MHI Solutions Improving Supply Chain Performance
For Grocers and Other Online Retailers, Dark Stores Offer Pros and Cons
Are dark stores here to stay, or are they just a supply chain experiment spurred on by a singular event and destined to fizzle out? That’s a question grocery chains and other online retailers will grapple with over the next few years as they continue to adapt to changing consumer preferences.
COVID-19 fueled a sharp rise in online shopping, leading grocery chains and major retailers such as Walmart to invest heavily in dark stores. The customer-free micro-fulfillment centers, often located in shuttered retail stores, enable retailers to offer faster delivery to customers in densely populated communities.
Dark stores serve as small warehouses or distribution centers, using automated material handling equipment and small staff to process high volumes of orders. Many dark stores allow customers to pick up orders, lessening the burden of lastmile delivery for retailers. Since last mile delivery typically is the costliest leg of the supply chain, making it easy for customers to pick up their orders is one way online retailers can improve their operating margins.
Rather than having an employee at a front desk handing orders to customers, many dark stores use cubby or locker systems so customers can serve themselves. Customers may receive a number by email or text that they can input into a locker’s keypad to retrieve orders, which reduces theft and the incidence of customers taking the wrong orders by mistake.
Deliveries are accomplished using retailers’ own fleets of vehicles or through third-party logistics providers. Route-management software groups orders together according to address to minimize the distance between stops, making delivery quicker and more efficient. Advanced software platforms, powered by machine learning and artificial intelligence, ensure that deliveries are optimally sequenced, saving time, fuel and labor costs.
For grocers in particular, proximity to their targeted customer base is essential because their products may be refrigerated or frozen or may have short shelf lives, making speedy delivery vital. Grocery chains such as Kroger, Whole Foods and Giant Co. are among the major brands operating dark stores. The facilities also make sense for some pharmacies and retailers of high-volume consumer packaged goods because customers often need those products right away and want prompt delivery.
The successful operation of dark stores has led online retailers in other sectors to consider embracing the trend, but so far, uptake has been limited, according to Ed Romaine, vice president of marketing and business development for MHI member Conveyco Technologies.
“There are some big grocers that have jumped in with both feet, but I’m not seeing a wave, and certainly not outside of the grocers,” Romaine said. “I’ve spoken to a number of companies thinking about it, but none of them have pulled the trigger.
“The last mile is always tricky, and more so for grocers because of their products, so this gets them closer to their customers, and there’s nothing more important.”
Rupesh Narkar, director of sales at MHI member Swisslog Logistics Automation, said the dark-store concept is “still a work in progress” and “in the trial phase,” adding that as companies evaluate their ongoing pilot projects, they will see a business case either for or against dark stores.
“Companies are trying out this concept, so we’ll have to see what this brings about,” he said. “If this really works out, then we’ll have a better case to deploy this across other industries.”
The restaurant industry also is trying out a version of dark stores, with brands such as Wendy’s and Chick-fil-A now operating “ghost kitchens,” according to Forbes. With no dining room or carryout options, ghost kitchens serve only those customers who order online and want home delivery. Since there’s no signage or branding, multiple brands can share a ghost kitchen, which lowers operating costs without sacrificing customer satisfaction.
Reducing Power Consumption
Narkar said one appeal of dark stores is that automation allows them to live up to their name. The cost of illuminating an entire warehouse or distribution center so workers can perform all aspects of operations is immense, but with automated material handling solutions, some areas of the facility can operate in darkness, significantly reducing power consumption, he said.
High-density vertical storage solutions can accommodate a large number of SKUs in a small space, and automated storage and retrieval systems can bring the right items to workers at picking stations. Autonomous mobile robots and automated guided vehicles also can operate in areas that aren’t well lit, so only the sections of the dark store where workers are present need to be illuminated.
Narkar said automated material handling equipment typically uses about one-third of the electricity needed to illuminate those sections of the warehouse, resulting in considerable savings over time.
“There is more and more interest in cutting down operational costs of DCs, and one of their key spends is power consumption,” he said. “There’s a huge gap between the power consumption required for automation versus what is spent to illuminate an entire facility throughout the day.”
Since dark stores are largely automated, high throughput is possible with limited manpower. With no customers clogging up the aisles and asking for assistance, workers and material handling equipment, both guided by software such as a warehouse management system, work in synchrony to streamline operations.
“You don’t have the customer in the way in dark stores, so you can be more efficient, and that’s part of the upside,” said Kevin Reader, vice president of marketing at MHI member KNAPP. In addition, using dark stores to fulfill online orders creates a better shopping experience for customers in brick-and-mortar stores because they are no longer competing for merchandise with pickers, he said.
Separating customers from inventory has an additional benefit in that it reduces theft, said Narkar.
In 2022, the average shrink rate—the percentage of retail products lost to factors such as theft and damage—rose to 1.6% from 1.4% the previous year, according to the National Retail Federation. Shrinkage resulted in retailers losing $112.1 billion in revenue in 2022, up from $93.9 billion in 2021, with theft by customers and employees accounting for 65% of that total, the NRF said.
In September, Target cited persistent theft as a major reason for closing nine stores in major cities. The retail giant, which operates almost 2,000 stores in the United States, said last May that it expected to lose $500 million to theft in 2023.
“With dark stores, these types of problems essentially are resolved,” Narkar said.
Geographic Limitations
To justify the cost of a dark store, retailers need a high volume of orders from customers in the immediate vicinity, so dark stores typically make sense only in cities and densely packed suburbs.
In 2022, for example, there were 115 dark stores operating in New York City’s five boroughs, according to a map commissioned by City Councilwoman Gail Brewer. Most were located in wealthier neighborhoods where residents were more willing to pay high delivery fees.
Still, many instant-delivery companies were hemorrhaging money, striving to build customer loyalty and acquire new customers before their seed funding ran out, according to The Guardian. The newspaper reported that the instant-delivery company Jokr was losing $159 per order almost a year before shutting down its U.S. operations in June 2022.
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