Powered by robotic technology, micro-fulfillment centers can be in a parking lot or in the back of an existing store.
Grocery is the last frontier of e-commerce expansion. While online shopping has rapidly attracted consumers and forced the evolution of retail, online grocery shopping has yet to usurp a significant portion of the market.
Back in 2019, only about 3% of grocery sales took place online, and shoppers weren’t enthusiastic about the concept of grocery shopping over the internet. A survey from Bain & Co. found that only 6% of consumers at the time planned to complete at least one online grocery order per month. Consumers hadn’t shown the same fervency for online grocery shopping as they had in other retail categories because the process was cumbersome and clunky. Deloitte had uncovered the central pain point almost a decade ago in a 2013 Supermarket E-commerce survey, saying that the reason why most consumers buy food, households consumables and personal items in a physical store is because “consumer packaged goods companies and retailers [had] yet to create a compelling online or mobile shopping experience for the majority of consumers.”
Micro-fulfillment is the solution. In as small as 3,000 square feet, micro-fulfillment centers have been solving these pain points for grocery retailers and creating a more seamless customer experience. While the pandemic and stay-at-home restrictions have driven more consumers to fill virtual shopping carts with groceries, micro-fulfillment centers have played a crucial role in forging a pathway to a future for online grocery shopping.
SOLVING GROCERY’S E-COMMERCE PROBLEM
Micro-fulfillment provides two value propositions for grocers, according to Ethan Chernofsky, VP of marketing at Placer.ai and an expert in the micro-fulfillment space. First, it automates the process of fulfilling orders through robotics technology, and second, it solves a spatial problem in that the facilities are located near or within an existing grocery store, allowing orders to meet the one- or two-hour expectation of grocery delivery. “Micro-fulfillment’s promise is to enable fulfillment in a much smaller space,” says Chernofsky. “That is what makes this so exciting. It fulfills the promise of one-hour delivery by bringing online grocery as close to the end user as possible.”
Micro-fulfillment centers also allow grocers to narrow the focus of online shopping. “During the pandemic, we learned there are certain items that people don’t want to buy online. It might be an annoying process; it might be that they prefer doing it offline; it might be they want to touch and feel the products,” says Chernofsky. However, there are also a myriad of grocery items that consumers are willing to buy online, like paper products and dry or boxed food products, like crackers, cereal or rice. Micro-fulfillment centers can be tailored to serve orders of goods in these categories. “If you are buying paper towels, toilet paper and cereal and you want those things quickly, there is no real value in going to the supermarket to get those few items,” says Chernofsky. “What grocery stores can do with online fulfillment is very efficiently and quickly solve that problem, and, perhaps even most importantly, they can solve it almost anywhere.”
Now more than ever, grocery retailers are furiously looking for solutions to streamline the backend system that processes these orders. In the last two years, the growth in online sales has been significant. Up from 3% in 2019, online sales accounted for 8.1% of total grocery sales in 2020 and 9.5% of total grocery sales in 2021. By 2026, research from Mercatus expects online grocery sales volume will grow to 20% of the market.
Grocers need to rapidly evolve and invest in last-mile logistics technologies, like micro-fulfillment, to meet demand from this growing group of customers. With the expectation that online orders will continue to increase over the next five years, grocers are looking to alleviate the pain points in the shopping process today. “Micro-fulfillment makes the speed and convenience of online that much more palpable,” says Chernofsky.
INSIDE MICRO-FULFILLMENT SPACES
Today, the typical grocery store has wide aisles and products stacked low, within arm’s reach. They are perfect for in-store shopping, but not adequate to accommodate online ordering. Plus, workers fulfilling online orders often create a negative in-store experience for offline shoppers. Warehouses, on the other hand, are large boxes in a separate location outside of the city center. While these spaces are conducive to fulfilling online orders, they fail in the last-mile delivery, taking too long to deliver products to users in a timely manner.
Micro-fulfillment centers bridge the divide. These are small-footprint facilities that can be located in the parking lot or in the back of an existing store. Excess space is retrofitted into a warehouse-type facility, but located close to the end-user to ensure speedy delivery times. “In a major city, the idea that you can take a small piece of real estate oriented towards items that people really want, want regularly and want quickly is a huge plus. It offers a lot of potential for that middle of the store experience,” says Chernofsky.
