Whalesbook
Profitability Squeeze for Indian E-commerce Brands
Online brands in India's e-commerce market are losing 25% to 30% of their gross income to failed deliveries and returns, especially during busy holiday seasons. This revenue loss stems from basic logistics problems, according to e-commerce platform Velocity. These issues significantly hurt profits for many online sellers.
Tier-2/3 Cities Pose Logistics Challenges
Growth in Tier-2 and Tier-3 cities, making up over 67% of shipments, is crucial but comes with challenges. The delivery setup in these areas is unreliable. Abhiroop Medhekar, co-founder and CEO of Velocity, noted that problems like unclear addresses, patchy courier services, wide delivery areas, and many Cash on Delivery (COD) orders lead to more delivery failures and returns. This raises costs and cuts revenue.
AI Improves Delivery But Doesn't Solve All Problems
Brands are using AI tools to improve operations. One AI use helps nudge customers to switch Cash on Delivery (COD) orders to prepaid payments. For risky COD orders from less predictable areas, AI voice agents talk to customers locally, explain prepaid benefits, and offer immediate incentives to cut failed deliveries. Prepaid orders show stronger buyer intent, leading to better delivery success and fewer returns. Velocity found that AI verification in Tier-2 cities improved delivery success rates by about 11%. This positive step shows the size of the problem still remaining. Studies suggest AI can boost delivery rates by up to 15% in some areas, showing AI helps efficiency but doesn't fix all logistics issues.
Indian E-commerce Logistics Market: Competition and Costs
India's e-commerce logistics market is competitive, with major companies like Delhivery and Ecom Express, plus platforms like Shiprocket and Velocity. These companies grow fast, with the market expected to grow 15-20% annually. Yet, profitability is a big concern. Indian logistics tech firms are valued highly (30x-60x earnings), showing investor belief in growth, but costs remain high. Market trends in early 2026 suggest slower volume growth than before, with costs staying high due to infrastructure spending and competition. Regulations aim to digitize paperwork and improve supply chain visibility, but no big policy changes have recently hurt delivery. Last-mile delivery issues, especially in poorer areas, need more than AI; they require better networks, route planning, and possibly higher prices or major restructuring for stable profits. Experts see AI as key but warn that economic realities demand deeper strategies.
Logistics Issues Remain a Risk for Online Sellers
Even with AI's claimed success in improving delivery rates, basic problems in India's Tier-2 and Tier-3 logistics networks are an ongoing threat to online brands. The heavy reliance on COD orders, combined with delivery issues in poorer areas, leads to more returns and failed deliveries, hurting profits. AI conversions only help so much; they don't change the basic cost of last-mile delivery. Brands focused on these areas may see growth stalled by these logistics issues. Also, in a competitive market, charging more for shipping could hurt demand, creating a tough balance for profits. The difficulty and revenue loss from these problems show that while AI helps current operations, it doesn't fix the basic financial risk of serving scattered, underdeveloped markets.