Photo: Hy-Vee
Is Hy-Vee onto something as it moves online fulfillment from warehouses to stores?
In an abrupt switch in strategy, Hy-Vee is closing four fulfillment centers and will now handle all online orders from store locations.
“We are listening to our customers and they are wanting a full assortment of products, personalized shoppers and same-day pickup at the store, which we are unable to fully provide when we process orders at a fulfillment center,” Hy-Vee said in a media statement.
Three of the distribution centers — Kansas City, MO; Eagan, MN; and Omaha, NE — only opened last year. The center set to close at Urbandale, IA opened in 2016. More than 1,500 jobs will be affected, although some will be transferred as fulfillment shifts to stores.
Aisles Online, Hy-Vee’s online delivery service first introduced in 2015, was initially fulfilled from stores. The retailer then opened dedicated e-commerce fulfillment centers to support high-volume orders near major metropolitan areas.
Stores may be able to more easily support perishables and niche items, although the Des Moines Register said fewer substitution options should be expected from in-store fulfillment. Bakery and deli items remain unavailable for ordering.
The change may be related to the popularity of in-store pickup, which Hy-Vee offers for free with a minimum purchase of $30.
Aisles Online has been finetuned over the years. Same-day delivery now costs $9.95 with a minimum $30 purchase. Under a $99 annual membership, deliveries are free with a minimum $30 purchase. Hy-Vee also partnered with Instacart and Shipt in July 2018 to complement Aisles Online by expanding delivery areas and further supporting more same-day delivery.
Other grocers are likewise retooling operations to support omnichannel behaviors from shoppers.
According to a January article from The Wall Street Journal, some grocers are testing micro-fulfillment systems as small as 10,000 square feet that can be located next to stores or in urban areas where rents are excessive for a full-scale warehouse. Closer inventory promises quicker delivery times. Author Jennifer Smith wrote, “The store owners are evaluating whether automation can help tamp down costs while speeding up deliveries and they are turning to a new set of startups aiming to make e-commerce fulfillment more efficient in a small footprint.”
- Hy-Vee shifting operation of Aisles Online from fulfillment centers to stores – Des Moines Register
- Grocer Hy-Vee Moving Online Order Fulfillment to Stores – Multichannelmerchant
- Hy-Vee lays off hundreds at south Kansas City facility – Kansas City Business Journal
- Hy-Vee To Close Fulfillment Centers In 4 Midwest States – The Associated Press/WCC)
- Hy-Vee Announces Partnerships with National Online Grocery Delivery Services – Hy-Vee
- Grocery Delivery Goes Small With Micro-Fulfillment Centers – The Wall Street Journal
Discussion Questions
DISCUSSION QUESTIONS: Why do you think Hy-Vee shifted to in-store fulfillment of online orders? What mix between in-store, micro-fulfillment centers and regional centers makes the most sense to support grocery delivery and pick-up? Have the pain points changed?
Poll
BrainTrust
Bethany Allee
Senior Vice President Marketing, PDI
Ken Lonyai
Consultant, Strategist, Tech Innovator, UX Evangelist
The abrupt switch doesn’t make much sense. Of course we haven’t seen the data they have, but distribution centers and stores are complementary to one another and not substitutes for one another. It is a matter of providing transparency and setting expectations on availability. Some can be available to pick up from curbside. Some as BOPIS in a day, others can be available as ship only.
By taking an all-or-nothing approach, they are going to sell less.
I am not sure this was abrupt. The original designs for the centers from a few years ago were to meet online delivery demand. It does show some change, but financially it makes sense if customers are driving more growth in pickup than delivery which may we’ll be the case. It’s smart for them to cut losses if the growth just isn’t where they expected, and online grocery, while perceived to improve rapidly has evolved mostly towards pickup. Online grocery is still less than 5 percent of grocery in most places.
This could be as simple as a learning curve exercise. More data available earlier in the cycle lets them bypass the DC and go direct to the store in the most need. Saves time and handling costs. Time and financial efficiency. That’s exactly what more and better data is supposed to give retailers.
An abrupt shift in a tumultuous time with limited certainty (“Stores may be able”) seems like a risky move for an industry that is maxed with demand and supply chain stress right now. With a shift from in-store for delivery and pre-packaged pick-up, the supply chain will have better insight into demand and this could help reduce any friction associated with the change. I appreciate and applaud Hy-Vee’s willingness to innovate, but I worry about the timing right now.
One of the big shifts as a result of the coronavirus, and potentially a long-term trend, is the growth of online grocery purchases. Historically, online grocery in the U.S. has lagged behind Europe and Asia’s adoption. Now that consumers have tried it, it may become a habit. With the instant growth of online orders for grocery due to social distancing, the move to in-store fulfillment seems logical. Consumers want their groceries quickly and many may want to avoid delivery charges by picking up the groceries curbside.
These new developments are creating new challenges for grocers – quickly hiring more employees to fulfill the increased demand for orders, adopting new processes, managing inventory, etc. New challenges create new opportunities.
This is a matter of execution. If stores serve the purpose it makes sense. It doesn’t seem likely, but we’ll find out soon enough.
That said, $9.95 same-day delivery fees and $99 annual memberships are not growth mechanisms, so I’m not too concerned that delivery will cause bare shelves.
