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Are Dark Stores a Long-Term Solution or just a “band-aid”?

As grocery sales boom during the Covid-19 pandemic, stores in the U.S. are increasingly going dark, i.e., closing their doors to the public except for pick-up and delivery.

Until recently, dark stores have been relatively rare in the U.S., though they’re more common in countries such as the U.K. and France. But many retailers in the U.S. are turning to this model during the crisis to keep up with online grocery orders, while also trying to minimize employees’ physical exposure to customers so as to try to reduce the spread of the virus.

For example, Amazon converted its Bryant Park Whole Foods location in New York to only focus on deliveries, and other large grocers like Kroger and Giant Eagle are similarly trying out pickup- and delivery-only options, as CNN reports.

However, dark stores are a temporary solution to the long-term challenge of meeting online grocery demand. For now, making these conversions can help keep employees and customers safe, while leveraging existing locations. But long term, dark stores are not necessarily the optimal solution for online grocery, so in the long term, retailers will need to turn to more efficient fulfillment methods.

The Challenge With Dark Stores

Dark stores can help grocers scale e-commerce operations by increasing throughput. Without customers in the stores, retailers can increase storage capacity, improve inventory layout in a way that makes picking more efficient, and more easily track inventory in real-time.

Yet simply converting existing grocery locations into dark stores will become cost-prohibitive in the long run due to a combination of labor, real estate and other operational costs.

As it stands, grocers lose an average of $10.50 for every delivery and $3 for every curbside pickup order fulfilled via manual, in-store picking, according to a P&L from Jefferies’ October 2019 Fulfilment Deep Dive: MFCs = Best Path to Profitability report that we dive into in one of our grocery reports.

Even with the scalable advantages of a dark store, they usually can’t overcome the labor costs of manual picking, especially for stores in high-rent areas. By closing the doors entirely to customers, grocers miss out on the profitability of in-store transactions and go from having the relatively small portion of online sales be unprofitable to having 100% of sales be unprofitable, since all sales become online transactions.

A Better Way Forward

Although dark stores’ profitability is questionable, the move could help grocers get in the mindset of gearing up for online grocery growth. However, grocers need well-designed, automated fulfillment centers that have a clear path to profitability, instead of just flipping existing locations into dark stores and relying only on manual labor.

Grocers who wish to ensure they are prepared for the future of online grocery should consider alternative solutions, such as micro-fulfillment centers, which can automate picking within a small area of existing stores, while the rest of these locations still remain open to customers.

Doing so can allow grocers to make online fulfillment profitable, gaining an average of $18 per delivery order and $24 per curbside pickup order using automated micro-fulfillment centers, according to Jefferies.

Then, the rest of the store can still be used for customers that prefer in-person shopping, and with both aspects being profitable, retailers can be in a better position to provide a great customer experience both online and offline.