“Yes, of course November we saw a pretty large dip in the volumes,” Dhruv Agarwal, Chief Strategy Officer of Gati Kintetsu during the company’s earnings conference call post announcing its results for the September to December quarter. This has typically been the strongest quarter for Gati, given increased ecommerce purchases during the festive season, but this year was different, because the Indian government unexpectedly removed the legal-tender status of Rs 500 and Rs 1000 notes, effectively rendering 83% of the cash in circulation in India worthless. This move is colloquially referred to as demonetization. Cash on delivery is a key component of deliveries in India: it accounts for as much as 60% of ecommerce purchases in the country, and has led to the growth of ecommerce in a market where debit card usage was abysmally low, and credit cards have limited usage.
“Actually the volumes did not dip…they did dip to a large extent, but the real metric,” Agarwal continued, “was that the returns which is typically 10%-11% shot up to almost 20% during the month of November primarily because packages were already ordered, reached the last mile, but people did not have cash to pay and hence those packages were returned.” Gati says it has the capacity to do about 65,000 ecommerce deliveries a day, at does around “close to 57000 deliveries a day on average.” During November and December, “almost 70%to 75% of the packages were value below Rs 5000.”
Cash on delivery orders suffered, margins squeezed
On an average, 55-60% of Gati’s ecommerce delivery business is Cash on Delivery, Peter Jayakumar, CFO of Gati Kintetsu added. “In the month of November those COD orders kind of dipped down to around 45% and in the month of December also maintained at a similar 45%-46% COD kind of levels January it has gone up slightly above 50%.”
There was a slight uptick in ecommerce volumes in December, and “January is much better,” Agarwal added. “The volumes are coming back up and I think moving forward as the e-commerce company also continues to expand its product portfolio, and also more data networks reaching more and more locations in India, I think we should continue to see growth in e-com but probably not at the 60%-70% kind of rates that we have been seeing over the last three four years.”
How Gati dealt with declining Cash on Delivery orders
Gati reported a 25% growth in ecommerce packages for the quarter (revenue up 11%), despite the fact that in October, it “actually had a significant peak because both the surface express, as well as the e-com packages, had a very significant growth in that one single month”. It found that its margins on the ecommerce businesses were down by a couple of percentage points, which, according to Agarwal was because “that is something that we charge the customers to collect (cash).” Essentially, upon delivery, Gati collects cash from customers, and charges ecommerce companies a fee for collecting that cash.
– Switch to digital payments: With cash on deliveries indicating “a downward bias following demonetization”, Gati had to quickly introduce digital payment options, not just because of e-commerce, but also its GKE business, which is around 24-25% of its surface business, which it felt might also need a cashless option. “…hence we moved very, very swiftly and introduced multiple options for cashless payment.” Around 750 swipe (Point-of-sales / PoS) machines have been introduced across India. “The digital wallet has been included codified into our tablets that last mile people carry, and this is across the country, so we have offered both to our retail customers and the e-commerce customers the option of paying through these digital means.”
“We have already on-boarded couple of large mobile wallets and are also ready to accept payments through card swipe probably we will just see a shift from COD to swiping or mobile wallets, where also we will earned a margin so I expect that what we have lost in the couple of months should come back in the next couple or over the next quarter or so.” Bala Aghoramurthy, President at Gati Kintetsu also clarified that “for the mobile wallets there is no cost to on-board. For the card swipe machines, it is on a lease model, and it is a pretty economical and when we charge when we actually take payment on a card or a mobile wallet.” The company will earn a commission from ecommerce players for this digital payments, and Gati believes that this will substitute Cash on Delivery revenues.
– Reduction in pin codes: Gati operates e-commerce deliveries in around 17,500-18,000 pin-codes in India, and keeps adding as and when needed as per customer requirements, especially during peak times. The company expanded its pin-codes to around 20,000 from around 19,000 during the quarter (to deal with the peak): “there were more pincodes opened up. Post demonetization some of those pincodes were closed down“…”if the volumes sustain we keep them those pincodes open and if the volume do not really sustain then in conjunction with customers we close those pincodes down.”
– Fired “extra” delivery bike drivers: “…post peak we anyway had a plan to shed capacity, and as soon as demonetization hit, we kind of aggressively over a period of three to four days, we shed all the extra capacity almost eight to nine hundred biker drivers etc., and we are focusing a lot more on productivity now of our fleet to help us maintain our margins moving forward.”
An Aside: Gati focusing on smaller packages
“Gati has shifted its focus to smaller packages for delivery; around a year ago, almost 70% (of volume) of its ecommerce deliveries were over 3 kg in weight. “We had a lot of four wheelers doing our deliveries, and now since we are focused on the smaller packages we have actually increased the number of two-wheelers and decreased the number of four wheelers”. Now “Packages below 3 kg is about 70% of what we carry, and we are continuing to focus on that package segment because that is where the growth is going to come from, because those are the kind of things that people ordered on a daily basis.”