I am betting the most profitable space in any brick-and-mortar store today is the pick, pack and ship area. If the accounting were really accurate, it would show the highest sales and margin per square foot, because that’s technically where the sale is made (online is just the order — no sale until it ships). But how do you keep your stores properly in stock without a backup distribution network? The new normal has to be a multi-echelon fulfillment network with a series of flow centers above the stores and other customer fulfillment areas.
Retail is undergoing a dramatic shift to e-commerce. Social distancing and self-isolation have created massive demand for e-grocery options among consumers who, just a week ago, may have savored in-store shopping.
Now convenience, variety and prompt service (BOPIS and home delivery) are essential to succeed in our new retail landscape. That’s why local stores make good business sense by investing in speed and logistics partnerships to serve consumers in their neighborhoods and at their doorsteps.
If you look at e-commerce as an order management system, it makes more sense to provide instant gratification and an entertainment value by localizing warehousing and merging the physical and digital sales with fulfillment processes. Ordering online, picking up after the softball game for dinner tonight; and perhaps grabbing some last-minute items. Shopfulfill is doing this specifically to help D2C brands cut shipping costs and shorten the time products are stuck in the supply chain. I think this strategy makes more sense in the long-run and is a better use of resources.
No need to read outside of what Hy-Vee is stating – full assortment, personalized shoppers and same day pickup. The new fulfillment centers were designed for delivery, not for BOPIS, which is growing fast. The concept of micro-fulfillment centers (MFCs) are strong add-ons to stores. They offer all the facilitation to meet customer demand needs for BOPIS and curbside pickup. All of this points to economical value in servicing the customer with lower costs than managing the volume of a full distribution center/sorting center. Its parcels not pallets now, and retailers are finding ways to use existing space to make this work. The MFC will become a more significant part of retail orchestration – especially as the customer still seeks the full assortment of products and a better store experience.
I’m not sure why they ever went away from in-store fulfillment. I believe that grocery should be fulfilled locally with a mix of micro-fulfillment or super-stores for metro areas. BOPIS has shifted everything to this model and with the current pandemic this shift is here to stay. Even after this challenge ends people will not return completely to their old shopping habits. Delivery and BOPIS will be permanently increased along with local fulfillment.
This makes sense for BOPIS, but for delivery it does not compute for me. The best way to fulfill both for availability and efficiency should be through centralized distribution centers. I almost feel that this is channel thinking and they want to support the store revenues.
Personal anecdote: The pickers for online orders in my Whole Foods drive me crazy. They are all over the place. In the way of the shoppers. Making it harder to get to shelves as they fill three or four orders at a time. I should add, they are aware of the problem they cause and try to be cooperative. But there are so many that it is an intrusion into what should be a reasonable shopping experience. The aisles of a supermarket should be for the in-store shoppers, not the online orderers.
I have not seen if Hy-Vee has announced if it will be manually picking the orders at store level, relying on Instacart to do that manual picking, or automating that process with in-store micro-fulfillment centers (MFCs).
I believe picking needs to be done at store level. Building separate facilities (Central Fulfillment Centers or CFCs) to support online orders instead of picking at the store means that the retailer is creating two competing supply chains with longer delivery lead times. Customers can either go to shop (self-service) at their local store or they can shop online and either pick-up at their local store (after having the retailer cross dock orders multiple times per day from the CFC) or get it delivered from the CFC to the consumers home for an additional fee.
By giving them that choice a retailer is allowing the revenues that are supporting the stores to go to the alternative supply chain. The more successful the retailer is with those CFCs and their smaller cousins, dark stores, the faster they will cause their self-service stores to be unprofitable because they’re cannibalizing the sales of their own stores. They can’t reduce the fixed costs as they have to pay the rent and utilities and there has to be people there to run the store. Those costs continue to run while the revenues are going elsewhere within the retailers’ organization.
The stores are highly leveraged businesses because of those fixed costs. Every percentage drop in revenue is going to be a larger percentage drop in profit. If you take the revenues out, you are removing the gross margin that support those fixed costs. It doesn’t take a big shift to online grocery before you’re losing money in those stores. 10 percent online penetration? 15 percent?
Christopher Mandeville from Jefferies did a well-regarded analysis this Fall (Fulfillment Deep Dive: MFCs = Best Path to Profitability) on the profitability of in-store fulfillment vs CFC fulfillment. Worth a read if you are considering alternatives to manual in-store picking.
Picking should be done at store level but needs to be automated as online volume grows. MFCs can enable this fast-growing segment of the grocery business to be profitable for the retailer.
It’s generally understood that a typical online order contains about an hour’s worth of labor to pick, prepare and handle before it gets to the customer. That’s not including the delivery cost. The typical manual in-store pick rates are 80 items an hour. If you think about 80 items an hour versus 800 items an hour per work station using a MFC (like Alert Innovation’s Alphabot) then we eliminate 90 percent of the pick labor while being able to have a customer pick up in as soon as two hours or even one hour (vs. next-day delivery for most CFC options).
There is an opportunity to improve additional processes like storing, staging and retrieving orders when the customer comes to collect. The right MFC solution can take that hour of labor costs down to just a few minutes. With that, click and collect grocery e-commerce at the store level can be profitable for a retailer without charging additional fees, which has been one of the impediments to higher online penetration.