The Micro-Fulfillment Market Shift

Supermarkets are fighting for local market share by offering online click-to-collect or on-demand delivery services. But traditional retail strategies can’t keep pace — or profit — in this rapidly growing digital segment. As retailers explore new solutions, micro-fulfillment looks most promising.

It’s a sweltering hot Friday afternoon and thousands of commuters are trapped in dense traffic on a highway to cottage country with the goal of escaping the city for the weekend. Minutes and hours disappear in frustration as traffic crawls at a snail’s pace. To make the most of a bad situation, smart consumers are busy placing their online orders for weekend groceries for pick-up at the store before arriving at the cottage. This saves a precious hour of time that would have otherwise been spent trudging through the store and waiting in line at the cashier. Life is great!

For some stores, digital sales are up by over 200% during the busy summer months with no end in sight for growth. In fact, some stores are having extreme difficulty keeping up with demand and in-store shoppers are becoming frustrated because they have to compete for space with the valets who are responsible for picking online orders.

This scenario is playing itself out throughout the North America with digital sales experiencing annual typical growth rates in the range of 30–60%. Supermarkets are rapidly gearing up for the high-growth online grocery market for two primary reasons: to defend market share and to obtain “first-mover advantage”. The grocery industry is responding to the online challenge in several different ways:

• In-store fulfillment. Many grocery retailers in North America start out with this method. The online order is captured, and an associate walks the store with a cart to pick the order. Given that most grocery retailers generate in the range of 2.0% net margin, this type of valet service is not only expensive, it is prone to out of stocks. When order volumes become too high, this option causes annoyance to instore shoppers who have to compete for space with the valets picking online orders and could potentially cause customer defection as Tesco learned in the United Kingdom.
• Dark store. In general, a Dark Store can best be described as a small manual warehouse that services several stores within a remote geographic area that is not cost justifiable for the retailer to service with more sophisticated automation options. It may not be able to carry every item due to space limitations therefore the variety of SKUs offered online may be a subset of the total instore offering. It’s typically set up as a next day fulfillment service because orders are received up until a cutoff time and then batch processing and outbound route optimization can be performed based on deliveries being conducted the following day.
• Micro-Fulfillment Center (MFC). A relatively new option that has quickly come of age, the MFC implements a compact, automated goods-to-person shuttle system within a section of one store of 10 – 12,000 sq. ft. Automation enables the retailer to pick and process orders approximately ten times faster than the manual in-store method. Inventory information is available in real time and accuracy is near perfect, which results in satisfied customers who can pick up their order within one hour of placement. Orders can also be transferred to other stores or delivered directly to the consumer.
• Customer Fulfillment Center (CFC). The CFC is a highly automated distribution center designed to service a larger geographical region (100 miles or more). It processes substantially higher order volumes than the MFC and typically requires a much larger footprint (e.g. 300,000 sq. ft.). Given that the CFC services a larger geographical area than the MFC, the outbound transportation cost to deliver to the home-delivery customer can be substantially higher, which is a cause for concern given the high cost of the last mile.

The experienced online food shopper orders from a list of 340 favorite items that constitutes their standard order template. The process of developing the order template takes time but once done, the consumer can rapidly enter an order by simply calling up their template and entering quantities by item. Convenience and ease of use translate into high long-term loyalty rates and low customer price sensitivity — on the condition that the order fulfillment process is consistently fast and flawless. Herein lies the challenge for grocery retailers, who mostly rely on manual labor-intensive processes to fulfill online grocery orders.

In my opinion, the micro-fulfillment center is a permanent market shift and will be the option of choice for most grocery retailers, because it offers the cost-benefit and speed that automation enables — at an affordable price tag. The ballpark investment requirement for a three-aisle MFC is in the order of $4 million (plus the cost of the building), which makes this solution accessible to retailers seeking to service densely populated urban markets. I firmly believe that the market for MFC automation will exceed $1 billion in the U.S. by 2021.