A drive about 90 minutes southwest of New Delhi and you are at a village that shows how seriously e-commerce giant Amazon is making its bet on serving one-sixth of humanity. Jamalpur is where Amazon’s latest warehouse is. Spread over a quarter of a million sq. ft. – that’s more space than four football fields – the latest “fulfilment centre” (FC) is the company’s largest in north India and the fifth in the state of Haryana.

Warehouses rank among the top four goals in Amazon’s India short-term growth strategy and it is doubling down on setting them up at manic speed. At the end of 2016, Amazon had 27 warehouses. Eight months into 2017, that had jumped to 41. In terms of storage space, they had almost doubled from 7.5 million cubic feet to 13 million cubic feet. On an average, each of its FCs handle 25,000 packages a day.

“Amazon as a company is like a fort, but the fort is (only) as strong as its moat,” said Akhil Saxena, vice president, customer fulfilment at Amazon India. “Operations is the moat around the fort.” By operations, Saxena is referring to warehousing and logistics.

The other three goals in the company’s growth playbook are private labels, digital payments and groceries but this story is about its logistics bet and how it could be Amazon’s silver bullet for India.

Amazon’s FCs are not like regular godowns of yesteryear India. They are the 21st-century creation that depicts size, scale and technology of the self-acclaimed most customer-centric company of the world, which since its inception in 1994 has been based on three tenets: selection and pricing, fast and reliable delivery, and a trusted shopping experience.

The warehousing and logistics part of the business is central to achieve the three tenets.

Over the past four years Amazon has been quietly building its warehousing and logistics business in India — the brick and mortar foundation behind Amazon’s virtual mall where millions of buyers shop for almost everything from jewellery to clothes to phones to washing machines and grocery.

The importance of the warehouses is spelt out in the speed at which they are being built. Since January, 14 new FCs have been built — seven planned for the state of Haryana alone to supply North Indian buyers. The largest FC, more than half a million sq. ft in size is coming up on the National Highway 8, one of the busiest highways in the country that connects Delhi with Mumbai.

Logistics as a percentage of total supply chain costs rack up to an estimated 12.5% in India, more than 1.5 times what is comparable in developed economies despite labour costs being lower here. That leaves a significant amount of flab for a serious player like Amazon to shave off in a market that is sub-optimised for efficiency and under served by capacity.

A consultant lists the main costs in logistics as: inbound transportation from supplier into the FC; the cost of operating the FC and any other sortation centres, Prime Now warehouses, delivery stations; and returns processing facilities in the network. “And the most important cost is the outbound transportation expense to move packages to customers. The more warehouses one has, the higher the warehousing expense becomes but the lower the transportation expense becomes,” said Marc Wulfraat, president of the Canadian logistics consultancy firm MWPVL International Inc.

Also, the efficiency of delivery is the biggest factor when Amazon competes with neighbourhood kirana stores? “In the absence of retail stores, the speed of fulfilling and delivering the order to the customer is Amazon’s main line of defence against retailers that sell from brick and mortar stores,” said Wulfraat — referring to what Saxena called the moat around Amazon India.

To put in context Amazon’s warehousing and logistics business, compare it with Future Group, India’s largest brick-and-mortar retail conglomerate run by Kishore Biyani. Its unit Future Supply Chain Solutions, at last count, had 41 distribution centres with a capacity of 3.8 million sq.ft of warehousing space. The company operates in a hub-and-spoke model just like Amazon does, and comprises 14 large hubs with 105 smaller distribution centres.

Globally, Amazon spent 13.68% of its overall expense, or $9.86 billion in building and maintaining its fulfilment network in the past six months, according to filings with US markets regulator SEC. The company doesn’t give out country-specific spending but a disproportionate amount is expected to have been soaked up by Amazon India.

What is internally called Amazon’s gold standard in services is FBA, short for Fulfilled by Amazon, where a seller uses all of Amazon’s services to sell, store and send a product to the buyer. About 90% of sellers use FBA and Easy Ship, Amazon’s courier service.

