The coronavirus pandemic has sent hordes of shoppers online for all their needs, and grocery is the category where the shift has been felt most profoundly. 

  • New Whole Foods dark store is “another piece of the jigsaw of Amazon exploring various options for grocery”
  • Dark stores have significant cost but they are much more efficient than store-picking model
  • DPD managing director says city centres “need a network of microsites and that means repurposing buildings”

This change has been felt particularly in city centres, where shoppers living in areas of high population density flocked online to buy food in a way that allowed them to forgo the supermarket car park queue and stay indoors.

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Amazon opened its first Whole Foods ‘online-only store’ in New York

In response, retailers have launched a range of initiatives to bolster their urban fulfilment options.

In recent, months grocers such as the Co-op and Marks & Spencer have launched partnerships with Deliveroo, while Waitrose is developing its third London-centric customer fulfilment centre in Greenford, which will become operational before the end of this year. 

Last week, Amazon unveiled its first Whole Foods dark store in Brooklyn, New York. The 28,000 sq ft premises has been purpose-built and was in development for a year, but it seems particularly relevant to current conditions. Laid out like a supermarket, the store operates like a warehouse where staff select customers’ orders from shop-style shelves. 

Designed to allow shoppers in the nearby area to order their Whole Foods shop online and have it picked by ‘store’ staff, packed and delivered to their door in under two hours, it is the latest in a series of strategic moves by Amazon to increase its grocery penetration in city centres. These have varied from acquiring a stake in Deliveroo to a mooted cashier-less store launch in London’s Notting Hill in the pipeline.

Shore Capital analyst Clive Black says: “Brooklyn is another piece of the jigsaw of Amazon exploring various options for grocery urban fulfilment.

“Combining supertanker warehouses for wider delivery with store-picking options through Whole Foods is part of Amazon working to strike the right balance from a financial and customer service perspective in getting an offer that works.”

“We’ve got £680m in the pipeline to spend on buying up and developing more urban locations to drive last-mile distribution centres”

Andrew Gulliford, Segro

While this is Amazon’s first dark store, that model is well established in the UK. Warehouse specialist Segro’s chief operating officer Andrew Gulliford says the appetite for a robust roster of urban fulfilment sites for grocers has been coming down the track for some time.

“We’ve got £680m in the pipeline to spend on buying up and developing more urban locations to drive last-mile distribution centres,” he says.

“With the rise of ecommerce and same-day and next-day delivery, the traditional out-of-town hub fulfilment centres –greenfield, with motorway access, usually in the centre of the country – aren’t really enough any more.”

So how are grocers tackling urban fulfilment? And what are the advantages and drawbacks of different approaches?

The downside of dark stores

Dark stores like that deployed by Amazon in Brooklyn have been part of the UK grocery landscape for some time.

Tesco, Waitrose and Asda, for instance, have all used the format to varying degrees in recent years. Dark stores allow grocers greater access to shoppers in population-dense areas and can also shorten fulfilment times for local customers. 

Deliveroo rider and Sainsbury's Groceries Online driver

Supermarkets have teamed up with food delivery apps

But, as grocery analyst Bryan Roberts points out, they are also expensive to develop.

“Dark stores come with a significant cost, effectively the same cost as building a supermarket, but they are approximately four to five times more efficient than store-picking,” he explains.

Food industry body IGD’s director of programmes Stewart Samuel says: “Dark stores provide an opportunity to significantly increase pick rates, minimise delivery distances through using existing locations and improve channel profitability. Many retailers are likely to look at automated solutions, including micro-fulfilment.”

Despite such efficiencies, Black says the dark store model has been “retrenched” by many UK grocers in recent years. Why?

While Black says that dark stores are typically smaller and therefore less expensive to build than a full-scale warehouse from scratch, they are still an additional cost that many grocers are reluctant to take on.

“If you look at what has happened to superstores over the last decade, sales densities have fallen, which has created the void [for picking from stores] to overtake online picking,” he says.

“Superstores have rocketed in sales during the pandemic because spare capacity has been absorbed by store picking for online orders, which has meant a channel that was marginally loss-making has become marginally profitable again.” 

