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The Future of Dark Stores

After traditional retail was turned upside down during the peak of the Covid-19 pandemic, more and more retail brands have changed locations to become "dark stores". 2020 was all about adaptation, followed by 2021's innovation, which meant that the retail industry had to make a shift from physical locations to virtual worlds for their customers. In this blog, we discuss what dark stores are, the benefits they bring and whether it's shift is becoming permanent.

Whilst the boom in e-commerce has prompted physical stores to innovate in the customer experience space, the pandemic has since further accentuated this trend. Beyond the emergence of click and collect experiences, consumer patterns have since been reshaped with the rise of local shopping and concepts such as 'instant' delivery. Consumers are constantly looking for more efficient delivery times, more diverse products, and more competitive prices over 'traditional' retailers.

It goes without saying that demand for food delivery has seen a steep rise during the last few years. In fact, McKinsey now estimates the global food delivery market to be worth over $150bn - the main contribution due to the rise in delivery kitchens, otherwise known as "ghost kitchens". Delivery kitchens exist to only cook for delivery, rather than offering indoor dining - there are many dotted around most European cities.

The need for convenient home delivery has fuelled further hospitality innovation, with the rise of dark stores or food storage centres hidden in traditional storefronts. These support a massive wave of on-demand grocery delivery startups, some even promising your order to be delivered to your door within minutes.

What is a dark store?

With the rise in e-commerce and also a decline of in-store purchases due to Covid-19, the pandemic occasioned a surge in e-commerce growth that now has many different businesses re-evaluating their use of retail spaces.

Dark stores do use physical outlets, however, these spaces are used as e-commerce warehouses, distribution centres, and micro-fulfilment hubs. Dark stores typically get their name from "being dark" - to put it simply, closed to the public as they're only used to fulfil online orders.

These stores are a lot more common within the grocery and whole food sectors, but they are becoming increasingly prevalent in fashion, big box retail, and even homeware & furniture industries.

The customer-free, highly automated stores are combining the strengths of online shipping and the convenience of a physical store to be able to provide an optimal customer experience - as all the customer needs to do it place an online order to have it directly delivered to their door, or collect from a pick-up point in as little as 24 hours (sometimes even less).

How Do Dark Stores Work?

A simple requirement of a dark store is that it needs to be located close to the customer base as this helps businesses deliver rapidly, on-demand order fulfilment, and also enables retailers to seamlessly satisfy e-commerce consumer demands - dark stores even operate around the clock to be able to meet the high online demand.

The digitisation and automation are fundamental to the success of dark stores, although, companies that are looking to implement the dark store concept don't need to invest large sums of capital into full automation and AI technology - the fundamental operations of a dark store can be undertaken with a robust inventory software system, along with an efficient team of pickers and a store layout that's optimised for fast picking.

The typical floor plan of a traditional retail store is, and has always been, strategically designed to direct the flow of customers - encouraging a longer time in-store, tempting customers with end of aisle displays and even POS impulse buys. Whereas dark stores differ to retail stores as they're set up solely for functionality and rapid order fulfilment.

Why Are Dark Stores On The Rise?

The global pandemic has definitely intensified the trajectory of e-commerce, causing a dramatic surge in online shopping, contactless transactions, along with on-demand deliveries.

Covid has also highlighted vulnerabilities in the long, and usually complicated supply chains of many different organisations. The closure of a single company or even a small disruption could take its toll on the supply chain which can affect delivery times - shutdowns and shipping disruptions could suspend production on the other side of the world, which will then lead to supply shortages.

As retailers are more reluctant to accept the risk of supply chain disruptions with the pressure for on-demand delivery, dark stores have become a way to help them succeed in the quick commerce (q-commerce) era.

Converting locations into dark stores to help reduce costs, boost supply chains, whilst supporting online shopping has been an effective option for retail stores since before the pandemic even started. Many chains have tested the concept, and retailers teamed up with other e-commerce brands to help customer demands - grocery delivery and online sales were already on the rise before the pandemic.

To try and make the most out of this behavioural shift, many retailers have started to change store operations to make them work as a distribution hub. With big brands closing their locations permanently, rightsizing and converting into dark stores, it's inevitable that in-store is going to join online as one.

Ensuring It's Profitable

Starting with existing demand, map out the current online order demand that is being fulfilled by existing stores, highlight areas where there's plenty of demand to shift out existing stores before considering opening a dark store.

While some larger organisations are converting their existing space into dark store distribution centres, this is most likely not going to be a viable option for smaller SMEs. It's best to seek out locations in nearby industrial locations that offer lower rents and provide better access for delivery vehicles with easy dispatch.

The key considerations to ensure profitability on your dark store is to select the right product categories and best location. Location should be based on the local demand patterns as this is critical to ensure fast order fulfilment and delivery to your customers - implementing an effective management system is also vital to monitor real-time inventory stock and also manage inventory replenishment in order to avoid stock-outs.

The Benefits

There are many benefits of why a retailer or grocery store would want to create a dark store, and here's why:

  • Order accuracy. The orders are placed on what is actually in the store at any time, so the customer will get exactly what they ordered instead of a replacement that's chosen by a designated shopper.

  • Inventory management. Since items are scanned and inventory records will update as soon as the item is taken off the shelf for an order, the accuracy holds true for both orders and inventory.

  • Reduced number of human workers. When running a dark store, it requires less associates are needed when the checkouts are taken away. Smart dark stores use a combination of human pickers and also robotics.

  • Reduced expenses on design. Dark stores don't need to have sleek designed aisles and end caps of a retail/grocery store. Instead, they can save money by simply having a warehouse and spend the money on automation and technology.

  • Reduced cycle time. Customers will typically want their orders within a day or sooner. Dark stores offer increased speed and efficiency, which reduces the cycle time to the customer receiving their orders.

To put it simply, dark stores may well be an immediate supplement to stores that are currently, or have been overwhelmed by the pandemic-driven surge in demand. However, dark stores appear to be short- rather than long-term solutions to the problems of e-commerce.

In the long run, retailers will experience challenges to operate profitably by serving both physically and digitally shopping customers, it's definitely something that's worth considering as there are plenty of benefits that come along with introducing a dark store for your business.

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