Through FBA, the seller sends its products to an Amazon FC, where they share space with other brands and Amazon’s private labels. Once ordered, the products are picked up by either Amazon’s own logistics service or third-party courier companies and sent to the buyers – many of whom are Prime members, entitled for faster and free delivery.

By offering these services, Amazon India provides its 2.25 lakh sellers on Amazon an infrastructure that they would never be able to build on their own. Imagine a carpet buyer in Bhopal getting delivery of a fruit bowl from Bengaluru within three days of the order. To be sure, there are delays even on Prime orders but that is precisely what Amazon is trying to stop.

Add to that, Amazon’s global technology — it allows the e-commerce giant to stack the right product in the right warehouses, where it is nearest to the relevant buyer. “You look at the environment you operate in and look at the challenges. Some of them you will solve with technology and some you will have to build,” said Saxena.

Based on conversations with independent experts, FactorDaily estimates Amazon has about 35% to 38% share in India’s e-commerce market. The Flipkart group, which comprises Flipkart, Myntra and Jabong, leads with about 40% to 45%. The rest is split between a long tail of e-commerce companies. This estimate is based on the value of goods shopped currently.

Amazon grade FCs

The FCs allows Amazon India to stock a vast selection of products, without spending a single paisa in buying them and deliver them as it would deliver its own products. They have over 2.4 million products stocked up for immediate delivery. (That’s a small percentage of the over 160 million products it has on sale in India.)

Some weeks ago, Amazon invited half a dozen journalists to show them the FC at Jamalpur in Haryana. Amazon is a tightly controlled operation and it prioritises its secrecy even while rolling out the marketing red carpet. We are asked to leave our phones and even watches in lockers; cameras aren’t allowed, too. All we are allowed to could take is a notepad and a pen.

Saxena is a proud tour guide. “This is a restricted zone… only people who are authorised to enter the FC can come in,” Saxena boomed as his voice echoed against a 49-feet tall ceiling. “This is my FC voice,” he added, suddenly conscious.

On the surface the FC looks like a giant air-conditioned shop floor, with 1.5 km long conveyor belt, staffers with trolleys, taking out and putting in goods in countless shelves that reach right up to the ceiling. Others are packing them and getting them ready for delivery.

Building FCs is not cheap. Contractors are given a 100-page document on dos and don’ts complete with the minutest detail. The land can cost anywhere between Rs 1 crore and Rs 1.5 crore an acre. The land parcel for each FC is about 20-25 acre. The construction cost can vary between Rs 1,500 to Rs 1,700 a sq.ft. Double that investment goes into building the complete warehouse with electrification, racking, conveyor belts, security and safety systems, and air conditioning before it is ready for operations. The large logistics parks have a parking lot for trucks, residential buildings for workers and an office complex.

A warehouse company said Amazon’s warehouses stick to National Building Code (NBC), that define the quality of masonry, electric fittings, air conditioning, plumbing, fire safety, and other building standards — which, in turn, increases costs by a fourth. “A lot of money is spent on the flooring so that very heavy goods do not damage it. The FCs are built keeping the future in mind, like the use of more conveyor belts, robotics. Even the lanes and the aisles are designed accordingly,” said Jitender Yadav, director of Pragati Infra Solutions, which builds and manages warehouses.

E-commerce companies want large warehouses with integrated systems, explains Jitender. “They want to transport and multi-unit facility… These FCs are built in such places, which is 20-50 km away from the dispatch centre,” Yadav, a retired Indian Army colonel, said.

Walk into the FC, and you see a row of 32 docks, where trucks of various sizes are offloading goods. At any time, up to 60 trucks can load or offload products. A seller can book an appointment with the FC online to bring in the inventory.

A closer look shows that it’s not the humans but machines that do most of the work.

The products scanned are marked with a barcode at the dock. Some of the products, which can break or have sharp edges are packed or bubble wrapped. Products that have come to an Amazon FC for the first time are put on a machine called Cubiscan, which takes the length, height and width of the product. This helps Amazon decide the size of the packet or box in which the product will go to the customer.

Cubiscan and its implementation is work in progress, to be sure. Amazon and other e-commerce companies have been panned for their overuse of plastic packaging, often the consequence of odd-sized boxes the products are shipped in.

