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What are Micro-fulfilment Centers and who is using them?

Almost one year since the pandemic hit and if micro-fulfilment was not at the top of the retail agenda it certainly is now. The big players in the retail industry were already pushing the boundaries of online shopping a few years ago with two-day delivery promises and started looking at how they could make order fulfilment more efficient and delivery to customers even faster to get an edge on their rivals and take a bigger share of the market.

As the closure of non-essential stores kicked-in, consumers - some of whom had never made an online purchase and were probably reluctant to do so, had no other option but to take the leap and all retail trade subsectors saw massive increases in their e-commerce sales. Whilst in-store sales fell by around 18%, e-commerce sales grew by a staggering 99% between February and May 2020 according to StatCan.

An industry unprepared for e-commerce growth

What emerged over the last year was that companies were neither prepared nor agile enough to deal with the pace at which the online shopping market grew. Many had to adapt their existing systems to deal with the surge and found this to be cost-prohibitive as they attempted to fulfil orders from separate store and online fulfilment locations, serving neither one very well; stores struggled to keep up with the level of e-commerce demand and e-commerce orders were forfeited as product was never in the right place at the right time.

Even post-pandemic it’s widely believed that most sectors will never return to the in-store sales levels as they had previously. In the grocery market particularly, shoppers are becoming more comfortable using pick-up and delivery services and after the initial unpreparedness of retailers for the swift uptick in volume, it appears that customer experiences are improving. According to the November 2020 Online Grocery Scorecard from Brick Meets Click, 83% of those surveyed said they were intending to purchase again in the coming month and the frequency of purchases is also on the up.

Retailers in every sector are now prioritizing micro-fulfilment strategy as COVID-19 continues to transform the landscape. No one can realistically ignore this kind of e-commerce growth and risk being left behind and micro-fulfilment centers might just be a solution for smaller retailers to compete with those who have already invested billions into their infrastructure.

What is a micro-fulfilment center?

Micro-fulfilment centers or MFCs, are smaller, sometimes highly automated fulfilment sites that can be positioned closer to customers in densely populated areas, enabling retailers to streamline the online ordering and curbside pickup process whilst reducing delivery times.

Rather than closing underperforming locations permanently, those hit hardest by the lack of footfall to stores are repurposing their existing real estate by utilizing part or all of their space for online order fulfilment.

To a lesser degree, other retailers have opened their first stores dedicated to online orders, such as Amazon's ‘Whole Foods’ market in Brooklyn, New York which essentially operates as a warehouse, serving an online grocery market which tripled for them year on year in the second half of 2020.

Also referred to as ‘dark stores’ - devoid of customers, this type of fulfilment model, along with the hybrid store / MFC, will characterize the retail industry over the next ten to fifteen years and facilitate best-in-class customer service, if executed well.

What are the benefits of micro-fulfilment centers?

The first and most appealing benefit to retailers is that MFCs have a smaller footprint and can be incorporated into existing buildings or be standalone units; it doesn’t need to be a specially designed building. The average fulfilment center may be 300,000 square feet and an MFC could fit into the corner of a store taking up just 3000 square feet. A smaller space in an inner-city area equals the first significant cost-saving for businesses.

The format of these spaces is largely modular, doesn’t require expensive conveyors and can take a matter of weeks to construct, so the savings can be realized earlier. Moreover, this type of e-fulfilment strategy is scalable in line with online business growth.

MFCs can serve various retail sectors, however, in grocery for example, the stakes are high to be in the first round of those able to provide a better and quicker online shopping experience. It might take an hour for an employee in-store to pick an order and have it ready for dispatch. Moving to micro-fulfilment which combines automation technology for order picking with human intervention for checking and packing, can drastically reduce order processing time. Benefits of this are two-fold in that employees are able to be utilized in other areas, reducing overhead costs and retailers can improve customer experience and retention through quicker order to processing times and decreased wait time for collection. A good example of this would be the rollout of ‘Alphabot’, Walmart’s automated product retrieval system at their Salem supercenter in 2019. Compared to the efficiency of a human processing an order, a robot with AI like this is capable of picking around 60 items every 5 minutes.

Similarly, for home delivery customers, having the fulfilment center closer to them means retailers can provide the delivery service expected, whether that’s one day, same-day or by the hour and those crucial ‘last-mile’ delivery costs are significantly lowered.

Who is investing in micro-fulfilment strategies?

Broadly speaking, grocers have been the main sector to aggressively pursue micro-fulfilment strategies as COVID gave them the push needed to address the disparity between their e-commerce offering and that of their biggest adversaries. Other general retail sectors such as apparel, health and beauty and pharmaceutical are hot on the heels however and now have options as to how they want to progress.

Warehouse automation tech startups such as fabric and dematic offer micro-fulfilment solutions combining world-class equipment, automation software and AI systems, to deliver a staggering throughput from a very small space, as little as 3000 square feet in some cases.

Looking at the growth in e-commerce sales and the cost-savings posed by localized, automated fulfilment, It’s fair to say the entire retail industry will adopt a micro-fulfilment strategy to some extent, whether that be leveraging redundant space in their own properties or opting to lease from third-party co-warehousing and fulfilment suppliers.

What’s the future of Micro-fulfilment space?

The market for micro-fulfilment centers is set to reach 10 billion by 2026. Many of the larger retailers are well on the way with investment into micro-fulfilment and others will need to get on board to get a piece of the rapidly-growing e-commerce market. Retailers will be looking at how they might integrate a fulfilment area into their existing space or find suitable new spaces for MFCs, all while keeping a firm handle on profitability.

Ambitious investors and startups have been buying up previously obsolete industrial buildings fast and with space at a premium, rents are on the increase. With flexibility in the type of building that can accommodate micro-fulfilment, investors will need to be ready to capitalize on opportunities as we finally emerge at the other side of this pandemic. Malls and parking lots may never be used as they were a year ago but we’re all still waiting to see if there will be a ‘new norm’ or a return to the ‘norm’.

Now is the time to act if there’s any chance of riding this wave towards automated service retail. Reach out to explore your options and be kept in-the-loop for upcoming opportunities.

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