Rob Wilson is managing director and Shang Saavedra is engagement manager at L.E.K. Consulting. The views expressed here are those of the authors.
Given lockdown and quarantine measures for many consumers over the course of 2020, it’s little surprise that the COVID-19 pandemic has driven an explosion in grocery ecommerce.
Retail grocers have had to rapidly transform to accommodate this surge in online ordering. Some have converted store space from retail shelves or back rooms to dedicated space for online order fulfillment. And some have built automated micro-fulfillment centers (MFCs) to help support automated fulfillment for curbside pickup.
Consumers worried about COVID-19 have turned to same-day grocery e-commerce ordering in huge numbers. In fact, according to research from Brick Meets Click, the number of U.S. households using online grocery services has more than tripled — from 16 million (13% of U.S. households) in August 2019 to 46 million (35% of US households) in June 2020. While the trend to online grocery shopping was already underway, we estimate that it would have taken three to five years to reach this level of penetration without the effects of COVID-19.
And the numbers posted from leading grocery retailers confirm the eye-popping demand of grocery e-commerce. Target, for instance, has recorded over 700% growth in curbside pickup in the second quarter of 2020 as compared to the same time in 2019, and Walmart reported e-commerce sales growth of 97% in Q2.
Embracing curbside pickup
For grocers to adapt and stay relevant — and for consumers to eat the cost of the last mile — grocery retailers need to embrace curbside pickup. Given that stores are designed for optimal in-store shopping, it’s often inefficient for staff to wander through aisles to assemble orders and, when it comes to operating margins, far from sustainable. Moreover, stores have been forced to quickly create online pickup areas, leading to messy front-of-store experiences for consumers.
To address this, some grocers have begun installing MFCs within their stores to automate picking. Thanks to lower operating expenses — the result of digital ordering instead of cashiers, and robots picking orders and restocking the shelves instead of staff — the financial picture of a grocery store could change if automated curbside pickup becomes a significant chunk of its volume.
Right now, it’s mainly the big grocers — including Kroger, Albertsons, Stop & Shop, Meijer, Hy-Vee and Target — that are converting store space to micro-fulfillment or building dedicated micro-fulfillment “dark stores” without any retail space for customers. In Walmart’s recent $3.5 billion expansion in Canada, all of the stores have dedicated MFCs. That said, we’ve seen interest across the board, from single-site grocers and up.
MFCs can cut costs but aren’t for everyone
Grocers considering a move into micro-fulfillment to support curbside pickup need to understand what’s different compared to traditional retail shopping, and act to protect profitability.
To start, grocers should consider balancing the initial investment versus long-term operational savings and changes in consumer baskets. The initial setup investment is significant — the costs for a single MFC that can handle 5,000 orders per week are wide ranging, but may be $8 to $10 million to set up and construct. In the long-term, an MFC allows grocers to recapture fees from third-party delivery services such as Instacart, who may be eating nearly all of the profit margin of the order — as long as the grocer has the volume and enough “eyeballs” on their store e-commerce website to make the payback period attractive.
MFCs are still evolving to increase the amount of the basket that can be auto-picked. Bulkier items, such as bottled water, fresh items (e.g., produce) and some frozen and refrigerated items are still being worked out. Consumer baskets may also be different in-person versus online — e-commerce baskets are typically less profitable as they are more likely to consist of bulk and staple items. On top of that, e-commerce baskets lack the same degree of impulse buys due to the lack of displays, visuals and smells in a digital environment as compared to a physical one.
In spite of these challenges, MFCs are a promising solution that helps enable grocers to offer convenient e-commerce — and, importantly, keep the sale. And that is certainly preferable to losing it to the competition.
MFCs part of a broader e-commerce strategy
MFCs are just one of many levers that grocers should consider to enhance the curbside customer experience and increase profitability of click-and-collect order baskets. While MFCs do require up-front capital expenditures, reduced operating expenses through increased automation could create a steady state of higher margins over the long term. MFCs may not be for everyone — but in an industry historically known for razor-thin margins, they do make a lot of sense for many.
One thing is for certain: as the shift toward e-commerce accelerates, retail grocery spaces are going to undergo significant transformation, and grocers will need to act fast to remain relevant. While not all grocers were ready for the rapid shift to e-commerce during the pandemic, they need a strong e-commerce strategy going forward. MFCs are one piece of that puzzle to solve for the future of grocery e-commerce — and are a critical consideration to drive future profitable growth in the space.