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[21 comments]

Are dark stores a good solution for online fulfillment?

May 19, 2014

Through a special arrangement, presented here for discussion is an excerpt of a current article from Commerce Anywhere Blog.

Toys "R" Us has been offering omni-channel (so sick of that term) journeys such as buy online/in-store pick-up for several years. Stores are also used to fulfill online orders, which becomes particularly important during the holidays. In both cases, a store employee picks product from the floor and move it to the backroom.

Someone from Toys "R" Us told me a funny story about this. You can imagine the chaos on the floor during the holidays, so when employees were picking items they were constantly being interrupted to answer questions or retrieve items from high shelves. To combat the issue, employees assigned picking duty did so without an official uniform. Yep, they had to wear street clothes to get the job done.

Some U.K. stores have found a hybrid solution in the "dark store."

Although online grocery shopping hasn't yet taken off in the U.S., it's quite popular in the U.K. Orders are fulfilled at a nearby store and delivered by truck. Pickers are given a large cart with separate bins for separate orders, and they use a tablet to efficiently navigate the store. With enough orders, you can imagine those customers slowing down the pickers. The grocery store layout isn't really conducive to both types of foot-traffic. Thus the dark store was born.

Just as you might expect, the dark store has no customers and is used strictly for picking and fulfillment. Its location and layout are similar to traditional stores, but there are no price tags, no endcap advertising, and no checkout lines. It's a neighborhood warehouse, complete with fresh, frozen and dry goods.

Sainsbury, Tesco, and Waitrose continue to open dark stores in the U.K., filling 4,000 online orders a day per store in some cases. I suppose this makes perfect sense in areas where order volume is high, like big cities. In the suburbs, it might be acceptable to leverage the existing store, perhaps with an express lane for crowd-sourced deliveries like Instacart.

Although I don't know of any dark stores in the U.S., it wouldn't surprise me to hear that Amazon Fresh and Fresh Direct are using them.

FINANCIALS:     [OTC:JSAIY] [ LON:TSCO] [ ]

Discussion Questions:

Are dark stores a better answer to burgeoning demands for online fulfillment versus existing stores? What do you see as the pros and cons of picking from existing stores versus dark stores?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Do you think retailers are underestimating or overestimating the capacity of associates to pull inventory from active stores to support online fulfillment?

Comments:

Given the excess real state inventory in many markets, I imagine it would be easy for retailers to site and setup dark stores. However, I like the idea of having clerks pick orders in active stores, especially grocery. It keeps a presence in the aisles and, if the selectors are properly trained, they can engage the shoppers, answer questions, even talk up a product or service.

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Ron Margulis, Managing Director, RAM Communications

If the order volume demands it, and if the revenue per foot can pay the rent, dark stores might be a good idea. Staff can efficiently pick and pack without disturbing customers and without customers interrupting the staff. Inventory can be more efficiently planned and sudden out-of-stocks will be rarer.

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Max Goldberg, President, Max Goldberg & Associates

I have to think real estate costs is one of the most important factors - it's pretty hard to justify prime retail location rents for a warehouse. And location becomes a factor as well - with a store, you're partly paying for traffic in a neighborhood or draw area with the "right" demographics. With a dark store, you want access to major roads to maximize your effective delivery area.

So while it's tempting to look at home delivery and your existing store real estate as the primary asset for enabling it, in the end, stores are made for customers to shop. Warehouses are made for employees to pick. Dark stores take the latter model to a highly distributed extreme - but in the end, they're still more warehouse than store, and need to be that way. The economics of stores aren't going to be solved by home delivery, I don't think.

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Nikki Baird, Managing Partner, RSR Research

Dark stores are working in the UK. With so much of America "overstored" in terms of food retailers, this concept will get traction here. As locations are shuttered, a second life becomes a real possibility. I like the efficiency concept of a dark store. After all Amazon doesn't fulfill orders from centers crowded with shoppers.

The dark store concept could be effectively managed as a distribution point for home delivery, store delivery or "click & collect." Personally, I see the "click & collect" option growing in the US. While "click & collect" could be very efficiently done at the dark store, the real opportunity for food retailers for basket and margin enhancement is to have dark store-sourced merchandise available for "click & collect" at the retailers' physical store locations.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

Dark stores are inevitably going to grow. Real estate costs, potential savings in energy, labor efficiency, less inconvenience to shoppers. At the very least, if retailers still want to pick from regular stores, they should do it during a late-night shift or when the stores are closed.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

Yes, there is value for dark stores for online fulfillment, but only if the final mile of fulfillment is home delivery (if densely populated areas). Margins are tight and you need high transaction volume to support a central model that's destined for home delivery. Hence why Tesco has been successful with their solution. The pros are additional capacity, full product compliment, 24x7 operation, and centralized route planning. The cons or con: cost; you're basically standing-up a new distribution centre with frozen, fresh, and dry goods in one location, which is expensive and might yield a good return.

