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The Surprisingly Simple Economics Of eGroceries & Hyperlocal Micro Fullfilment

May 2, 2022
Introduction

Hyperlocal micro fulfillment centers (MFCs) made my Forbes 2018 list of the top five trends that will impact retail over the next few years, and the first half of 2019 looks well on its way to validating this prediction. Numerous retailers have inked deals to pilot the concept, including Sedano’s, Stop & Shop, Albertsons, and ShopRite. Interestingly enough, all have signed up with tech startup Takeoff Technologies. Even Woolworths is getting into the action. Crikey!

What these retailers understand is that now is not the time to pour through reams and reams of research, only to be led back down that all too familiar rabbit hole of internal eGrocery strategy waffling. No, now is the time to act. Now is the time to do, and to use enlightened trial and error to one’s own benefit in the pursuit of a shopping future that makes better business sense.

Amid all the noise, amid all the doom and gloom of the retail grocery apocalypse, the case for hyperlocal micro fulfilment is quite clear:

1. The financial pressures from eGroceries will only intensify

We live in a competitive world. Nothing ever stays status quo. Research suggesting that consumers will pay added fees for grocery delivery, and that the resulting economics of doing so will accommodate manual in-store picking (either by retailers themselves or by third-party services) are just ludicrous.

The competitive pressures of Amazon and Walmart are real. Is it realistic to assume that retailers will be able to compete on price, with service fees and manual picking in-store, given the resources Amazon and Walmart will likely throw at the problem? Consider the fact that Walmart’s and Amazon’s brands are both built around the promise of low prices. Service fees are to them what blood in the water is to sharks.

The plan just cannot stay the same. A retailer cannot expect to generate the same revenue on a more expensive business model. Automation has to come into play because consumers won’t pay an upcharge, and in-store picking will never be as cost effective as in the olden days when customers did all the picking themselves!

2. MFCs save money and improve productivity

Look, it’s just common sense that picking and packing out of a defined location, leveraging warehousing best practices, has to be more efficient and cost effective than manual labor. Especially manual labor that has to work in and around shoppers and deal with far worse inventory integrity. Plus, co-locating warehouses in existing stores also puts retailers closer to their customers from a last-mile standpoint, and thereby also makes localized fulfillment a more advantageous proposition than the option of large centralized warehousing.

Productivity metrics against manual picking are laughable. MFCs can process 145 items per hour -- just ask the average worker to do that either out of the backroom or, worse, off the selling floor. It is not going to happen.

According to Takeoff, the company with the most MFC sites in place, MFCs can now process as many as 4,000 grocery orders per week, and one hyperlocal warehouse can serve as many as 8 to 12 grocery stores within a 20-mile radius. All of which means that any MFC investment is also not a “per store” investment, which brings us to the third and final point of this piece.

3. MFCs are modular in design and have a low cost of experimentation

Even if you are skeptical, even if you don’t buy into the fancy charts or my mellifluous prose, the opportunity cost of experimenting with hyperlocal micro fulfillment is incredibly low when put in the proper context.

An MFC can be built for roughly $3.0 million*, an amount of money that any retailer worth its salt can find. Contrast this figure with a large scale automated fulfillment center that runs, what? $55 million or more? And, is far larger in size and takes more time to build? That’s a high cost of failure, and it also means potentially a hell of a lot of lost time amid intense competition. MFCs, in contrast, can be stood up in under twenty weeks, once the physical space is conditioned, and they can serve multiple stores.

Because MFCs are modular, no MFC design needs to be the same as any other. They can meet demand as it grows. Retailers can place them wherever they need them geographically, now or down the line, making them the smartest long-term play out there.

So stop the madness!

There is no sense in deliberating any further. The expected value of experimentation, given the size of the opportunity and weighted against the economic likelihood of what was just described above, means it makes no sense for retailers to wait any longer to experiment with hyperlocal micro fulfillment.

A new grocery store of the future is coming, but it won’t be a “store” as we know it today. Soon it will be a pickup locker, a doorstep, or even a text messaging platform. It will be wherever and whatever the modern consumer needs it to be, and the retailers that wait, those that fail to experiment now, will be left literally holding the bag, not of the grocery store of future, but of the past.

*Per Takeoff Technologies, capex investment in an MFC is approx. US$3M

Chris Walton, Co-CEO and Editor-in-Chief, Omni Talk

Chris Walton is a leading expert and influencer in omnichannel retailing. An accomplished Senior Executive, Chris has high-level executive experience across nearly every discipline within retail. Currently he is the Co-CEO and Editor-in-Chief of Omni Talk, one of the fastest growing blogs in retail. He is also a Senior Contributor for Forbes, where his work has been read by over 3 million people, a regular keynote speaker, and he sits on the Advisory Boards for Delivery Solutions, Sezzle, and Xenia Retail. Prior to starting Omni Talk, Chris worked for Target, where he was the Vice President of the retailer’s Store of the Future project and also the Vice President of Merchandising for Home Furnishings on Target.com. Chris began his career at Gap, Inc. and holds a BA in Economics and History from Stanford University, and an MBA from the Harvard Business School.

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