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04/16/2021

The Age of Micro Fulfillment

The largest retailers are racing to quickly fulfill online orders using micro fulfillment, and now numerous regional players are joining them
The Age of Micro Fulfillment
Ahold Delhaize USA's Peapod Digital Labs' micro-fulfillment pilot with The Giant Co. will incorporate AutoStore technology empowered by Swisslog's SynQ software, as well as Peapod's manual picking capabilities.

In just a few short years, micro fulfillment has moved from being a promising experiment into a full-fledged part of omnichannel strategy for major grocery retailers such as Walmart, Ahold Delhaize, Kroger and Albertsons. As retailers have found themselves competing with Amazon’s enviable two-hour delivery offer, and after going through last year’s transition to survival mode during the outbreak of COVID-19, their search for the fastest, most efficient way to fulfill online orders has become a top supply chain priority and, in some cases, a competitive advantage.

Look for 2021 to be a year of further progression for micro-fulfillment centers (MFCs) as leading technology providers continue their partnerships with a growing number of grocers, including regional players with a smaller selection of stores.

Bentonville, Ark.-based Walmart has smartly been testing micro fulfillment with a number of different companies, including Alert Innovation, to widen its learnings. The world’s largest retailer said in a blog post in January that it will “scale the number of stores that will also serve as local fulfillment centers,” with dozens of locations already selected and “many more to come.” Walmart has said that it plans to have more than 100 MFCs within the next couple of years, with some of these so-called “local fulfillment centers” using existing store space, while others will be added on to its buildings. In some cases, it will even build stand-alone units.

Ahold Delhaize USA is in the thick of a number of forward-thinking pilots, including its latest micro-fulfillment project with The Giant Co. in the Philadelphia market. The retailer’s digital, e-commerce and commercial engine, Peapod Digital Labs, is leveraging a solution by Swisslog that includes the AutoStore storage and retrieval system. (In late March H Mart also teamed up with AutoStore on micro fulfillment.) The system will combine Swisslog’s SynQ software for automation with Peapod’s proprietary manual picking capabilities. The location is expected to fulfill approximately 15,000 online orders per week for delivery to customers’ homes, according to Ahold Delhaize.

The company also noted that it will continue other micro-fulfillment tests, such as a multishuttle pilot with Stop & Shop and Waltham, Mass.-based Takeoff Technologies in the Hartford, Conn., market, and others that will be revealed in the coming months.

“As we continue to transform the supply chain for the future, we’re doing so with the lens of creating a truly omnichannel supply chain, there for customers whenever, wherever, however they want to shop,” said Chris Lewis, EVP, supply chain for Retail Business Services, Ahold Delhaize USA’s services company, at the time of the pilot rollout.

Out west, Boise, Idaho-based Albertsons Cos. is moving forward with more Takeoff pilots itself. Albertsons CEO Vivek Sankaran noted during Citigroup’s Retail Madness virtual conference in March that the retailer is planning to add seven more MFCs in 2021, aiming to provide two-hour deliveries in all of its markets. Meanwhile, Sankaran envisions a time in the not-too-distant future when digital sales could account for 20% of the retailer’s business.

The Kroger Co., through its exclusive partnership with U.K. e-grocer Ocado, is advancing more of a “macro-fulfillment” approach with regional stand-alone automated warehouse facilities that measure up to 375,000 square feet. Its first customer fulfillment center (CFC) recently became operational near its Cincinnati headquarters, with nine more locations planned in regions throughout the country. Meanwhile, Kroger is working with Ocado to roll out in-store fulfillment capabilities in some of its stores beginning this year.

Regional chains involved in micro-fulfillment tests or deployment include H-E-B (with Swisslog/AutoStore), Meijer (with Dematic), and Big Y, Sedano’s and Wakefern/ShopRite (with Takeoff).

“While Walmart is making headlines, several regional players are becoming aggressive with their e-commerce grocery strategies,” observes Joe McMenamin, director of e-commerce for KPS Global, a cold-storage provider based in Fort Worth, Texas. “We see the anticipated changes to more MFCs connected to sites, while dark stores take a back seat to long-term plans. While a lot of this movement has not been in the news, rest assured: It is happening both discreetly and relatively quickly.”

