The Pandemic Helped Build the Momentum Behind Micro Fulfillment Centers, but Something Else is Sustaining It
Micro fulfillment is now a key part of retailers’ e-commerce strategy, and related technology investments are appearing on many retailers’ to-do lists. This is why.
It’s hard to believe that shopping – particularly for groceries – will ever return to the way it was pre-COVID-19. It seems almost nostalgic to think about grabbing a shopping cart and spending an hour or so walking the aisles of your favorite store, perhaps tasting samples as you go and piling items into your cart in a leisurely fashion.
In just a year’s time, even people who never considered shopping online before the pandemic have become very adept at the process – opting for delivery, buy online pick up curbside (BOPAC) or picking up in the store (BOPIS) to minimize potential exposure to the virus. And lo and behold, many are discovering they like it…a lot!
When trips are made into essential stores, those trips are now brief and purpose driven – leaving retailers little opportunity to tempt shoppers with impulse purchases. In fact, many people wonder why they ever lugged home 20 packs of paper towels or large bags of dog food in the first place. Surely, it’s easier to have those delivered or simply placed in the back of their SUVs at the curb.
And, as shoppers have become more proficient navigating retailers’ websites and, in many cases, manufacturers’ sites, they have realized they don’t actually need to pick produce or meat themselves. There are others just as competent (and particular) as them. Of course, product shortages in the early days of the pandemic prompted consumers to switch brands and, in many cases, some ugly truths emerged. For example, one brand of ketchup tastes very much like another brand. (So much for brand loyalty!)
So, if 2020 was all about retailers installing plexiglass shields and tape on the floors to help keep staff and shoppers safe, 2021 will be all about dealing with the new realities around e-commerce. At the top of the list? E-commerce fulfillment.
Why More Retailers are “Setting Up Shop” for E-Commerce Operations within Existing Stores
Before the pandemic, e-commerce accounted for 2-3% of overall sales within the grocery sector – even less in rural areas. Coming out of Q4 2020, many retailers are seeing numbers in the high 20% range – some over 30%. And those numbers show no sign of declining, as the length of the pandemic has created a lot of “stickiness” in terms of behavior. What is declining is foot traffic, with the speed and level of change varying by geography. As retailers take a deep breath after closing out 2020, they’re also noticing certain categories of in-store sales showing signs of decline due to the number of shoppers who have moved to subscription and/or direct to consumer (DTC) purchase models.
What does this mean for the future of retail?
At the most fundamental level, the need for fixed point of sale (POS) lanes is dwindling. Though this isn’t necessarily a new revelation – e-commerce has been slowly chipping away at stores’ foot traffic for years – COVID-19 has placed it under the microscope. Why take up valuable real estate with 15 clunky fixed lanes when only four are open most of the time? Why not use that space for a better e-commerce fulfillment approach?
Enter the concept of micro fulfillment centers (MFC) – a technology-driven fulfillment approach that’s rapidly gaining steam globally, but even faster in North America. (We have been laggards in adopting e-commerce when compared to some other geographies, so we’re rushing to catch up with consumer demand.)
Yes, Tearing Down Lanes and Putting Up Walls Can Actually Bring Retailers Closer to Consumers
The MFC concept is relatively simple: wall off an area of an existing store or create space adjacent to the store and install what is essentially a vending machine for grocery fulfillment. The technology is relatively easy to deploy, and there are a number of technology providers already under contract with leading retailers. The advantages are multifold:
- MFCs typically take up less than 20,000 square feet and, given the reduction in selling space facilitated by what I mentioned above, the construction impact is minimal.
- From a capital expenditure (capex) perspective, a MFC is not nearly as expensive as a larger customer fulfillment center. As a result, the desired return on investment (ROI) can be achieved within 2-3 years in many cases as opposed to the 7+ years it could potentially take with a much larger facility and setup.
- From a last-mile perspective, an MFC places product closest to the end customer of any other potential e-commerce fulfillment solution. It doesn’t create extra logistics issues, either. Product is still received at the back of the store – some simply goes directly into the MFC and the rest goes out to the retail sales floor.
- An MFC leverages the investment a retailer has already made in its physical stores and dramatically reduces the need for additional pickers on the store floor. (Even before COVID-19, online order pickers would often irritate customers who were shopping in store. The issue has only been compounded by the uptick in online order volume and same-day turnaround times. Their pick carts are oversized and crowd aisles, and associates tend to rush around the store with little regard for customers because they are up against a deadline and want to please online customers.)
- An MFC creates a great “labor” balance, especially when retailers are facing a human labor shortage. Because faster moving commodity goods are picked in an automated fashion, store associates are freed up to focus on items customers want picked more carefully, such as produce, meat, floral, etc. The vending machine picks and packs the canned and boxed goods while a staff member ensures the customer’s bananas are a little green as requested. Plus, picking is an extremely labor-intensive process, and there are challenges around gaining real efficiencies. For example, it involves a lot of training to standup an effective e-commerce fulfillment workforce. Yet, this is a workforce that has a high turnover rate. Add in the increasing costs of labor – and labor scarcity in general – and MFCs gain favor over an exclusively human-led fulfillment model.
- With all of this in mind, it’s easy to see how MFCs turn the e-commerce model – which is traditionally a labor-intensive, money losing proposition for brick-and-mortar retailers – into a breakeven proposition at a minimum. In many cases, we’re seeing MFCs make e-commerce a margin generator.
There’s another industry dynamic at play here that weighs in favor of a move to the MFC model. As I mentioned at the outset, when e-commerce was less than 2% of a retailer’s business, it was tempting to simply farm the support of fulfillment activities out to a third party. Given all the priorities on retailers’ plates at the time, it simply made sense to outsource to a supply chain partner. Even as online shopping activity exploded in the early months of the pandemic and it began to make more financial sense to bring picking activities in house, retailers were forced to continue their reliance on third parties. The pace was simply accelerating too quickly.
However, as we get deeper into 2021 and further away from that surge demand, retailers who outsourced e-commerce activities are realizing they no longer have direct relationships with their customers. Given the pandemic stretched customer loyalty to its limit, this is not a tenable situation for retailers who want to remain relevant in their communities. Plus, many retailers are eager to bring the fulfillment function inhouse and lessen the reliance on third parties as soon as possible considering these “partners” might become their competition at some point.
In other words, it’s somewhat of a “perfect storm” causing investments in this technology to climb sharply.
In the coming weeks, I’ll take a deeper dive into the technologies powering MFCs and the groundwork retailers should be laying now if this is a fulfillment model they hope to implement in the next year or two. I’ll also talk more about the solution design proving most effective with our customers in both relieving the labor burden and increasing e-commerce capacity in stores to help regain customer loyalty.
In the meantime, if you’d like help assessing the viability of an MFC in your store or want to learn more about the role Zebra’s automation, mobility and scanning solutions are playing in MFCs around the world, don’t hesitate to contact me or other retail team members.
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