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In an effort to more cost-effectively fulfill online grocery orders for its customers, Amazon has opened a “dark store,” which is more of a warehouse than a store. Located in Brooklyn, New York, Amazon’s dark store will be a good test of the concept to determine how big of a role the stores will play as the company accelerates investment in the grocery ecosystem.

Amazon is confronted with many of the same challenges as its grocery competitors, like Walmart, Kroger, Albertsons, and Ahold Delhaize. Among the challenges is how to meet the increasing demand for online grocery ordering and delivery.

On the surface, fulfilling online grocery orders appears to be a fairly simple and straightforward process. It’s not. Consumers purchase a wide variety of products, resulting in a mixture of small, medium, and large orders, ranging from a few products to 50 or more items.

Prior to COVID-19, 4.3% of grocery sales were online. Online grocery sales currently account for 10.2% of all grocery sales. The increased volume of orders, when combined with the large variance of products that need to be picked to fulfill each individual order, has significantly increased costs and complexity.

The Costs And Complexity Challenges

Unlike other industries where economies of scale decrease the cost per unit with increasing scale (volume of orders), the cost to fulfill online orders remains constant when using a store’s staff or third-party labor to fulfill an order. Based on my own research, and research from consulting firms that specialize in analyzing the grocery industry, the cost to pick, prepare and deliver an online grocery order is between $10 and $25, with most deliveries averaging $11 to $12.

If a grocery retailer fulfills and delivers one order at a cost of $20, it can be expected that fulfilling 1,000 orders using the same process will still cost $20 per order. I have argued since 2013 that the worst business model in existence is online grocery ordering and delivery in its current form, due to the fact retailers that provide online grocery ordering and delivery can lose up to $25 on every order they fulfill.

The process for fulfilling or “picking” orders is primarily manual. Store associates or third-party labor receive a list of orders to pick with an itemized list of each product desired by the customer. Like a team of ants, pickers push carts up and down store aisles, frantically searching and pulling items off of shelves. Because online orders are received hourly, the process only stops when a store closes.

As retailers have increased the number of pickers to fulfill online orders, shoppers inside the stores are more likely to experience crowded aisles and an increase of out-of-stock items.

I believe Amazon and other grocery retailers likely understand that the current process for fulfilling online orders is broken and unsustainable. The dark store concept is designed to alleviate much of the difficulty and costs of fulfilling online orders, as customers are not allowed inside dark stores. Associates rapidly move throughout the dark store, fulfilling orders.

Based on my experience, and based on comments I’ve heard from retailers testing dark stores, dark stores help but do not solve the problem of costs and complexity.

The Case For The Micro-Fulfillment Model

Over my 20 years of working globally in supply chain management, logistics, e-commerce, fulfillment, and last-mile delivery, I have maintained a focus on researching and mastering technology and strategy. My experience with Amazon, Kroger, and leading retailers in Russia, the United Kingdom, India, and China gives me a unique perspective on the grocery industry and where it is heading. Further, the company I currently work for as chief marketing officer offers micro-fulfillment and other fulfillment solutions for the industry. I do my best to share my knowledge of the grocery industry, including hosting webinars on micro-fulfillment.

When looking at what’s next in the industry, we can use the Texas-based grocery retailer H-E-B as an example. H-E-B recently announced that it has partnered with AutoStore to install its micro-fulfillment solutions across its retail ecosystem. This is not a pilot. This is an investment by H-E-B to transform its online fulfillment model from manual to automated. (Full disclosure: I advised executives from H-E-B in 2019 to select AutoStore.)

H-E-B has multiple options for how it can use the micro-fulfillment systems from AutoStore. The systems can be installed inside select H-E-B grocery stores, and/or the systems can be installed in dark stores to create automated dark stores for more efficiency. Using the AutoStore system to fulfill online and curbside pickup orders will allow H-E-B to reduce the cost to fulfill each order, plus increase the speed of picking and delivery to customers.

It’s important to understand that micro-fulfillment isn’t just technology that can be purchased and installed; it’s a strategy that can create a competitive advantage. Determining the optimal micro-fulfillment strategy includes identifying the total number of micro-fulfillment centers and/or dark stores that can be supported within your network, where they will be installed, and how inventory will be managed.

Retailers that want to install micro-fulfillment centers inside their stores must be aware of the requirements for remodeling and the time needed to do so before the stores are fully operational. Retailers should also evaluate whether they want to expand their operations into different cities and states where they currently don’t operate. Micro-fulfillment can be leveraged to create an online presence in a state without owning and operating stores. Fulfillment is provided through strategically located micro-fulfillment centers.

Grocery retailers have a strategic imperative to consider the micro-fulfillment model since their stores and supply chains weren’t designed for e-commerce. In addition to dark stores, I anticipate that Amazon will open a micro-fulfillment center either inside one of its supermarkets or as a dark store to fulfill orders. The company may eventually install super micro-fulfillment centers for use inside Whole Foods stores. The way I see it, Amazon’s strategy will likely drive the industry.