India’s retail sector has entered a scale phase, but the supply chain is still structurally inefficient. Growth in demand is no longer the limiting factor. The limiting factor is the ability to move inventory across a geographically diverse market at an economic cost that preserves margins.

Four frictions dominate the Indian retail supply chain:

High logistics intensity that absorbs a disproportionate share of operating margin
Fragmented networks that duplicate inventory and inflate working capital
Increasing reverse logistics costs driven by high return rates in e-commerce
Persistent shrinkage and operational leakages inside warehouses and stores

These frictions are magnified by rapid demand expansion in Tier 2 and Tier 3 cities, rising last-mile expectations, and category proliferation.

The supply chain reset is already underway. Digital freight platforms, micro-fulfilment infrastructure, unified inventory pools, and real-time POS and UPI signal integration are beginning to shift unit economics. Retailers that redesign their networks rather than scale their legacy structures will unlock 1.5 to 2 percentage points of EBITDA improvement within 18 to 24 months.

1. Structural Drivers of Cost Pressure

1.1 Logistics still consumes too much value

India’s logistics cost remains close to 7.9 percent of GDP and for many mid-scale retailers the cost ratio is materially higher. Linehaul pricing volatility, fragmented carrier relationships, and unpredictable transit variance introduce safety stock requirements that increase working capital and markdown risk.

1.2 Fragmented fulfilment networks inflate inventory

Many retailers operate separate fulfilment systems for offline and online channels, and often build redundant regional warehouses during expansion. This isolates inventory into disconnected pools. As a result:

stock turns decline
working capital cycles elongate
forecast error increases
season-end Markdown risk becomes structurally high

1.3 Reverse logistics has become a P&L headwind

Return rates in e-commerce are not converging downward. In fashion, blended return percentages above 20 percent remain common and reverse freight usually exceeds contribution margin for low-ticket items. For electronics and appliances, refurbishment processes vary widely in efficiency, which creates leakage at scale.

1.4 Shrinkage is poorly controlled

Shrinkage in India is not purely theft driven. The bigger source of loss is operational slippage which includes:

mis-picks
supplier mis-counts
lack of real-time cycle counts
non-standard receiving processes

Even single-digit shrinkage can erode multiple basis points of EBITDA.

2. Why Efficiency Will Improve Over the Next Cycle

2.1 Digitalization of freight reduces inbound volatility

Real-time carrier booking and algorithmic lane matching create more predictable transit times, which allows retailers to reduce safety stock buffers. The availability of price ladders across logistics partners introduces competitive tension that directly lowers inbound cost to serve.

2.2 Micro-fulfilment centers compress last-mile economics

MFCs located closer to dense demand pockets improve delivery SLAs while simultaneously lowering last-mile cost. Grocery and Q-commerce have proved this model at scale. The same approach is now viable for household essentials, beauty, pet, and other high-velocity categories in both Tier 1 and Tier 2 markets.

2.3 Unified inventory pools drive availability and reduce duplication

The combination of POS data, UPI transaction visibility, and multi-channel OMS enables a single source of truth for inventory. Once store stock can serve online orders and DC inventory can serve stores on the same platform, stock turns rise, stockouts fall, and peak season planning becomes more precise.

2.4 Algorithmic demand sensing improves buying and replenishment

Demand signals no longer need to rely on quarterly planning cycles. High frequency UPI sales data combined with real-time marketplace and ONDC data allows:

SKU rationalization
localization of assortments by region and cluster
smarter pack sizes and lot sizes
timelier vendor ordering

The outcome is lower working capital and materially lower end-of-season risk.

3. Strategic Implications for Retailers

3.1 Network design is now a margin determinant

The old paradigm rewarded scale in store footprint. The new paradigm rewards supply chain architecture. Brands that optimize their network structure will outperform those that rely on brute force capacity addition.

3.2 Operational discipline becomes the new differentiator

Digital channels reduce brand differentiation and increase price transparency. Supply chain efficiency becomes a competitive strategy. Retailers with high forecast accuracy, high fill rates, and low returns will gain margin advantage.

3.3 Unified fulfilment unlocks omnichannel profitability

Every channel that runs on isolated infrastructure creates a margin penalty. Once channels share inventory, systems, and analytics, omnichannel becomes profitable rather than a brand-building cost.

3.4 Returns must become a designed process

For high-return categories, the reverse logistics journey needs to resemble a forward supply chain with measurement, triage protocols, and cost ceilings. Most leakage is not due to the return itself, but due to the lack of structured decision trees.

4. Action Framework for Retail Leaders

1. Redesign the supply chain network

Consolidate DC footprint into fewer but stronger regional hubs
Add selective micro-fulfilment centers in top demand clusters
Enable stores as forward mini hubs where economically justified

2. Shift to demand-driven inventory planning

Merge store, e-commerce, marketplace, and ONDC inventory into a single view
Use UPI and POS signals to power weekly replenishment for high-velocity SKUs
Implement SKU rationalization cycles by cluster

3. Industrialize returns management

Categorize returns into restock, refurbish, or liquidate streams
Automate refund and disposition to minimize cycle times
Track returns by supplier, article, and store to flag systemic issues

4. Systematically eliminate shrinkage

Run weekly cycle counts on high-loss SKUs instead of quarterly counts
Outsource receiving audits selectively to reduce supplier leakage
Create store performance ladders to detect patterns early

5. The 18 to 36-month horizon

The highest-performing retailers in India will be those that treat the supply chain as a design problem rather than a cost center. The operating model of the next cycle will combine:

fewer but smarter distribution nodes
hybrid store and MFC fulfilment
algorithmic replenishment
real-time UPI signal integration
returns architecture that is engineered rather than tolerated

The margin differential between leaders and laggards will widen. Retailers that modernize early will capture the benefits of faster turns, lower working capital, and better delivered experience at a lower cost. Retailers that scale legacy systems will incur rising logistics spend and shrinking profitability despite revenue growth.

References: DPIIT Bain & Company Gati Shakti

Retail Supply Chain India: Cost Pressures, Margin Leaks, and Where Efficiency Will Come From