Gary Hawkins, CEO of the Walnut, Calif.-based Center for Advancing Retail & Technology called CART for short maintains that there won’t be a “one size fits all” approach. “Some retailers, like Walmart, are going to deploy MFCs inside or alongside the store,” Hawkins notes. “Other retailers are looking at MFC tech for local or regional fulfillment servicing multiple stores. Yet others are exploring how a centrally located MFC might provide grocery fulfillment and fulfillment from other non-competing local companies like hardware.”

Hawkins goes on to observe that some retailers are advancing their in-store fulfillment using technology like augmented-reality smart glasses to guide the picker, fulfilling orders at night when stores are closed, or using dark stores.

At the end of the day, he says that while he believes a “significant number” of retailers will be using MFCs in the next five to 10 years, the technology is best suited for larger retailers that are able to invest in it and have the space within or alongside their stores. He sees smaller grocers using less capital-intensive approaches to fulfillment.

“The greatest challenge for grocers relative to MFCs is the cost and getting a strong return on investment,” Hawkins advises. “There’s no doubt that the MFCs are more efficient than manually picking an order from within the store, but to justify the investment and get a good return on investment, the retailer needs to be doing a good volume of online orders.” He adds that the upfront investment for these solutions includes integration with the retailer’s e-commerce solution, along with having the right space, including square feet, high enough ceilings, reinforced concrete floors and heavy electrical service. “All those costs add up,” he cautions.

John Lert, founder and CEO of Billerica, Mass.-based Alert Innovation, is quite bullish on the future of micro fulfillment, so much so that he maintains that “some form of ‘micro fulfillment’ will become nearly universal.”

“The advantages of e-commerce compared to self-service in terms of convenience and time savings will be more greatly felt in food retail than in any other retail vertical, because of the amount of time consumers spend shopping for groceries,” Lert reasons. “As consumers increasingly choose to order their groceries digitally, nearly all food retailers will need to be able to sell their products online in a way that is sustainably profitable and preserves the value of their stores in order to survive competitively. We believe that automating the fulfillment process at store level is the only way this can be done.”

Key Considerations in Micro Fulfillment

As retailers consider which path to take for online grocery fulfillment, there are a number of important factors to consider, and some of those may change, triggering refinements to the overall plan, notes David Bishop, partner at Brick Meets Click, in Barrington, Ill.

According to Bishop: “Grocers need to think about where they operate stores, how many locations operate in a specific trade area, how many orders they are doing today and how many they expect to do within five years, the mix of fresh foods in the orders, ways customers can receive their online orders, and how cycle times play into their competitive positioning.”

Colman Roche, VP of sales and consulting, e-commerce/retail, Americas at Swisslog, says that his company has learned a lot since entering the micro-fulfillment market for grocery in 2018, and now has more insights to share with potential customers. “We’ve really tightened up our designs and have figured out how to get more and more out of the equipment,” Roche says, adding that Swisslog is routinely meeting its customers’ requirements for net present value, return on capital and payback periods.

In recent months, Swisslog, whose U.S. headquarters is in Newport News, Va., has been in talks with an increasing number of smaller retailers, including those with maybe 20 to 30 stores, he adds. “For some people it’s a question of trying to get ahead if they feel there’s an advantage, and others are defensive strategies,” Roche explains. “Also, the ratio of micro fulfillment to stores has been coming down rapidly, particularly with COVID.”

Grocers also have to think about how much home delivery they want to provide versus click-and-collect, and where the pickup locations will be and some of that will change as more people go back to work in offices, he observes. Also, the coveted evening pickup times will become more attractive once that happens, which could change retailers’ existing plans and make more order consolidation necessary.

Another key challenge facing retailers that are exploring micro fulfillment is space, Lert and others point out. “Relatively few stores are either large enough to be able to repurpose existing floor space to house an automation system and remain viable as a self-service store, or can be expanded to add space for this person,” Lert says. “Ultimately, we believe that the solution will be a new store format that combines an optional checkout-free fresh market with a fully automated center store that fulfills all orders of packaged goods, which are placed electronically by customers either in the store or remotely.”