The Jamalpur FC is for regular goods, not one of the seven warehouses that Amazon India has built specifically for large appliances such as fridges, ACs, washing machines etc. This FC is designed for products that easily fit into shelves divided into storage cubes – or cubbies – the size of a locker in a dormitory.

Once scanned at the unloading dock, the products are taken to the cubbies by associates, as Amazon calls its FC workers. Each cubby has a barcode. The products are kept randomly in whichever cubby they fit into. A mosquito repellent machine can be stacked in the same cubby with a cloth hanger but before putting the product into the cubby, the barcode of the product and the cubby are matched.

Each aisle has hundreds of cubbies. The Jamalpur FC has 150 aisles on each floor and there are four floors.

The randomness in the storage of products is by design: so that an associate won’t have to go to the farthest corner to find a product while servicing an order. Each associate has a scanner that directs them to the closest cubby a particular product is stored.

The products are collected and put in coloured bins — yellow for one product in one order, grey for multiple products in one order, and red is when the associate finds a damaged product. These bins are put on the conveyor belt, which takes it to the outbound process area.

This area is called SLAM, which stands for ship, label, apply and manage. This is where the Amazon’s home-build software takes over. It tells which packet the product should be put in. The packet is then labelled. The software already knows where the order is from, if it is cash-on-delivery or is already pre-paid, if the order is from a Prime customer or not, if it has to be delivered within 48 hours, and if needs to travel by road or air. Accordingly, the machine prints the label, which is pasted on the box. It is then channelled for delivery to one of the courier partners, which has been assigned, again, by the software.

Still, Amazon needs a lot of humans. In 2017, alone the company said that it will hire 5,000 associates. During Diwali, it will have work for 22,000 seasonal associates sourced from contract manufacturers. In an interview earlier this year, Amit Agarwal, global senior vice president and country manager for India at Amazon, said the company accounted for 87,000 direct jobs in the country.

The Caring Everything Store

Amazon, sensitive to local Indian concerns over what electronic retail can do to a nation of some 30 million shops and a few supermarket chains serving a $600 billion market, makes special efforts to show visiting journalists that it takes care of its neighbourhood even as it expands.

At the Jamalpur FC, local MLA Pratibha Choudhury said that the company has given jobs to about 350 village locals. That allows locals to stay close to their homes and not travel far in search of work. “I will be responsible for any kind of unionisation, but more boys from the locality should be taken,” said Choudhury.

With the government on its side, promises of jobs, deep pockets, deeper technology and millions of shoppers, Amazon wants to execute its global ambition in India, too — be the Everything Store.

The company, which is adding nearly one million products to its platform every week, is signing up more partnerships. Recently, it brought one of the television makers TCL and Sanyo to exclusively launch in India. Over years, it has built relationships with companies such as LG, Samsung, Hitachi, Voltas, among others, for exclusives.

“When (mobile phone-maker) Xiaomi launched the Redmi 4A exclusively, every second 1,500 phones were being sold. I think in four to 4.5 minutes we sold 250,000 phones,” says Manish Tiwary, vice-president at Amazon India. Xiaomi had never seen anything like that, not at least in India.

Simultaneously, Amazon is building its own private label — from furniture to apparel to electronics. FactorDaily had reported earlier that the company will launch it Echo speakers by the of the month. Washing machines, refrigerators and other consumer appliances are next. The company will also enter into the food retail business, which means Amazon will soon launch a large number of private label products in food.

With millions buying these goods, Amazon has more data than any research or consultancy firm. That allows Amazon to put a layer of technology to understand the buyer, her buying behaviour, which parts of the country sells more of which products, what do buyers want etc. “Because of the kind of data we have, so whether it’s a IDC or a GFK or a Neilsen, their databases are very small… We understand the customer habit and translate it and (are) saying let’s create something like this; it should work,” Tiwary said.

Already, a layer of machine learning and artificial intelligence is at work on top of its inventory and purchases.

To start with, it uses AI to correct the colour of the products if there’s a mismatch from the order and fix missing attributes with an aim to improve buyer experience. The software matches the product with relevant packaging – for instance, does it need any extra packaging like bubble wrap or does it need an extra heavy box? For example, a hazardous product would be packed in a different way than, say a shirt.

