over India. It has its own logistics subsidiary, eKart Logistics, that handles all its logistics operations.

·         Third party logistics service providers:

·         Flipkart’s in-house logistics handles 60-70% of the order fulfillment while the rest is done through third-party logistics. The company maintains a database of logistics companies and their respective areas of operations. In many places, there are no logistics services. In that case, the company uses India Post. For efficiency, the company allocates slots to different logistics companies when they collect their goods.

Product procurement:

·         Flipkart sources products from different suppliers. It has regional procurement teams that work with local suppliers and a central procurement team. The central team overlooks the entire operation and deals with big suppliers.

·         Based on customer data, Flipkart collects products from suppliers.

·         For fast-moving products, Flipkart collects them from suppliers and delivers them to its customers using its own logistics or third-party logistics partners.

·         For low-selling items or items where the demand fluctuates, the company uses the just-in-time method. In this method, Flipkart procures the product from suppliers only after getting orders from customers. Just-in-time procurement is expensive and has slow growth.

Goods inbound:

·         Flipkart collects the goods from suppliers.

·         After the goods reach the warehouse, employees conduct a quality check.

Storage management:

·         Employees at the warehouse create a list of the products.

·         They also check for pending orders. If 'Yes' then the product is delivered. If 'No' then the product is stored and the product list is updated.

·         An item is labeled “Out of Stock” if it is not available in the warehouse or the vendors cannot supply it within the mentioned time limit.

Goods outbound:

·         A product list is generated.

·         Employees then pick up the products from the shelves.

·         The product is packed to make it tamper-proof, weather-proof, and breakage-proof. 

·         The product is then categorized based on delivery locations.

Order fulfillment Process:

·         After the customer places an order, the Flipkart Operations team checks inventory to see if the product is available in their warehouse or if they have to order it from the supplier.

·         The good is transported to the mother hub and then to the delivery hub.

·         From this delivery hub, last-mile delivery is made either by motorcycle or bicycle or on foot.

·         The customer gets SMS, email, or message from the website.

Delivery:

·         Based on location and product availability, product delivery varies from three days to three weeks.

·         If the product has to be imported from abroad, it might take about three weeks to deliver.

·         If the product is available in the local warehouse, it is delivered in three days.

Mode of transportation:

·         To transport goods at long distances, Flipkart uses air cargo.

·         If the location is close, goods are transported by train or truck.

·         For goods transport in cities, Flipkart uses two-wheelers and bicycles.

Product return and reverse logistics:

·         To gain customers’ trust, Flipkart has a flexible return policy.

·         In case of product replacement, Flipkart returns the product to the supplier and obtains a replacement, which is then delivered to the customer.

·         If the replacement is not possible, Flipkart gives customers store credit or a similar amount they paid to purchase the product. The customer then purchases another product.

·         In many cases, third-party logistics cannot deliver to the address, or the customer changes his mind and does not accept the product. In that case, the product is delivered, and the customer contacts customer support and returns the product. Flipkart then collects the product and processes it on its own expenditure.

Increasing logistic capability:

Better logistics capability makes a big difference for e-commerce companies, but developing such capabilities requires solid planning and a huge investment. Flipkart is well aware of this challenge and has been tackling it head-on since the beginning. The company developed a state-of-the-art system that connects all its operations and ensures smooth data exchange and coordination between different branches.

The company has been investing heavily to improve its storage management and order processing capacity. Since 2019, eKart has been using Automated Guided Vehicles (AGVs) in its warehouses. These robots can sort 4,500 packages every hour.

Last-mile delivery is the single biggest challenge for every e-commerce company in India. Because of unplanned urbanization, many areas do not follow any zoning system or policies. To tackle this problem, Flipkart announced to invest $2.5 billion in logistics in the next 4-5 years. The company will invest in building more warehouses and acquiring delivery vehicles. In addition, the company is also using machine learning technology. The company also partnered with 10,000 local shops that serve as pick-up and drop-off points.

Customer fraud is another big challenge. Flipkart is using a data management system to prevent customer fraud.

Can Flipkart successfully expand into rural areas?

