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The Future of Grocery Fulfillment

Chris Copenhaver • 12/8/2020

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Evolving Tech Helps Automate Grocery

Grocery supply chains are some of the most complex in the industry. Product shelf life, fragility, and temperature requirements present unavoidable challenges. Yet, groceries serve one of the most ubiquitous demands of any supply chain. Everyone needs sustenance, and as a result, these supply chains must meet the demand.

It’s understandable that grocery distributors have been hesitant to try new technology within the supply chain, risking a potentially devastating disruption. However, the recent challenges created by the global pandemic and growing competition within the market is now driving new innovations in logistics to answer the demand for direct-to-consumer grocery supply chains.

Companies are competing to become the most affordable, reliable, and timely option for customers, while ensuring high quality deliveries that are fresh or locally sourced. In August of 2020, the number of consumers utilizing BOPIS for grocery shopping doubled from the pre-pandemic number of 31% to 64% utilization, according to WD Partners. Online grocery sales increased over 300% during the first few months of the global pandemic, according to FMI-The Food Industry Association.

Many innovative solutions have come out of this fast-growing consumer grocery trend, some better than others. Many grocers are utilizing third-party, crowd-sourced labor to pick, pack and delivery orders, like Instacart, Postmates and Shipt. The downside of this model is that the store loses the ability to control turnaround times and delivery quality. Consumer complaints about this model include receiving the wrong items or not getting the order fast enough. The upside is that grocery stores are able to jump into the delivery game without having to invest in labor or infrastructure.

The AmazonFresh and Whole Foods delivery model is similar except workers are company employees. Also, Amazon utilizes “dark stores” in some markets that are strictly for delivery and pick-up orders. This model allows for better inventory management, and cost and quality controls.

Probably the most interesting advancements in grocery fulfillment are two fairly new technological solutions – micro-fulfillment centers and automated online supermarkets. Micro-fulfillment centers, also known as MFCs, allow for small fulfillment centers to exist in heavily populated areas, including inside grocery store stock rooms. These automated systems make it possible to pick and pack a grocery order for delivery or pick-up in a few minutes. The main downside of this model is the size limitations that make it difficult to offer a wide variety of products. Many retailers are trying this out, including Meijer and PepsiCo who are both testing MFC concepts with technology developed by Dematic.

Highly automated online supermarkets are another recent innovation. British company Ocado is an online-only supermarket that started making deliveries back in 2002. It utilizes cutting-edge automation and robotics that can assemble an order of 50 items in a matter of minutes. In 2015, the company’s annual sales exceeded $1 billion euros. Kroger recently tapped Ocado to build 20 automated facilities ranging in size from 150,000 SF up to 350,000 SF depending on market size.

Which Tech Solution is Better – MFCs or Online Supermarkets?

MFCs and online supermarket models are two very different supply chain solutions, and each presents a different set of benefits and challenges. While MFCs offer the buy online and pick-up in-store option, rent is often higher for these retail centers. Yet, online supermarkets with lower warehouse rent face the challenge of increased transportation costs due to delivering further distances.

There are several differences between these two fulfillment strategies that make each successful:

Micro-Fulfillment Centers

Online Supermarkets

Benefits

Benefits

  • BOPIS and delivery services

  • Crowd-sourced last mile

  • Less investment per location

  • Less space needed with ~10,000- square-foot footprints

  • Can further leverage existing retail space

  • Speed of assembly and speed to market

  • Broader inventory assortment

  • Delivery only - product still must travel an additional time

  • Lower rental rates utilizing warehouse space

  • Warehouse could be utilized to quickly replenish stock for retail locations

  • Potential for huge growth once consumers buy-in

  • Grocery delivery could be differentiator from competitors

Drawbacks

Drawbacks

  • Limited inventory assortment

  • Higher rental rates utilizing retail space

  • Unproven concept with fragmented technology

  • Large building footprint

  • Higher transportation costs

  • Longer delivery distances and lead times

  • Large investment to get ROI

  • Large cooler/freezer space hard to find or costly to build

  • Online grocery shopping still needs consumer buy-in

 

The Takeaway

So, which fulfillment technology is better? There isn’t a right answer. Both fulfillment strategies work to benefit consumers in different ways. While some consumers may like to order all groceries online without dealing with the hassle of the grocery store, others prefer to shop at a particular store and even pick out the groceries themselves. Similarly, companies often have different goals and certain infrastructures already in place that better support one model over the other.

As new technology emerges, consumers have only seen the very beginning of what digital grocery shopping can look like. We’ll learn a lot in the coming years (post-pandemic) and with more time, we may have a better idea of which model is more effective and efficient in grocery distribution. In the meantime, every option will be tested, and only time will tell which strategy prevails.


Contributors: Tray Anderson, Bethany Clark, Bryan Jensen (St. Onge Company), and Erin Bruner

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