The Bright Side of ‘Dark Stores’
The term “Dark Stores” may have a rather sinister and almost dystopian ring to it. But it represents one of the many bright ideas and concepts that have helped numerous retail businesses stay afloat during the pandemic.
On-demand delivery is booming, and at the centre of this so-called quick commerce is the dark store – the customer-free store where online orders are packed for fulfilment in as short a time as possible.
If you think it’s just a trend for huge grocery companies, think again: retailers like Nordstrom’s have leapt aboard, and delivery start-ups have raised billions in funding in recent years.
Here we look at how dark stores operate, how they’re profitable and why they’re on the rise – along with four examples to showcase dark stores in action.
DARK STORES: A POST-PANDEMIC RETAIL MODEL HERE TO STAY
When the going gets tough, merchants get creative. We’ve witnessed this in all kinds of contexts the past year, as hotels have turned empty rooms into co-working spaces for the WFH-crowd and restaurants have started offering takeaway menus and home delivery. And along those same lines, many retailers have converted their physical stores into “dark stores.”
Because even though confined indoors, consumers did not stop consuming. Despite incomes going down significantly for many, global shopping volumes overall increased, with the retail sector gaining 35% in market capitalization. And yet, many retail businesses have been struggling. So, what separates the leaders from the laggards?
Well, McKinsey puts it like this: “In many cases, the strengths enabling some companies to surpass their industry peers—tech-forward and asset-light business models propelled by the tailwinds of growing demand—became even more important during the crisis.”
And one of the ways retail stores have successfully adapted their business models to the pandemic has been to “go dark.”
WHAT IS A DARK STORE?
Let’s first define what a dark store is and how it’s different from other hybrid and ecommerce business models. A Dark Store is basically a brick-and-mortar location that has been shut down and turned into a center for fulfillment operations.
These distribution outlets are not open to visitors, allowing more space for store inventory and to fulfill orders quickly and accurately. Dark Stores provide shoppers with resources and options like purchasing products online, same-day delivery, or pickup in-store.
Of course, this concept is not new. Some companies that have long been implementing variations of this process include Whole Foods, Walmart, Target, Bed Bath & Beyond, and most large fashion retailers. But as brick-and-mortar stores have struggled during lockdowns, the number of Dark Stores has grown significantly during the past year.
How do dark stores work?
A basic requirement of a dark store is that it’s located close to the customer base to help businesses deliver rapidly, on-demand order fulfillment and enable retailers to seamlessly satisfy online consumer demand. Dark stores operate around the clock to fulfil online demand.
Digitization and automation are fundamental to the success of dark stores – however, companies looking to implement the dark store concept do not need to invest large sums of capital into full automation and AI technology. The fundamental operations of any dark store can be undertaken with a robust inventory software system (WMS), an efficient team of pickers and a store layout optimized for rapid picking.
The floor plan and layout of a traditional retail or grocery store is strategically designed to direct the flow of customers. Encouraging longer time in-store, tempting customers with end of aisle displays and POS impulse buys. Lighting, music, merchandise displays, and even carefully planned aisle space are all features used to enhance the in-store shopping experience.
A dark store differs to a retail outlet because it is set up solely for functionality and rapid order fulfilment. Basic warehouse racking is used to store inventory stock, which is strategically positioned for ease and speed of picking.
Dark store order processing is much like the steps taken for warehouse order fulfilment, however on a smaller scale:
1. Online orders are received and processed.
2. Orders are electronically sent to the warehouse pickers.
3. Warehouse employees pick orders displayed on a digital screen attached to their shopping trolley.
4. Multiple orders can often be collected simultaneously.
5. Orders are packed and shipped.
In other words, dark stores do not have any of the frills you would find in a traditional, customer-centric retail outlet.
How to ensure a dark store is profitable
Start with existing demand. Map out current online order demand currently being fulfilled by existing stores. Highlight areas where there is enough demand to shift out of existing stores before considering opening a dark store.
While some larger organizations are converting existing space into dark store distribution centers. Seek out locations in nearby industrial or former retail locations that offer lower rents and offer better access for delivery vehicles and easy dispatch.
Selecting the right product categories and the best location are key considerations to ensure the profitability of your dark store. Location should be based on local demand patterns because this is critical to ensure fast order fulfilment and delivery.
Keep the fit-out simple and easy to navigate. Implementing an effective inventory management system is vital to monitor real-time inventory stock and manage inventory replenishment to avoid stock-outs.
Why are dark stores on the rise?
Covid-19 intensified the trajectory of eCommerce with a dramatic surge in online shopping, contactless transactions, and on-demand deliveries.
Covid also highlighted vulnerabilities in the long – and often complicated – global supply chains of many organizations. The closure of a single company or even the smallest disruption could filter along the supply chain to affect delivery times. Shutdowns and shipping disruptions could suspend production on the other side of the world, leading to supply shortages.
As retailers are increasingly more reluctant to accept the risk of supply chain disruptions in the face of increasing pressure for on-demand delivery, dark stores are a way to help them succeed in qCommerce, or the ‘quick commerce’ era.
