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3PL: Here is another one for you

Nov 22, 2000

Tired of B2B, B2C, P2P and all the other net jargons. Here is one more and you are going to hear a lot of it in the future; 3PL or third party logistics. Third party logistics is set to grow at 20% annually for the next three to five years, thanks to the Internet. Sounds surprising? Well not really. We talk of e-commerce all the time and also hear about B2B being bigger than B2C. But B2C is here and it is here to stay. Any product ordered online, has to be delivered. If you look at the B2B segment, it is primarily EDI (electronic data interchange, companies exchanging huge amounts of information) but B2C is a totally different ball game. People do not order only electronic information, they order physical goods and these have to be delivered.

Amazon sells books, Rediff sells a whole lot of things that include rail and air tickets. When it comes to delivering these items they have two options

    a) Do it on their own, which means establish a huge infrastructure (men and machines)
    b) Out source the services.

Well, the second option seems more tempting. According to estimates, global purchases on the Internet will grow to approximately US$ 25 billion by the next year. Closer at home the situation is quite similar. The total volume of e-commerce transactions in India was Rs 1.3 bn in FY99 out of which 9% constituted B2C transactions and 91% were B2B transactions. Volumes are expected to increase to Rs 3 bn in FY00 with 17% B2C transactions and 83% B2B. By FY02, volumes are expected to shoot up to Rs 100 bn. Logistics costs would account for 5% of the value of e-commerce transactions. All this means big money.

Corporations that wish to be successful Internet retailers will need to devise complex logistical strategies to ship large volumes of goods to consumers efficiently. And the industry too has started offering specialized solutions for e-business companies. Elbee is the first to get a product specially targeted for this segment.

Elbee has been quick to identify this opportunity and today has the first mover advantage. This is reflected in the financials of the company. It announced an operating profit of Rs 27 m for the quarter ended June 30, 2000 as against Rs 15 m for the corresponding period last year, a growth of 79%. For FY00, Elbee posted a profit of 3 m compared to a loss of 76 m in FY99 (9 months).

Though Blue Dart (the other major) has taken a lot of e-business initiatives, it has not targeted the e-business market per se. Blue Dart too has been doing quite well. Sales grew by 25% for the second quarter ended FY01 as compared to the corresponding period in FY00. The net margins grew by 85% during the same period. Right now the valuation of Elbee is far in excess of Blue Dart in spite of better performance by the latter.

Comparative Valuations
Elbee Blue Dart
Market Price 83 213
P/e (X) 36.1 14.7

The competition is getting intense, with companies going out of the way to provide value added services. To address the security concerns of the consumer, Elbee has started a COD (Cash On Demand) program wherein the money is collected once the goods are delivered. Also Elbee has entered into an alliance with Rediff.

Third-party firms currently manage only 7% of the Rs 156 trillion worldwide logistics market, and there is not a single third-party logistics provider (3PL) that can manage an entire global supply chain of a major company.

The third-party logistics marketplace, which is currently a highly fragmented industry will inevitably experience consolidation over the next three to five years. But one thing is for sure, this is one industry where machines cant deliver.

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