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As a report from eMarketer shows, at the height of the pandemic in 2020, many consumers ordered their groceries online — which resulted in 63.9% growth in e-commerce grocery sales that year. In 2021, the report estimates that e-commerce sales accounted for 10% of all grocery sales. By 2025, eMarketer predicts that online sales will make up about 17% of all sales.
In my opinion, the increase in online sales is actually bad news for grocery retailers. Estimates from Bain & Co. published in the Financial Times (paywall) suggest that retailers could see negative margins for most grocery home delivery models even after delivery fees.
Worse, as the percentage of customers that rely exclusively on ordering their groceries online increases, the number of customers that shop inside each grocery store is likely to decrease. Grocery retailers invest significant amounts of money into building and operating their stores and in purchasing inventory to stock their shelves.
Grocery retailing is an already low margin business: Many articles estimate that retailers only achieve between 1% and 3% margins on the products they sell. If fewer customers are shopping inside stores, grocery retailers may struggle to cover their costs and generate a profit.
Changing business models are also affecting grocery retailers. The latest craze in the grocery industry is rapid grocery delivery, whereby consumers can order a limited number of products and have the products they select arrive within as little as 10 to 15 minutes.
Rapid grocery delivery companies are generally able to achieve fast delivery speeds by opening manually operated micro-fulfillment centers and stocking a low number of products inside each fulfillment center. Employees fulfill orders and couriers use transportation like bicycles or motorized scooters to make the deliveries.
Grocery retailers generally do not have the ability to compete with such a model, which forces them to look for partners that can perform the service. Therefore, retailers may lose money on rapid grocery delivery orders.
EMarketer estimates that U.S. grocery sales will reach $1.451 trillion in 2025 (up from $1.269 trillion in 2021), so being in the grocery business has its advantages. However, grocery retailers need to find a solution for reducing or eliminating the amount of money they lose when fulfilling online orders, fulfilling rapid grocery delivery orders and operating stores that could potentially see fewer in-person customers.
I believe the solution is micro-fulfillment centers: lots of them.
Micro-Fulfillment Maximizes Store Value
Micro-fulfillment centers (MFC) are mechanical systems that hold grocery inventory and automate the process for fulfilling online orders using robotics and automation.
There are three primary ways to utilize a micro-fulfillment center: Grocery retailers can install an MFC in a building attached to a store; they can install an MFC in a building located at an off-site location (often referred to as a “dark store,” as no customers can shop inside the store and the retailer only uses the store to fulfill orders); or they can install an MFC inside a grocery store. The latter is the strategy I recommend.
MFCs can be valuable to retailers, as they can reduce the cost of fulfilling online orders because minimal human labor is required. In addition, MFCs can provide retailers with the ability to change their business models. For example, grocery retailers can leverage MFCs to fulfill rapid grocery delivery orders in addition to fulfilling online and even curbside pickup orders. MFCs can maximize the value of stores by leveraging the real estate and location to fulfill orders close to customers.
With the projected growth in e-commerce grocery sales and with Technavio (via PR Newswire) estimating that the online grocery delivery service market will grow by $631.84 billion between 2020 and 2024, grocery retailers will likely require a large number of MFCs to meet demand.
The process would work as follows: The retailer would install the MFC inside a grocery store (preferably) or in a building next to or attached to a grocery store. The MFC would fulfill online and curbside orders for the store in which the MFC sits or is attached, plus fulfill online and curbside orders for any additional stores. Depending on the volume of orders the MFC receives, it’s possible that one MFC will be able to fulfill orders for a number of additional stores.
In my experience, an MFC can only fulfill rapid grocery delivery orders for a small number of stores due to the 15-minute delivery requirement. This means stores may need to create sections within their stores that are specific to the needs of rapid grocery delivery. It is possible to automate the process of fulfillment by utilizing small nano-fulfillment systems, but I believe we still need to collect more data on the efficacy of these systems for rapid grocery delivery.
The model I describe could reduce fulfillment costs for retailers. However, retailers will have to invest capital into installing the MFCs. Retailers that don’t want to install MFCs inside their stores have the option of outsourcing online grocery, curbside and even rapid grocery fulfillment to third parties like Shipt, Instacart, DoorDash or Uber. Instacart recently announced that it had teamed up with Fabric to offer micro-fulfillment solutions to grocery retailers.
The challenge for retailers that choose to outsource their fulfillment needs is that they may need to find a way to increase the number of customers that shop in their stores in order to ensure they can continue to cover the costs of operating the store if their revenues and profits from online sales are lower. Potential options include increasing the number of products customers can purchase in bulk, installing zero-waste refilling stations where customers can refill bottles of detergent, shampoo and other liquids, or opening cafes.