Against this backdrop, combined with a narrower number of SKUs and fulfilment areas than could be offered from a superstore or larger fulfilment centre, Black argues that the incentive to double down on establishing dark stores in central locations, where many major grocers already have stores, is not sufficiently compelling to justify the cost.

Growing appetite

But there is some evidence that the tide may be turning.

DPD group’s UK marketing director Tim Jones says that, as subscription services such as Amazon Prime grow, so does the need for logistics tailored to the urban environment, where factors such as high population densities, lots of short-distance delivery trips and low emission zones bring particular challenges. 

Businesses, including his own, are establishing new types of depots in response. DPD, for instance, has three – soon to be four – such depots, which are typically smaller and served by emission-free vehicles. 

He says: “This is how it will evolve because the demand for delivery in city centres is increasing. You can’t build a big depot in the centre of London, so you need a network of microsites and that means repurposing buildings.”

He envisages locations such as railway arches and even caged-off areas of car parks becoming such microsites to cater to urban demand.

“A lot of half-decent real estate is coming up in desirable locations, which could mean the options to get more urban fulfilment locations might increase over time”

Bryan Roberts, grocery analyst

Gulliford echoes that view, and says Segro’s distribution network for grocers is “trying to get closer to the city centre all of the time”. 

“One of the ways around that is we’re looking at more multilevel schemes,” he says.

“That way you can get more space from the one site by expanding up, rather than out. Other areas we’re looking at is underground logistics, based on the same principle as building sites up rather than out.

“We’re also looking at converting car park space in city centres. All of those things are being looked at.”

Roberts also says there could be compelling options for micro-fulfilment centres for grocers as the retail property landscape alters in the wake of Brexit.

“A lot of half-decent real estate is coming up in desirable locations, be that department stores or shopping centres, which could mean the options [for grocers] to get more urban fulfilment locations might increase over time, although it will mean increased competition with office companies and residential.”

One retail executive also pointed out that, unlike dedicated warehouse facilities or out-of-town locations, more centrally located dark stores have fewer bays for delivery vans, which means they are less efficient than big warehouses.

Third-party partners and hybrid stores

With the challenges and costs of urban fulfilment in mind, many grocers have opted for in-store picking to drive up capacity, be it through their own staff or third-party tie-ups.

Grocers including Marks & Spencer, Co-op and Aldi partnered with Deliveroo amid the coronavirus outbreak to increase their reach with city-dwelling customers. 

Deliveroo

Grocers have to cede some control when they tie-up with delivery apps

Roberts points out that shoppers are generally accustomed to paying a comparatively hefty delivery fee when ordering through Deliveroo, regardless of the fact that they are generally getting a smaller basket.

But that model, while useful in the short term for grocers scaling up or testing out urban demand, comes with obvious limitations. 

Alongside the lack of control a grocer has over the customer experience when a third-party brand such as Deliveroo is fulfilling orders on their behalf, the basket size is also impeded by what can feasibly fit into a storage box on a cyclist’s back, or on the back of a scooter. 

Roberts believes that, for this reason, many grocers will likely opt for a combination of small-basket urban fulfilment through third-party brands combined with larger orders from a selection of out-of-town sites.

Black, however, believes a model like the one Tesco has adopted in West Bromwich, where 20,000 sq ft in an operating Extra store has been converted into an urban fulfilment centre, could be the “next iteration” for multichannel grocers.

Tesco Extra

Tesco has converted excess space in stores to urban fulfilment

He argues that this format allows Tesco to combine the urban locations of its stores with more efficient store picking because workers do not need to contend with shoppers while fulfilling orders.

He says this format is also more efficient because it takes advantage of existing real estate, rather than Tesco being obliged to build a dedicated customer fulfilment centre to extend its reach in urban areas – something he says could be “the Achilles’ heel” for Ocado

Pre-pandemic, Tesco said it planned to open a further 25 urban fulfilment centres akin to its West Bromwich model, which would deliver 625,000 sq ft of dark store space for the grocer.

Roberts believes grocers should think carefully about how to exploit their existing models in a similar way to Tesco, in order to respond to the increased appetite for online shopping in city centres without sacrificing their bottom line.

“Urban grocery is an important opportunity, but I still struggle to see how it is going to be a very lucrative one,” he says.

However, as urban demand for delivery grows, the pressure will only mount to find solutions that work for the customer – and the retailer’s bottom line.