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Digital-first brands are increasingly turning to artificial intelligence-led interventions to strengthen last-mile delivery reliability in Tier-2 and smaller cities, as logistics inefficiencies continue to impact e-commerce growth and profitability.
According to data from Velocity Shipping, run by Velocity, tools such as AI voice calls, automated order and address verification, and conversion of cash-on-delivery (COD) orders to prepaid have improved delivery completion rates by 11%.
The shift comes as smaller cities emerge as key growth drivers for India’s online retail ecosystem. A report by Bain & Company found that three in five new online shoppers since 2020 are from Tier-3 towns and beyond, while nearly 60% of new sellers since 2021 are based outside Tier-1 markets.
However, fulfilment infrastructure has struggled to keep pace with this surge in demand. Velocity Shipping’s analysis of over 40 lakh orders shows that while Tier-2 and smaller cities accounted for more than 67% of shipments, only about 60% were successfully delivered, significantly lower than the 73% fulfilment rate seen in metro markets.
The gap is largely driven by structural challenges such as inconsistent address formats, limited courier network coverage, larger delivery geographies, and a high share of COD orders, which increases the likelihood of cancellations and failed deliveries.
“For digital-first brands, logistics inefficiencies are where profitability is increasingly lost,” said Abhiroop Medhekar, Co-founder and CEO of Velocity. He noted that AI-led interventions across order verification, risk scoring and delivery workflows are helping improve delivery outcomes while reducing returns to origin (RTOs), enabling more scalable expansion into high-growth markets.
The fulfilment challenge comes at a time when India’s e-commerce market is expanding rapidly. According to McKinsey & Company, the sector is projected to grow from $70 billion to $80 billion in 2024 to as much as $180 billion to $200 billion by 2030. Direct-to-consumer (D2C) channels are expected to grow nearly three times faster than traditional marketplaces, with 53% of MSMEs preferring D2C due to lower platform and delivery costs.
Despite strong demand, fulfilment efficiency remains a major bottleneck. Velocity Shipping’s analysis of over 1,000 digital-first brands shows that failed deliveries and RTOs account for 25% to 30% of revenue losses during peak festive periods.
Challenges are particularly acute in Tier-3 pincodes, where limited national courier coverage forces brands to depend on regional logistics partners or postal services, often resulting in inconsistent service quality and slower deliveries.
Issues such as unclear addresses, lack of standardised location data and last-minute customer cancellations further complicate last-mile delivery, making it harder for brands to convert demand into realised revenue in India’s fastest-growing e-commerce markets.
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