Are dark stores retail’s bright future?

With online retailers running out of warehouse space and physical outlets seeing less footfall, a brilliant new partnership has sprung up
Ecommerce giant Amazon will potentially purchase empty JCPenney units in shopping centres to turn them into fulfi llment centres, in just one example of dark stores’ potential

In many ways, 2020 has been a bumper year for online shopping, but there have also been major challenges to overcome. Grocery retailers experienced supply chain and last-mile logistical problems as demand skyrocketed, while bricks-and-mortar outlets lay fallow. But the coronavirus pandemic has revealed opportunities, accelerating strategies that were previously only in pilot stage. Retail’s bright future may lie in dark stores.

Dark stores are former shops that become functional fulfilment centres, staffed with a few pickers and visited only by delivery drivers. They have come to the fore during the pandemic, but the trend was already on the up.

Exploring dark store potential

Paul Boyle, chief executive at Retail Insight, says: “Amazon’s potential purchase of JCPenney’s empty units in US malls to make fulfilment centres is interesting. It’s always been really expensive to do that. The pandemic is going to change commercial real estate and gives lots of opportunities for retailers to create mini fulfilment centres.”

The cost of fulfilment has always been a sticking point, but more so during the pandemic. Chris Conway, the Co-op’s head of ecommerce, explains: “Financially, it’s really hard for the last-mile cost. Stores have to maintain big vans and send them on long journeys.” Dark stores bring fulfilment closer to the customer and reduce the cost of extra warehousing space.

Jarkko Kyttänen, digital, transformation and growth chief digital officer at Finland’s SOK Retail Trade, which has one dark store so far, sees the evolution towards dark stores taking two distinct paths. “We need to know two things,” he says. “On the one hand, how to automate most processes like Amazon or Ocado in large-scale warehouses and on the other, how to make smaller grocery operators have more efficient processes locally.”

Finland is having an interesting experience of the dark store concept as its population is geographically widely spread. Many of the benefits of rapid fulfilment depend on dense, urban centres. This works well for the UK’s cities, but is less well explored in its more rural areas.

This is one challenge, but Boyle adds another: dark stores have tended to be larger spaces that are still relatively far from customers’ houses. “It is always on the wrong side of the city because customers change and demographics move. It’s never perfect,” he says. The answer may be micro-fulfilment.

Deliver direct from the high street

The Co-op, with 2,500 locations on local high streets is ideal for micro-fulfilment. The company began a programme of high-speed local fulfilment in partnership with takeaway delivery specialists Deliveroo before the pandemic struck.

“People are shifting away from the big shop and customers want groceries like they want a takeaway. We’re practically on everyone’s doorstep. With lots of stores close to customers, it can be delivered really fast. The average distance may only be a kilometre,” says the Co-op’s Conway.

People are shifting away from the big shop and customers want groceries like they want a takeaway

He says most deliveries from the 500 participating stores make it to customers in around 25 minutes, but concedes this approach requires dedicated rapid-delivery ranges with the price increases that come with it. However, Conway insists essentials are unchanged and it’s added extras that bear the brunt.

At SOK Retail Trade, Kyttänen agrees fast-food delivery specialists make excellent partners. “Meal delivery companies in Finland have expanded their operations to dark stores and are helping us with same-day delivery because they’re so used to it,” he says.

Conway adds: “It takes time and effort to build the technology and get to scale. Working with partners is the healthy way to do it.”

Boyle reveals that in the United States fulfilment by gig economy is starting to dominate. “We’ve seen the outsourcing of that to Instacart and Deliveroo,” he says. “Instacart is currently doing 54 per cent of all online picking. It’s the biggest online retailer in America right now and it doesn’t have a store. It’s the interim solution.”

Transforming the traditional store

However, is it wise to move fulfilment from warehousing specialists to already harried staff in convenience stores? Might it not damage retail efficiency, rather than enhance it?

“The customer doesn’t care where things have been fulfilled from. They want to get the same thing online as in-store whether you ship it, collect it or walk in and buy it,” says Boyle.

“Technology is a big one, as well as communicating to colleagues and dealing with real-time information. We’re making all our colleagues multi-skilled. Ten years ago, we’d hire someone to work the till, not be in the warehouse, and now we’re hiring Co-op colleagues who can perform multiple tasks,” Conway adds.

“Amazon Go-type stores [high-tech with no checkouts] are really interesting, but in micro-fulfilment where you automate part of the process, you still have to pick a lot of things by personnel,” says Kyttänen. “We’re exploring how you can make the actual picking process faster and more efficient. There’s a lot of potential to innovate there.”

One of the challenges will be marrying automation with smart picking. “How do we speed the process of picking, minimise outages and make intelligent substitutions. If the picker can’t find something, there is the risk of letting the customer down. There is no significant impact on customer satisfaction or NPS [net promoter score] from a smart pick. In fact, you have the occasion to delight them. That means having as many items on shelf as possible,” says Boyle.

Conway thinks micro-fulfilment and dark stores can at least pay for themselves if they solve enough customer problems in the right place, at the right time. “There is a lot to be said for using back-up space more effectively. We can see a huge change in the way we buy and allocate stores. It’s about providing lots of products and services – parcel collections, paying for utilities and housing a post office – that makes it all pay,” he says.

Boyle concludes: “In the short term, micro-fulfilment will prosper. Longer term, it all moves towards dark stores. That’s because the labour cost will keep growing, but property costs will come down, particularly in large urban centres. Technology costs will come down too. Dark stores have to win long term, but we’re nowhere close to that right now.”