“AI also helps us to look at the demand and figure out which product goes to which FC. These are very complex algorithms. And then it suggests to the buyer which products are brought together… Accordingly, the FCs should be stocked,” said Rajeev Rastogi, director, machine learning at Amazon, tracing how customer buying patterns feed back into what is stored in the FC cubbies.

Result: delivery with minimum friction and a purchase experience that is increasingly the benchmark in India.

The End Game: Deliver Quick

Amazon always knew the importance of fast delivery, so it started building its logistics network quietly from June 2013, the year it started its operations in India.

With Prime, it has taken the experience to a different level: next day delivery at no additional cost, except for an annual subscription of Rs 500. And, you can stream national and international movies and serials using the same Prime account.

When Amazon rolled out the Prime programme just before Diwali 2016, one out of three orders were Prime orders. “By January, those same folks were contributing to one in two orders… So when you think of that you can kind of see how the engagement and the importance is increasing,” said Akshay Sahi, Prime India head. Data from the latest Great India Sale, Amazon’s marquee annual sale, that closed Sunday, is not in yet.

Saxena said that some of the problems can be solved with technology, but for others, Amazon had to spend heavily and just build out the brick-and-mortar infrastructure through partnerships and on its own. While Amazon has partnerships with courier companies, it has built its own courier service.

“We have a certain coverage on pin codes and service capabilities. We continue to grow that. We just opened up Jharkhand and Meghalaya,” said Saxena. Amazon delivers in more than 19,000 pin codes in the country today.

Globally, Amazon owns a fleet of trucks, has planes and has started experimenting with drones to deliver goods faster. In India, it has partnered with Blue Dart. “They have six planes. I don’t have have to rely on Jet Airways or IndiGo for that,” said Saxena.

For road transportation, it has Gati, the road transporter for many years. It also has a relationship with India Post, which delivers through its channel of 1.5 lakh post offices.

But, that was not enough. It needed more people to deliver goods. So it opened up what is called a service partner network, which engages retired army professionals and housewives. Amazon also works with some social organisations like Mirakle Couriers (it employs people who cannot speak or hear). They deliver in high-density areas, mostly apartments where the commute is minimal. Then there is Head Held High in Andhra Pradesh and Karnataka, which are all women centres.

Rastogi said that there is a high deployment of machine learning in the logistics business – for things like making the address of very high quality, segment the zip code, and go more granular into which street does the address belong to. “In India addresses are very complex… We need a lot of data to understand the right address: whether it is a residential or a commercial place.”

“AI and ML are used to map out the delivery, chalk out the route… It also helps us understand which is the best time to deliver a packet to a particular buyer,” Rastogi added.

Then, there are hugely complex markets that it hasn’t yet stepped in into: for example, grocery. That would require hyperlocal delivery. Orders have to be scheduled or be instantly delivered. Its next day grocery service Pantry is present only bigger cities. The orders are big, but Pantry is all about inventory in the local FCs. If you are in Delhi, it will show the inventory of the local FC. Amazon Now, the two-hour delivery business is a marketplace of local grocery shops. The food retail business hasn’t yet taken off. “We will have to design the right network when we start food retailing,” said Saxena.

Grapevine has it that Amazon wants to open up its transportation and logistics business to other companies. As in, if you are, say, a distributor for Samsung or Lenovo, you can sign up with Amazon Transportation Services (ATS) just like you would with a UPS or a Schenker. The move will be very similar what it did with Amazon Web Services, or AWS, where Amazon opened up its servers for others to use by paying a rent.

Amazon India is said to have done a small pilot with ATD but has held back on its plan. Saxena or anyone else wouldn’t disclose the exact plans. “At this time we are focused on building our own network and because we are scaling up… Right now, (we are) focusing on building our own to have our own capacity to serve our customers,” Saxena says.

If there is one thing that has been constant in the last four years Amazon has been in India, it is its internal wish list that is neverending. Jeff Bezos, the company’s founder and CEO, still says there is no end to being more customer-centric. For now, it seems, the route to customer delight is through better logistics and delivery.

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