HOW DOES DARK STORE ORDER FULFILLMENT WORK?
CURBSIDE PICKUP
Curbside pickup usually consists of a dedicated parking space where an employee of the retailer will bring out the order so that the customer doesn’t even have to leave their car. This provides the highest level of safety for customers from a pandemic perspective. But it’s also a very convenient way of shopping that many consumers have come to appreciate this past year.
IN-STORE PICKUP
Another traditional Dark Store option is to have a dedicated pickup area inside the store, often near the front entrance. This means customers won’t have to walk through the whole store to pick up their products. This option is convenient for customers and means no delivery expenses.
HOME DELIVERY
The demand for home delivery has increased dramatically this past year and works very well for Dark Stores. Home delivery means fast and convenient contactless delivery and is perfect for things like groceries and other essentials.
BENEFITS OF THE DARK STORE CONCEPT
There are many benefits of Dark Stores, some of which we’ve listed below:
QUICK AND CONTACT-FREE SHOPPING
The need for social distancing and safety measures have created a need and demand for contact-free shopping. Dark Stores allow consumers to purchase from a brick-and-mortar retail store without having to enter it. They can place their order online and either pick it up or have it shipped. This way, Dark Stores combine online shopping safety with the (almost) instant gratification of getting your product immediately.
IMPROVED DISTRIBUTION AND QUICKER DELIVERY
Converting physical stores into dark stores is a smart way to expedite order fulfillments quicker and more efficiently by including a variety of distribution options and bringing the products physically closer to a specific part of the market.
LARGER AUDIENCE AND BROADER REACH
Turning a brick-and-mortar store into a dark store gives you a much larger potential audience, as your products are now accessible online to everyone, 24/7.
IMPROVED SKU MANAGEMENT
Grocery stores have especially benefited from the Dark Store concept. One of the reasons is that Dark Stores can improve SKU management by focusing on storage and click-and-collect capabilities. In groceries, there are almost as many SKUs as there are customers, so this is a big win for those retailers.
EASIER TO MANAGE PERISHABLE PRODUCTS
Another reason grocery stores thrive with the Dark Store concept is that it addresses the challenge of perishability. Delivering fresh food requires flawless warehouse control and super-efficient order fulfillment to minimize the time between off-the-store-fridge and delivery.
MORE EXTENSIVE RANGE OF PRODUCTS
Since customers can’t come inside Dark Stores, their layout can be optimized and planned for more storage and better picking capabilities. Improved storage capacity means greater product assortment, and faster picking means orders are fulfilled quicker.
IMPROVED INVENTORY CONTROL AND MANAGEMENT
In some cases, one Dark Store can support the retail fulfillment of several other stores in the same geographic region. As these warehouses are customer-free zones, they can better control inventory and manage larger order volumes.
WILL DARK STORES REMAIN RELEVANT AFTER THE PANDEMIC?
Since long before the pandemic, converting physical stores into dark stores has been a way to reduce cost, optimize the supply chain, and leverage online shopping. Many retail chains have benefited from the concept, and sometimes retailers have teamed up with ecommerce merchants to meet customer demand. Grocery delivery and fashion retail were already big on dark stores, even before the pandemic hit.
But in the wake of the global pandemic, other sectors have followed suit. There has been massive growth in the demand for ecommerce, curbside, and instant delivery. Given this evolution, it looks likely that the new Dark Stores are not only here to stay but will continue to evolve as a concept.
Retailers who recognize and adapt to the constant behavioral shifts of the market are the ones who will win the hearts of tomorrow’s customers.
Four dark store case studies
Tesco: the original dark store
The term ‘dark store’ first appeared in 2009 when the UK’s largest supermarket chain Tesco opened their first customer-free supermarkets in Croydon, Surrey, and Kent. At that time Tesco was dispatching around 475,000 online orders per week from their 4,000 existing retail supermarkets.
With the supermarket struggling to cope with high demand from online orders and in-store shoppers having to contend with pickers and personal shoppers, Tesco needed to move their online picking out of its existing stores.
Tesco saw the dark store concept as a more efficient way to deal with the growth in online sales and projected opening one dark store per year. By 2013, Tesco was responsible for over 45% of online deliveries in the UK, had several dark stores and had opened six ‘dotcom’ centers in and around London.
How do Tesco’s dark stores work?
These highly automated dotcom centers are more efficient, provide a better service and a greater range of products. At their Enfield store 20,000 picking trays zip around the warehouse on conveyor belts, stopping at ‘goods to person’ picking stations where staff select products from the shelf and place them into the trays. Unlike other stores, aisles are laid out by picking location, not by category.
Each location has a mix of fast, medium, and slow-moving products, and easy-access phone apps are responsible for 35% of additions to baskets. Frozen is the only food category in the dotcom stores that uses picking trolleys. Once orders are complete, the trays are stored in a high-density storage unit in the centre of the warehouse before being loaded into delivery vans and dispatched to customers throughout the day.
Tesco recently launched Whoosh, a speedy home delivery service that offers store-to-door deliveries within 60 minutes. A third-party delivery partner transports orders by bike, so some weight and size restrictions apply to the service. Orders can be tracked via the Tesco mobile phone app.