From a business perspective, Flipkart ticks all the right boxes, but expanding into rural areas comes with a whole new set of challenges. Some of the major challenges of rural India are:

Cash-on-Delivery:

In rural India, people still prefer to transact in cash. Last year, CMS Infosystem published a study that revealed that more than 65% of online sales transactions in India happened in the Cash-on-Delivery (CoD) mode. A company spends a lot of money to deliver a product to a customer, but after receiving it, if the customer refuses to purchase the product or makes delays in payment, it affects the company’s business. CoD customers have a high product return probability. During the pandemic, Flipkart temporarily suspended CoD for fear of contacting COVID from cash.

Logistics:

Infrastructure and internet connectivity are still major issues in many rural areas. Many villages are not well connected by roads. Many villages do not have reliable Internet connectivity.

Language and Culture:

As we move further into semi-urban and village areas, local language is spoken more. Keeping this in mind, e-commerce companies have to develop more contents in local languages. This is a serious problem because different languages are spoken in different parts of India.

A deep understanding and appreciation of rural culture are also very much necessary because rural communities are very close. People do business with those they know. They are not very comfortable with outside influence.

How Flipkart will tackle these challenges?

Flipkart is one of the pioneers of CoD in the Indian e-commerce industry. A large number of Indian people do not use credit cards or digital payment systems. The only way to get these people to buy something online was to use CoD. So, Flipkart offered CoD to customers, which became one of the major reasons behind its growth. The company has ample experience and knowledge in handling CoD problems. For this reason, they can easily attract customers from rural areas.

When it comes to tackling the issue of infrastructure, Flipkart is partnering with various regional logistics service providers and local shops. Yes, there will be complexity in product delivery and product sourcing from remote areas, but Flipkart will have to come up with innovative ideas and technologies to successfully navigate those problems. Things will gradually improve in the near future.

In order to enable people located in areas with poor internet connectivity, Flipkart launched Flipkart Lite in 2015. It is a web app that works on low-cost smartphones and sketchy internet connections. The app will allow a person to access the Flipkart marketplace and order products.

In 2019, Flipkart launched Flipkart Samarth, a platform that enables rural artisans, craftsmen and weavers located in remote rural areas sell their products on the Flipkart marketplace. The project is now supporting 950,000 artisans, weavers and craftsmen. It is also working with the government to help rural people. Recently, the Ministry of Rural Development, under its Deendayal Antyodaya Yojana– National Rural Livelihood Mission (DAY-NRLM) program, partnered with Flipkart to sell products made by rural artisans and craftsmen. Flipkart should take more such initiatives in the future. This will help the company to build a better image in rural communities and will motivate people to purchase products from the marketplace in the long run.

Final Thoughts:

The reality is that “Rural India is not prepared for e-commerce.” Villagers are still not used to the idea of paying for a product without touching or feeling it first. It will take a long time and consistent effort from e-commerce companies to develop online shoppers in rural India. Companies that will start earlier will gain the “First Mover Advantage.” Top e-commerce companies like Amazon and Flipkart are very much aware of the potential. So, they are slowly and gradually trying to establish their footholds. They have to come up with strategies that will enable them to achieve people’s trust. Once it gains that trust, people will feel comfortable buying products on its platform. 

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The Impact of Russia-Ukraine Conflict on United Kingdom’s Wheat Supply Chain. What Can be done to lessen this impact?

The United Kingdom produces 80 to 85 percent of the wheat it consumes. Although the country does not import a large amount of wheat, the ongoing Russia-Ukraine conflict has an indirect impact on its wheat supply chain.

Already, the country’s economy was reeling from the effects of Brexit and the coronavirus pandemic. Food prices increased due to inflation. In December 2021, the United Kingdom saw 30-year high inflation of 5.4%, causing a rise in many food items, petrol, used cars, clothing and furniture. In January this year, the price of staple food items such as margarine, tomatoes and apples increased by 45%.

The pandemic also affected truck drivers in the UK. They were under immense stress. They could not eat or sleep properly. As a result, many truck drivers switched jobs. Before Brexit, people from the continent came to the UK and worked as truck drivers. After Brexit, they left the country, creating a severe shortage. As a result, big stores found it very challenging to offer products to customers last Christmas.