The more affordable approach is click and collect - pick up your order in-store and still have the opportunity to browse the store if you need to. When the transaction volume becomes higher and your customer wants to have items delivered to home, then look at the dark store model. There are two retailers that have done exceptionally well in the U.S. with their click and collect model - Harris Teeter and Lowe's Food Stores.

Sylvain Perrier, President and CEO, Sylvain Perrier

It's highly dependent on the category of retail. In most retail segments, only SKUs that are at risk of being liquidated are profitable to fulfill from store. The arbitration in your order management business rules needs to compare the business value of liquidating the goods in its current store against the high fulfillment cost of shipping from the store shelf. That kind of math doesn't happen when you try to fulfill an entire order from a dark store. In most cases picking and shipping from a dark store is more expensive than from an efficient warehouse.

Many dark stores are only "partially dark" i.e. they are used for picking and fulfillment off hours, or even through separate checkouts in live stores, so the math changes again.

At the end of the day you have three very different kinds of operations:

  • Distribution Centers - that are designed and built to cost effectively ship cases of goods to a retail store that then breaks them downs and sells individual units (such as a typical Walmart DC).
  • Direct to Consumer Fulfillment Centers - that are designed and built to efficiently ship individual items to a consumer (such as an Amazon Fulfillment center).
  • Retail Stores - that are designed to maximized customer satisfaction and serendipitous discovery of products by consumers (such as a Target store).

Of course there are edge cases, where any of the three models above can be cost effectively leveraged for the other two roles, but rarely is that the high volume, happy path use case.

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Jason Goldberg, VP Commerce Strategy, Razorfish

The ultimate fate of tens of thousands of soon-to-close stores is up in the air. We've had way too many stores for years, and new customer demands may result in repurposed stores. Someone I had dinner with recently suggested that Walmart should buy a thousands-of-stores electronics chain, to use that real estate for speedy fulfillment.

We're just at the beginning of this trend. It would be interesting to go back and look at this dialogue then....

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Cathy Hotka, Principal, Cathy Hotka & Associates

In the end, it's all about the convenience for the customer. I like ordering product online and then getting to the local store to pick up my order. Saves me the time of having to go up and down aisles looking for the merchandise I want to buy. However, if the retailer decides to move the fulfillment to the "dark store," that may not be as geographically convenient, I will opt to go back to the traditional way of shopping, or worse (for the retailer), go to a more convenient competitor who can give me the same service. By the way, I may even opt for an online experience that ships me the product - such as Amazon.

Finally, the dark store loses the opportunity of additional sales that a customer might make at the last minute - or even an impulse buy.

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Shep Hyken, Chief Amazement Officer, Shepard Presentations, LLC

This is an essential component of unloading billions of capital tied up by massive real estate holdings, and massive "quiet" inventory. Amazon doesn't keep truckloads of non-moving inventory scattered all over the planet. Bricks stores cannot afford to either, but neither can they surrender "the long tail." Dark stores are the solution. See: "The Misguided Bobbing of the Long Tail."

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Shopper Scientist LLC

No pun intended but why leave this kind of operation in the dark? I think an associate on the actual floor picking orders will show customers that the service exists. Have a special colored cart and the associate wear a special uniform that indicate they are picking products for their online customers.

The dark store model will create redundancy in inventory and fulfillment and I think could disrupt replenishment as well as a true omni-channel workflows by having two physical places to pick from inventory. Toys "R" Us had it right in the beginning - a customer bothering them while they picking orders is a good problem, not a bad one.

Ed Dunn, Founder, (Stealth Operation)

We continue to chase customers like they are rabbits. Every thing is changing quickly due to mergers, IPO, consumer preferences. I am a little in the dark on the dark-store concept of serving the increasing demands for online fulfillment vs. existing stores.

I'm beginning to reflect upon "What business are retailers in today?" Do they try their best to serve the diversifying and multi-generational audiences by providing each conceivable retail option for each audience or by being the best at what they basically do? Or both?

If a retailer seeks opportunistic sales where ever he/she can get them today, go with some dark stores until they are - or can be - optimized as well as with every new technique still not conceived. Otherwise concentrate on building your store(s) through clear branding. Both can provide large audiences but the key question is which one will help sustain a good sales/profit mix and "future-ability" in this era of changing demands and projected rising costs.

