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05/20/2022

Building the Business Case for 'Store as a Warehouse'

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While the wild surging of e-commerce sales has finally tempered, there’s no denying that several years of pandemic-induced consumer behavior shifts will have a lasting impact on the retail landscape.

One of the most significant – and, arguably, longest-lasting – impacts we’ll see is in the area of fulfillment operations. Over the past few years, there has been a proliferation of the ways in which consumers can get their purchased goods. The options are too numerous to list – from curbside and couriers to lockers and drones, we’ve seen tremendous innovations and iterations in what retail’s last-mile really looks like.

In nearly all of these instances, the need for speed is imperative. And with that comes the need to hold inventory closer to the source of demand.

The result? The rise of “store as a warehouse.” 

Converting selling space to storage space – Is it profitable?
When the topic of leveraging stores as mini-warehouses comes up, you will inevitability have a handful of naysayers who proclaim “that can’t be profitable” or “where’s the business case?”

On the surface, their concerns make a lot of sense. Traditionally, retail stores are located in higher-rent districts than warehouses. And when you start to reallocate store selling space to inventory storage space, traditional metrics for retail store performance go right out the window.

But isn’t it time we revisited how we measure the retail store anyway?
In this unified commerce world we live in, retailers have to get very holistic about how they look at retail space to identify its most profitable utilization. To fully understand the value of the store as a warehouse, retailers should examine both the cost of fulfillment as well as the speed factor.

For example, while a traditional warehouse will offer the most efficient place to pick and pack shipments, profitability goes right out the window if the retailer is forced to pay for expedited shipping to fulfill that product in the delivery timeframe the shopper expects.

And let’s not forget the cost of lost sales if a retailer cannot get shipments to potential customers in their required delivery window because that inventory is positioned too far away.

Alternatively, if retailers are able to fulfill from store locations when needed, they can avoid having to cross zones in shipping. This allows them to save on shipping and deliver with greater speed, both of which can offset the associated cost of storing inventory in a retail location.

But, not all retail locations are created equal when it comes to fulfillment.

Dark stores and grey stores – Oh my!
As demand for warehousing space has outstripped supply, and as retailers look to gain speed and cost savings by positioning inventory closer to shoppers, dark stores and grey stores are popping up all over retail.

Dark stores are locations that are proximate to a large concentration of customers and offer a store-sized level of inventory for order fulfillment, with no customers allowed inside.

Grey stores, on the other hand, are locations that balance attracting customers and offering logistics efficiencies for ship-from-store fulfillment. While grey stores are more typical in Europe, we are seeing an increasing number of US retailers looking at the model. With grey stores, the front of the store can serve up a typical store’s assortment – or it can serve as a showroom, which is becoming more popular.

The decision to add dark or grey stores into the retail mix is not one to take lightly. The right approach will vary greatly based on each retailer and a variety of factors such as where their stores, customers and existing warehouses are located, the footprint of their stores (large or small format), and staffing considerations.

But first, optimize your inventory strategies
Before a retailer embarks on a transformation project to utilize stores for fulfillment activities, it’s worth noting that none of this is possible (or profitable) until an enterprise-wide pool of inventory is established.

Retailers must first figure out how to best position inventory across their network, and how to maintain those positions over time, even as seasonality and peak surges come and go.

There’s a lot of money to be made, costs to be saved and customer satisfaction to be gained when retailers look holistically at inventory. With the help of stores as warehouses, retailers can be in a more optimal position to match available inventory to demand – no matter what channel that demand is captured in.

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