In 2021, UK companies that traded goods to and from Europe were not required to make full customs declarations or go through a rigorous checkout process, but it all changed as 2022 rolled in. Now, these companies have to go through a long and rigorous checking process and submit documents containing details of the goods they are bringing in or out and pay all the tariffs. This has become a very challenging task for many UK importers. A survey conducted by the Federation of Small Businesses (FSB) and the Institute of Directors (IoD) revealed that many firms were not aware of these changes. Many UK companies had to readjust their supply chains after Brexit. The December 2021 UK economic report, published by the Office for National Statistics (ONS), said that only 7.7% of companies changed their supply chains. 41% of those who did are now using UK suppliers and 11.6% are using more EU suppliers. Overall, 60% of businesses saw a rise in their cost of doing business since Brexit. Nowhere this rise is more visible than in transport and bureaucratic processes.

Against this backdrop, the Russian-Ukraine conflict only made matters more complicated. Even if the war ends tomorrow, things will not return the way they used to be. Western countries imposed major sanctions on Russia and removed it from the Swift messaging system. It means the UK cannot do trade with Russia and Ukraine through traditional routes.

In this emerging geo-political situation, millers and other companies whose products require wheat as one of the major ingredients have to take various short-term and long-term initiatives to ensure the stability of their wheat supply chain.

Wheat Market in the United Kingdom:

Wheat consumption:

Wheat is used to produce flour, which is used to make bread. Aside from bread, many other food items are prepared from flour, including biscuits, cakes, pies, pizzas, pastries, batters, and coatings. 37% of the fiber, 35% of the calcium and 31% of the iron in the UK people’s diet come from flour. In the UK, per person, flour consumption was 59 kg in 2018 and 2019. According to 2019 Kantar data, 99.8% of households in the UK purchased bread. For this reason, wheat is the most grown crop in the United Kingdom. Approximately 1.9 million hectares of land are used to grow this crop. Based on climate and other factors, annual wheat production in the UK ranges from 11 million to 16 million tons per year. 60% of this wheat production is used to produce bread.

The UK is self-sufficient in flour production. The flour milling industry, whose main ingredient is wheat, has a £1.25 billion annual turnover. 32 companies operate 51 mills. Of these, the top four companies produce the lion’s share of the flour. Together, all these companies produce more than 400 different types of flour. They mostly use locally produced wheat. They produce 5 million tons of flour every year. These mills also produce bran, which is consumed by people, and wheat feed that is used to manufacture livestock feeds. Aside from flour, wheat is also used in starch and bioethanol manufacturing. These manufacturers use 1.3 to 1.5 million tons of wheat. 

Wheat Import-Export:

Although it is a small amount, the United Kingdom imports wheat from other countries. According to The Observatory of Economic Complexity (OEC), in 2019, the United Kingdom imported wheat worth $299 million, making it the 38^th major wheat importer in the world. Primary import destinations include Canada, Germany, France, Latvia and Ukraine. Latvia, Turkey and Ukraine are the fast-growing import markets for wheat for the UK. That same year, the United Kingdom exported wheat worth $243 million, becoming the 17^th largest wheat exporter. The Netherlands, Spain, Ireland, Portugal, and Algeria were major export destinations. 

Russia and Ukraine: Largest Wheat Exporters

Russia and Ukraine are the two largest wheat producers in the world. As per OEC, in 2019, these two countries accounted for more than a quarter of the global wheat export. In the 1980s, the then Soviet Russia was a major wheat importer. After the fall of the USSR, Russia started to become self-sufficient in wheat production. The Russian government allowed farmers to sell their products on the international market. Investment in agriculture technology and infrastructure, coupled with the devaluation of the Russian currency, accelerated this process. In 2001, Russia accounted for only one percent of the global wheat export. That increased to 26.4 percent by 2018. Vietnam, Senegal, the UAE, Sudan, Azerbaijan, Yemen, Nigeria and Bangladesh were the largest buyers of Russian wheat in 2019. Of these countries, Egypt, Turkey and Bangladesh accounted for more than half of Russian wheat export.

Ukraine, on the other hand, is the fifth largest exporter of wheat. As of 2019, the country accounted for seven percent of the global wheat export. 71 percent of Ukraine’s land is devoted to agriculture. Its highly fertile “black soil” makes it suitable for growing a wide range of crops. The country exports its agricultural products to Europe, so aptly named “Bread Basket of Europe.” Ukraine also exports wheat to Indonesia, the Philippines, Tunisia, Thailand, Morocco, South Korea, Spain and Israel. Turkey and Vietnam also import wheat from Ukraine.