In early 2020, Tesco announced they were set to open 25 urban fulfilment centres over the following three years. As competition in the fast last-mile delivery escalates, Tesco is joining forces with 10-minute delivery service Gorillas to offer 2000 items that will be delivered from mini warehouses utilizing available space within existing supermarkets.
Nordstrom: click and collect convenience
Nordstrom is a high-end department store that had 116 retail locations in the US prior to the Covid-19 outbreak. The company was an early adopter of eCommerce, and in 2017 they launched Nordstrom Local, a service hub of convenient, central locations in big cities and dense suburban locations.
These miniature local hubs are smaller than their traditional department stores and don’t sell anything directly. They offer customers a place to make pickups and returns and to take advantage of Nordstrom’s express clothing alterations.
In May 2020 after assessing its hit from the Covid pandemic, Nordstrom announced it would be permanently closing 16 of its department stores. Then in October of 2020 the company expanded its pickup services for online orders for NordstromRack.com, Nordstrom.com, and HauteLook.com
Why is Nordstrom shifting to the dark store model?
Nordstrom’s market strategy is to provide customers with a greater selection of merchandise and quicker deliveries while increasing convenience through their service offerings.
BOPIS (buy online, pick up in-store) appeals to shoppers wanting to collect purchases without having to wait in checkout lines. Customers can pick-up purchases at stores’ collection points, which can be quicker than delivery and means they don’t have to be at home when products arrive.
While the Nordstrom’s focus is mainly on the convenience of click and collect, customers can have products delivered via FedEx, and for international shoppers they offer deliveries via Borderfree, a global e-commerce provider. Borderfree allows customers to shop in their local currency and takes advantage of its speedy, reliable shipping network.
Bolt: from ride-share to food delivery and dark stores
Bolt started out as a ride-share and micro-mobility company under the name Taxify in 2013. The Estonian-based company started with the goal of making urban travel more affordable and more sustainable. Recently the company introduced ‘women only ride’ to connect women passengers with female drivers to improve women’s mobility and address safety concerns.
In late 2019 the company launched Bolt food, moving into the already highly competitive European food delivery market. Bolt’s entry into the dark store business is part of a broader strategy – with dark store operations starting in Estonia before moving into other countries where they have an existing food delivery presence.
What does the future look like for Bolt food delivery?
In a recent fresh round of funding Bolt has raised €600 million to support its expansion into the skyrocketing online grocery delivery industry. This investment brings Bolt’s value to about $4.75 billion. With the leading food delivery businesses competing on 15-minute delivery times, growing its dark store network will help to target and deliver the 15-minute delivery goal for last-mile deliveries.
But massive investment doesn’t guarantee success – many food delivery companies still struggle with profitability even after large investment boosts. But by investing in more dark stores, Bolt is better placed to maintain control over logistics and product quality as they take on the market leaders.
Gorillas: from order to door in 10 minutes
Gorillas is a German delivery company that launched in 2020 with the objective of supplying products to consumers within 10 minutes of them placing their order. The company earns revenue from product sales and delivery fees.
Gorillas currently operates out of hyper-local fulfilment centres or dark stores in several cities in Europe and the UK. It has a total of more than 40 micro-fulfilment centres that carry limited selections across a variety of products and deliver only to specific areas.
Gorillas has become one of the fastest food delivery techs to surpass a $1 billion valuation. One of their key investors was Delivery Hero, a leading company in online food delivery in Europe.
What employment model does Gorillas use?
As a point of difference, Gorillas’ delivery drivers are employed directly by the company as a counter to the gig economy. But they have recently been subject to a series of protests and strikes by workers claiming that Gorillas are breaching contracts, not paying staff accurately and equally, and failing to provide safe equipment.
While the company argues that the strikes are illegal and has terminated the contracts of those found to be involved in industrial action, they have also been accused of violating German labour laws that require workers to have a break between 11-hour shifts. And they have also filled many of the positions left vacant by the sacked employees with gig workers.
Food delivery is set to become a $200 billion industry within the next few years, and competition is growing in correlation to the sector’s expansion. User-friendly apps, range of offerings and tech-enabled driver networks are all key to long-term sustainability. The Gorillas example shows how potential regulations to protect workers and how those workers are treated will also figure into the mix.
KEY TAKEAWAYS
The pandemic has accelerated the shift in consumer behavior that was already happening: a shift from brick-and-mortar stores to online shopping. This has permanently altered the retail landscape, and brands need to adapt to stay relevant and attractive. Closing some locations permanently and turning them into Dark Stores will be the best way forward for many brands.
Benefits of Dark Stores include:
Quick and contact-free shopping
Improved distribution and speedier delivery
Larger audience and broader reach
Improved SKU management
Easier to manage perishable products
Ability to stock a more extensive range of products across a decentralized network
Improved inventory control and management
When the going gets tough, merchants get creative. Ecommerce revenues are projected to reach $6.5 trillion by 2023—with Dark Stores helping drive this new shopping equation.
