The Supply Side: Micro-fulfillment centers newest retail supply chain strategy

Amazon, Walmart, Walgreens and grocery third-parties like Instacart are investing in micro-fulfillment centers to speed up delivery times, curb final-mile costs and get products closer to consumers. The investment comes as e-commerce sales are expected to reach about 35% of total sales by 2023, according to Edge Retail Insight, a subsidiary of Ascential.

The marketing research firm predicts the in-store share of sales will decline to 62.4% by 2025. This year in-store sales will account for roughly 70% of the total global sales.

“The global pandemic accelerated the adoption of online retail across all key categories,” noted Deren Baker, CEO at Edge by Ascential. “With record numbers of store closures since the pandemic outbreak, store-based retail is now at a tipping point. However, much value remains in the bricks-and-mortar model – you just need to look at Alibaba and Amazon’s investment into the high street as evidence of that. But retailers and suppliers must invest in a range of new capabilities to drive successful actions in the future store, which will have very different characteristics to the model that worked until about 2010.”

Supply chain insiders say micro-fulfillment centers are an essential part of next-day and same-day delivery. Retailers use their physical assets as intermediary fulfillment centers with dark stores and transform some retail stores and clubs into automated warehouses. Ascential reports that retailers are also likely to reallocate store space to accommodate more online orders. The report said up to one-third of retail space could be transformed into fulfillment centers.

Walmart announced earlier this year plans to build micro-fulfillment centers equipped with automation. Tom Ward, senior vice president of last-mile technology and operations at Walmart, said the retailer is building about a dozen micro-fulfillment centers (MFC) at store locations, including Store 100 on Walton Boulevard in Bentonville. The capital outlay is part of Walmart’s $14 billion expenditures planned for this year.

“Our customers love the speed and convenience of pickup and delivery, and we’re committed to finding faster ways to serve them, which is why we’re scaling the number of stores that will also serve as market fulfillment centers. We’re already planning dozens of locations, with many more to come,” Ward said.

Ward said the highly automated MFC would allow more orders to be picked at a faster speed. He said the micro-fulfillment center is a compact, modular warehouse built within, or added to, a store location. In addition to fresh and frozen items, an MFC can store thousands of items the retailer knows customers want most, from consumables to electronics. The end goal is to fulfill the order in minutes from the time it is placed. The order will then be picked up by shoppers or dispatched for delivery by third-party or Walmart in-home drivers.

Another benefit of the automated MFC is that one center can facilitate several stores, creating more efficiencies. One big difference for Walmart’s MFC strategy is that the locations are slated for busy stores that require more labor to pick orders. The MFC is also located in closer proximity to customers allowing for lower final-mile costs.

Annibal Sodero, professor of supply chain at Ohio State University, said Walmart’s move to more automated MFC usage is about efficiency in the final mile, which can be 27% to 30% of total logistics cost. He said Walmart mastered the lower mode of delivery warehousing system moving full-load trucks from the regional distribution centers to stores. Still, as more sales move online, that system has become archaic in trying to deliver same-day. He believes more retailers, from corner shops, 7-Eleven locations and even Starbucks, will become de facto locker space for online retailers seeking to reach rural areas.

A report by CV Insights said smaller retailers and retailer intermediaries also are turning to micro-fulfillment. Instacart recently partnered with Fabric to allow grocery retailers in the United States and Canada to tap micro-fulfillment solutions through Instacart’s system and personal shoppers with Fabric’s software and robotics systems. The companies said they would use the micro-fulfillment centers to fill retailers’ online grocery orders placed via the Instacart Marketplace or through a grocer’s branded Instacart e-commerce site. Besides speedier fulfillment, the MFCs would enable retailers to handle more online order volume and accommodate customers’ full grocery shop, ranging from packaged groceries, household staples and fresh produce to deli items, frozen food and alcohol, according to Instacart.

The partnership uses a combination of Instacart, Fabric and retail employees who will manage the MFCs, depending on the location and the retailer. Once orders are packed, Instacart personal shoppers will deliver orders to customers or bring them to staging areas for curbside pickup.

“Our next-gen fulfillment initiative combines our robust technology suite and dedicated community of shoppers with robotics solutions to give retailers even more innovative ways to compete and serve their customers online. This work will also help reduce some of the things that make in-store shopping cumbersome for Instacart shoppers, like crowded store aisles, out-of-stock items and long checkout lines,” said Mark Schaaf, chief technology officer for Instacart.

Clint Lazenby, a co-founder of Legacy Retail in Rogers, said Instacart is a force to be reckoned with. He said the partnership with Fabric for micro-fulfillment is timely as Instacart continues to grow its online sales chasing Walmart. Fabric is also one of the partners Walmart is working with on its MFC initiative.

“Our software-led robotics and modular solution gives grocery retailers the flexibility to build the fulfillment solution that best fits the needs of their business. With Instacart as a partner, we see an enormous opportunity to integrate our product and services into Instacart’s e-commerce solutions to provide a compelling service offering for grocers,” Fabric CEO and co-founder Elram Goren said.

Walgreens plans to introduce 11 new micro-fulfillment centers by the end of next year. This move comes on the heels of Walgreens’ acquisition of pharma tech developer and fulfillment business known as iA.

The CV report said that as the pandemic subsides or as another wave of lockdowns persists, e-commerce will remain crucial to the retail industry, and micro-fulfillment will likely grow.

“We will see smaller facilities pop up closer to the consumer instead of larger facilities in more rural areas. While the face of retail changes before our eyes, the supply chains must adapt as well, and this is one of the many ways it is doing so,” the report noted.

Retailers have said COVID-19 radically hastened the advancement of online grocery by three years or more. And while retailers like Walmart and Target said second-quarter online sales slowed as in-store traffic improved, the consensus is that online grocery will remain elevated for the time being.

NielsenIQ has noted that as more shoppers turned to online grocery, the gain for retailers and consumer packaged goods (CPG) companies is about $58 billion. The market researcher projected U.S. online CPG food and beverage sales to reach between $94 billion and $109 billion, up from $66 billion in 2020 and $31 billion in 2019. NielsenIQ estimated that more than 20 million new CPG customers entered the online arena in 2020, raising the share of households buying online to 32% for food (from 19% in 2019), 60% for nonfood (from 45% in 2019) and 40% for CPG overall from 27% in 2019.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.