E-Commerce and the Evolution of Fulfillment

Big-box retailers are leveraging their stores to fulfill online orders closer to their consumers. These "micro-fulfillment centers" are located in the rear of established stores, with the sole purpose of delivery fulfillment and pickups. In addition to those open for in-person shopping, there are increasing numbers of “dark stores” either transformed or designed to strictly fulfill delivery and sometimes pickup. As online orders rise, from grocery items to home improvement and household goods, these options address the need to reduce delivery windows and increase flexibility in urban and suburban areas. Automation efforts are also rising, from robotic picking and autonomous carts to fully driverless delivery pods.

COVID-19 has altered many long-standing consumer shopping habits, especially for groceries. According to Fabric, U.S. online grocery sales were approximately 5% in early 2020, and now are expected to rise this year to 10-12%, which was originally expected to occur over a four-year period. The company raised US$110 million to expand their micro-fulfillment solutions in the United States. Now that consumers have adapted to online ordering beyond Amazon, it is expected to continue well into the future. This will include direct-to-home deliveries and curbside and in-store pickup, aka Buy Online Pickup in Store (BOPIS).

As many major retailers operate on slim margins, it is essential that fulfilment processes and various types and levels of automation and systems integration are optimized. Location is also a key factor, as the cost of filling orders from more distant but centralized warehouses is about 2x that of more localized retail store micro-fulfillment. JD.com’s platform matches the order with supply that is nearest to the consumer and arranges for delivery using the most efficient route. Additional options, as leveraged by Target and Walmart, include repurposing existing open retail stores, with part of the stores off limits to consumers or utilizing staff to pull orders from the floor. Target stores now fill 80% of the company’s digital sales volume.

Yet another option is seen with companies like the United Kingdom’s online-only robotics supermarket, Ocado. The company recently inked a deal with Kroger in the United States (with a 5% ownership), as well as stores in Canada, Sweden, and France. This level of automation allows 50 items to be picked in a few minutes.

According to Emarsys, U.S. and Canadian e-commerce orders alone grew 129% Year-over-Year (YOY) as of April 21, 2020, taking place across a number of platforms and devices. The repetitive nature of these transactions, driven by regulation and health concerns, is creating an opportunity to quickly develop and test many types of new operations, locations, and automation types. The current environment supports failing fast via trials and gathering insights to transform consumers from experimental to loyal buyers.

In the short and medium term, many consumers will choose to remain at home instead of spending time and income on entertainment, dining, and travel, increasing their spending on home delivery. In the longer term, it is expected that both e-commerce and related micro-fulfillment will continue to expand to serve demand for next and same day delivery, sometimes within hours. Existing micro-fulfillment centers will require footprint flexibility, integration of systems with Machine Learning (ML), and scalable automation/sorting solutions. Five-year strategic plans need to be reviewed for near-term execution that is cost-effective and efficient, including “pop-up” distribution centers.

The changing habits of consumers have shifted and shrunk the supply chain from distribution centers to delivery warehouses to households to one supporting a five mile or less radius. These fully lean on micro-fulfillment centers to enable them. Additionally, further consolidation is expected across the network. Greater network density is expected to raise prices and reduce costs. Early scaling of autonomous delivery form factors will continue to build over the coming years, as regulation and culture adapt. Although the timing and degree of change is not yet clear, the direction of Business-to-Consumer (B2C) points clearly to an evolution of fulfillment.