Until recently, dark stores have been relatively rare in the U.S., but more common in countries such as the U.K. and France.
Dark stores refer to stores that are closed to the public except for pickup and delivery. As the COVID-19 pandemic hit the U.S. this spring, online grocery sales skyrocketed and driven both by safety concerns and the need to meet this surge in demand, an increasing number of grocers converted their brick-and-mortar locations into dark stores to fulfill online orders. Now there’s talk of a long-term industry shift toward going dark.
However, dark stores should be seen as only a temporary solution to the larger, long-term challenge of meeting online grocery demand. As stores begin to re-open across the U.S., retailers will need to get even more efficient at fulfilling orders and find new ways to do so profitably.
The challenge with dark stores
In a bind, 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 inevitably 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 Fabric analysis of data compiled by Jefferies. Even with the scalable advantages of a dark store, such stores can’t overcome the labor costs of manual picking, especially in high-rent areas.
What’s more, by closing their doors entirely to their brick-and-mortar customers, grocers miss out on the profitability of in-store transactions. Retailers will see a dramatic transformation for the worse, with mostly unprofitable online sales shifting from a small share of overall sales to 100% of transactions.
Altogether, with real estate costs, utilities and other expenses folded into labor costs, dark stores will see their losses for each online order roughly double compared with traditional stores that use manual, in-store picking.
A better way forward
Although dark stores are unprofitable, the current experiment in going dark could help put grocers on a better track toward growing online sales and increasing fulfillment efficiency. However, grocers need well-designed, automated fulfillment centers that have clear paths to profitability; simply flipping existing locations into dark stores and relying only on manual labor won’t cut it.
Once this crisis ends, we expect an enormous percentage of the online grocery dollars that shifted online during the pandemic to stay online. That means that grocers must consider alternative solutions to meet this demand profitably and at scale, such as micro-fulfillment centers, which can automate fulfillment adjacent to or in the back of the store, 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.
Once this transformation is implemented, retailers can maintain the remainder of their stores not devoted to micro-fulfillment as traditional grocery stores for customers who still prefer in-person shopping. Both the micro-fulfillment centers and the brick-and-mortar stores would offer retailers greater profitability, positioning grocers to deliver winning customer experiences both online and offline.
Steve Hornyak is CCO of Fabric