Impact of Russia-Ukraine conflict on global wheat supply chain

From the statistics above, it is obvious that any instability in Russia and Ukraine will definitely have a major impact on the global wheat supply chain. After the conflict started, the export of wheat and other cereals from Russia and Ukraine almost came to a halt.

Traders around the world are very much afraid to make any deals that might come under sanction. The price of wheat exceeded the price seen during the food crisis of 2007-2008. Through seaports in the Black Sea, Russia and Ukraine export their products to North African and Middle Eastern countries. Many poor Asian countries also depend on Russia and Ukraine for their wheat. With more than $4 billion expenditure per year, Egypt is the world’s biggest wheat importer. Russia and Ukraine account for 70% of Egypt’s wheat purchase. 80 percent of Lebanon’s wheat comes from Ukraine. Lebanon is already suffering from high wheat price. Somalia and Syria are also suffering.

Turkey is another big buyer. In 2019, 76% of its wheat import worth $1.6 billion came from these two countries. In 2021-2022, Turkey alone purchased 4.5 million metric tons, followed by Egypt with 3.2 million metric tons. Even before the invasion, Turkey saw a high inflation rate of 54.4 percent in February, the highest in the country’s history in the last twenty years. Turkish officials are worried that the price of food will only increase in the near future.

For Middle Eastern and North African countries, the Black Sea route is very cost-effective, and the conflict forced them to import wheat from other leading producers, such as the US and Australia, at a higher cost.

Rising food prices are a major element of political unrest in these countries. During the 2007–2008 food price rise, countries like Haiti and Ivory Coast saw serious protests. Bread prices caused serious political unrest in Egypt over the last fifty years. Grain price rise in 2009-2010 started the Arab Spring.

No one can say when this conflict will stop. Even if it ends tomorrow, the grain crisis will persist because the seeding of the spring crops in Ukraine starts from March. Many people fled the country, and able-bodied men who stayed are fighting against the Russians. So, there is no one left for farming. This will severely hamper their 2022 harvest. Many foreign companies invested in Ukraine’s agriculture. Because of the war, they stopped their operations.

Impact of this conflict on wheat supply chain in the UK

Since the United Kingdom grows most of the wheat it consumes, there is no immediate impact on its supply chain, but the country is not totally immune from the conflict. It is already having an impact in other areas related to wheat production, one of which is fertilizer. At the time of this writing, the price of fertilizers reached £1,000 per ton from about £650 last week. The price of nitrogen fertilizer increased 200% year on year. Farmers, already burdened by the rising cost of fuel, labor and feed, are purchasing fewer fertilizers. The UK produces 40% of its own fertilizer, but the fertilizer manufacturing plants need gas, which is in short supply because of the conflict. Russia is also the top exporter of synthetic fertilizers. The UK imports one-fifth of its urea fertilizer from Russia. After the conflict, Russia restricted exports. Wheat and corn are also used for livestock feed in the UK. Hence, the wheat price rise will also drive up the cost of meat, dairy and eggs.

According to the Office for National Statistics (ONS), the UK imported goods worth £10.3 billion from Russia in 2021, equal to 2% of the total value of goods the UK imported from other parts of the world. Of these numbers, one import is oil. The UK imported refined oil worth £3 billion and crude oil worth £1 billion. Other major imports include gas and non-ferrous metals. After the conflict, fuel and gas prices rose sharply not just in the UK but all over Europe. Energy is also necessary for processing wheat and food in different stages. This means the price of bread and other staple items will increase rapidly.

What can be done to lessen this impact?

In an interview with ITV News, Dr. Peter Alexander, lecturer on global food security at the University of Edinburgh, said that the UK government should intensify the production of wheat on existing land and bring more land into agricultural production in order to lessen the impact of the conflict. He also mentioned that bringing more land into agricultural production would also have a negative effect on the environment. Another thing the UK can do is develop trade relationships with other major wheat-producing countries and get into trade agreements with them.

Final Thoughts:

Even though the wheat supply chain in the UK did not see any major disruption, other factors such as rising fuel prices, Brexit and the pandemic contributed to the price rise. If the conflict continues for a longer period of time, it will definitely impact the wheat supply chains of developed countries in various ways.  

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