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Gene Hoffman, President/CEO, Corporate Strategies International

"Dark store crashes, pouring its light into ashes..." *

First off, it would be ridiculous to lay out a so-called dark store to replicate a conventional store. The organization and product adjacencies in such a facility should be optimized to the task at hand: picking, packing and delivering online orders. There is no reason for a back room in such a facility (it's all back room!).

Since the advent of order-online grocery services in the mid-90s, retailers have worried about the interplay between paid order pickers and the harried moms and blue-haired ladies they push out of the way in the aisles in breathless pursuit of the last carton of eggs. This concern may have been more theoretical than real in the early days, but as order volumes climb, it deserves to be revisited, as Tesco evidently has reasoned.

Here in the U.S. it might be a good moment to convert some low-producing retail spaces into local order fulfillment centers. We've been hearing recently about strategic downsizing at retail chains in various sectors, so there should be plenty of real-estate available (if landlords prove willing to think outside the big box).

(*Credit: Dark Star by the Grateful Dead and poetic license.)

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James Tenser, Principal, VSN Strategies

The United States Postal Service, in need of a purpose can serve the public good with a pivot, Introducing: The United States Package Service. The answer is dark post offices.

I nominate Rick Dalzell for Package Master General.

Vahe Katros, Consultant, Plan B

The author didn't know of any stores here in the U.S. but Sears Holdings has been using this concept for over 5 years now. They are called mygofer stores and consist of not only dark stores but the system also uses Kmart, Sears stores and warehouses. I'm not certain how many dark stores they have but I know they have locations in Plainfield, IL and Miami, FL. Order online, deliver to your home or pick up at your nearest location. The whole system is working well enough that you don't even know they are there.

'ToolBoxHero'

Maybe I'm missing something here - one of those jokes everyone but you get - but how is a "dark store" any different than a warehouse?

'notcom'

I have spent many months in Europe for business and vacation. One of the least favorite things to do while I'm there is to shop for anything. This feeling is shared by a large majority of friends and relatives that have had the pleasure of visiting abroad. The common practices and accepted norms in retail abroad differ vastly from those found throughout the USA. Selection, packaging, scope and content are the most obvious differences. For the average person living outside North America the internet is the only option for a big box, department store, mall or super store experience.

I find it no wonder at all that new ideas, technologies and practices have vastly different results when applied equally to both environments. As for putting fulfillment in active vs. inactive lease holdings, this is a plan that must be closely scrutinized by the logistics group of operations and tested by the finance department to verify ROI feasibility. A reasonable test period of six financial periods will show if the program "does" work with or without modifications to address demographic needs and active and/or new customer responses.

When moving into something new that can cause the need to make large unrecoverable expenditures quickly, the company must not use accepted market practices to limit test costs. This is where almost all failures occur and are often found to be the cause of a failed large scale project or process change.

'gjarnoldjr'

Order fulfillment from existing stores is a mixed blessing - a good utilization of space, but it can work against a good shopping experience. For many stores, tight aisles, busy day parts, and limited sales staff can make order picking less efficient.
Additionally, stores fight to keep shelves replenished as out-of-stocks are costly, and require constant attention - if a thoughtful, well managed pick system could work around the business while keeping a close eye on inventory levels, etc., it might succeed. But experience might suggest that dark stores might make more sense to provide the efficient service required for profitability.

Anne Bieler, Sr. Associate, Packaging and Technology Integrated Solutions

Dark stores are clearly a better alternative, as demand increases for "buy online pickup in-store." Two main reasons: first, the damage to the in-store customer experience of having employees pulling product off the shelves, the very product that a consumer may be wishing to purchase in that aisle. Imagine what happens when you face out-of-stocks! The second reason is the difficulty that retailers have in maintaining up-to-the-second status of their inventory.

Dark stores eliminate both of those risks.

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Mark Price, Managing Partner, LiftPoint Consulting, Inc.

A dark store is not a bad idea, but must be executed correctly and will only be economically viable under certain scenarios. First, I would not use shelving and pay for stocking. It is a wasted step in a dark store. Rather I would use case flow racks with the tops cut off the cases. Stocking cost would be less than 10% of item stocking to shelves. Second, issues is the building rent cost. While retail space is usually more expense than commercial, old stores with 20 year old leases may have a rent cost lower than commercial space. Third, the location may be idea for reducing transportation cost, which is the killer for home delivery.

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W. Frank Dell II, CMC, President, Dellmart & Company

At the end of the day, it all depends on the demand for in-store shopping vs home delivery. From an economic standpoint, it clearly makes sense to leverage your existing stores and pick from them as long as you can. When picking becomes too inconvenient and there is sufficient demand for home delivery, the retailer can find an optimal time to deploy a dark store.

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Alexander Rink, CEO, 360pi

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