This concept, which Alert Innovation calls “Novastore,” conveniently encompasses Alert’s Alphabot technology.

Eyeing Out-of-Stocks

Retailers have been challenged with higher than usual out-of-stock rates since the pandemic began, and this is an area that they want to master as much as possible before advancing their micro-fulfillment strategies, according to the experts. A report from New York-based IHL Group called “The Future of Grocery and CPG” estimates that overall, there were $505 billion sales lost due to out-of-stocks amid the pandemic, and that $75 billion was newly discovered simply due to the rise in digital orders for store fulfillment that were previously hidden (the report includes grocery sales in food, drug and mass merchandisers).

Jason Wirl, director of solutions consulting and marketing for Itasca Retail Information Systems, notes: “A robot can be faster, more efficient and more accurate. But if you already have an out-of-stock problem, it will just be exposed much more quickly.”

Des Moines, Iowa-based Itasca provides computer-generated ordering to 17 grocers, at least one of which is using a dark store to fulfill online orders. Itasca’s customers regularly report that they’re an impressive 99.5% in stock in their stores, and 95% as-ordered with e-commerce orders. Wirl says that Itasca’s systems don’t have to be set up differently to replenish a dark store or fulfillment center.

Brick Meets Click’s Bishop recommends that grocers anticipate some out-of-stocks and have a plan to make the substitution process as seamless as possible. “We’d advise retailers to ensure that their customers have the ability to determine not only which products they’re willing to accept as a substitute if the item ordered isn’t available, but also the ability to select what alternatives they consider acceptable,” he counsels

    Instacart’s Interest in Micro Fulfillment

    After serving as a lifeline to many grocers that needed help picking online orders during the surge of e-commerce usage last year, it seems that Instacart is now exploring micro fulfillment as a new service for its customers, as the company looks to further solidify its growth. A recent report in The Financial Times revealed that San Francisco-based Instacart has sent requests for proposals and has been in talks with micro-fulfillment companies, including Alert Innovation and Fabric, in the past year, reportedly with plans to build as many as 50 automated facilities across the country. Some industry watchers even speculated that Instacart is moving toward becoming an online retailer itself, similar to DoorDash’s launch of DashMart.

    Contacted by Progressive Grocer, an Instacart spokeswoman neither confirms nor denies the report, but she maintains that Instacart isn’t interested in becoming a retailer. Instead, she reiterates the company’s dedication to its retail partners: “While we have no updates to share today, we’re constantly evaluating our services in deep partnership with the nearly 600 retailers we work with. Instacart’s entire product and model is predicated on being a chief ally to our retail partners. We’re not a retailer, and our business is only successful when we’re driving value for our partners. Our goal has always been to lift up grocers and give retailers of all sizes an edge in an increasingly competitive industry. We’re committed to supporting our brick-and-mortar partners and continuing to invest in and explore new tools and technologies that support the needs of their customers and further enable their businesses to grow and scale over the long term.”

    It makes sense that Instacart might be considering such an action. The company is on the verge of going public; launching fulfillment operations either for itself or for other grocers would signal the kind of evolutionary growth that would make investors happy. Then again, competing with its retail partners could adversely affect those relationships.

    Industry watchers are mixed on their opinions about whether supermarket companies would want to outsource micro fulfillment. 

    Marc de Speville, partner, e-commerce at the Partnering Group, in Cincinnati, says that while “it makes sense for Instacart to look for ways to get more involved in fulfillment,” retailers might not be so willing to align with the company in this way. “I’m not sure it makes sense for them to do it from an operational, financial or strategic perspective,” he adds. 

    Meanwhile, Joe McMenamin, director of e-commerce for KPS Global, based in Fort Worth, Texas, believes that the idea has legs. “With Instacart’s recent cash influx from another round of fundraising, combined with their portfolio of customers, the thought of Instacart reshaping the supply chain seems virtually a lock,” he notes. “Instacart’s technological approach disrupted the industry, and now they have leverage. If you were a gambler, the odds look pretty good for this bet.” 

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