This is where the value proposition of a micro-fulfillment center really shines. The national industrial vacancy rate currently hovers around 4%, and it is even lower in some major metros; Los Angeles and the Inland Empire, the largest industrial markets in the country, have a 0.5% vacancy rate. Across the country, there is almost no warehouse space available. The small footprint of micro-fulfillment means that grocers can create distribution space in almost any city where there is already a brick-and-mortar presence. “It is not very easy to find big warehouses and it is not easy in major urban areas, but if I can plug them into the urban areas themselves, that is when things get exciting. The key then is deciding which products to get to people,” says Chernofsky.
Both investors and grocers are quickly waking up to the benefits of micro-fulfillment centers. Kroger, Albertsons and H-E-B are already utilizing this technology, and SoftBank has invested $2.8 billion in Norwegian robotics technology firm AutoStore, which allows warehouses to maximize space through automation. AutoStore’s clients already include British grocery chain Asda.
Using robotics technology, like that offered by AutoStore, grocers can convert a portion of a store or parking lot into a fulfillment center with products stacked from floor to ceiling. “In so doing, it can allow any retailers but particularly grocery stores, to maximize smaller spaces,” says Chernofsky, adding that from there, grocers can be strategic about what products they can stock in the fulfillment center. “When you get into urban areas, you have to get smaller and smarter about the merchandise you want to store.”
Micro-fulfillment isn’t exclusively beneficial to the grocery sector. It actually has a wide application for retailers. “When you recognize that there is a complementary component for specific products, it widens what micro-fulfillment can do. We often box it into the grocery space because that is one of the areas where we have seen an initial uptick, but the expansive areas where the technology can go is unbelievably significant,” says Chernofsky. “Grocery was an early adopter of micro-fulfillment, but the applications to the wider retail market make this really exciting.”
Chernofsky imagines that micro-fulfillment can solve a host of last-mile issues for retailers. A single shopping center, for example, could have a large portion of tenancy that struggles with last-mile fulfillment. These tenants could dedicate overlapping space to a micro-fulfillment center that would support online orders. “That might be a better utilization of space, especially if companies are downsizing the footprint that they use for a specific retail location,” says Chernofsky. “Micro-fulfillment is such an exciting technological step forward in that it brings so many opportunities to take fulfillment elements and put them in a wider array of spaces.”
Micro-fulfillment can also expand the potential uses of a retail location. Zoning restrictions limit industrial uses in retail-designated areas. It is one reason why there hasn’t been more adaptive reuse projects of obsolete and vacant retail boxes. Micro-fulfillment facilities, however, can exist within or next to a retail store, blurring the lines between these two uses and bringing the last-mile closer to the customer. “Micro-fulfillment is such an exciting technological step forward in that it brings so many opportunities to take fulfillment elements and put them in a wider array of spaces,” says Chernofsky, explaining that, ultimately, micro-fulfillment maximizes what a location can be utilized for.
Micro-fulfillment benefits grocers in that it allows for efficient fulfillment of online orders through automation, and it supports the speedy delivery of online orders because the facilities are located in populous areas. However, these are not the only benefits of micro-fulfillment. The technology can aid retailers in wide-scale distribution and last-mile logistics. This illustrates the adaptability of the technology—which is crucial to success in today’s retail market, where customers expect efficiency, accuracy and lightning-fast delivery. “We expect excellence everywhere. If we get bad apples in our grocery delivery, we don’t think, ‘it must have been a hard day at the grocery store.’ We think, ‘how dare you waste my money.’ Therefore, as a retailer, you have to think much more carefully about how you use technology to provide an optimal experience,” explains Chernofsky.
In many ways, micro-fulfillment represents an evolving supply chain. Today, the standard system requires a warehouse and a storefront—two separate locations, disconnected from one another. Micro-fulfillment offers something different. “It doesn’t demand you have a fulfillment center and another store,” says Chernofsky. “With micro-fulfillment, you can do both. That is where you get really exciting things moving forward.”