Grocers are betting on automated fulfillment centers to make internet orders more profitable amid the rise of online grocery shopping. 

Now that online grocery shopping appears to be here to stay, grocers are building fulfillment centers to make internet orders more profitable.

Jewel-Osco unveiled a micro-fulfillment center complete with grocery-carrying robots in Westmont on Dec. 7 and plans to add another next year in Chicago’s South Loop. Mariano’s parent Kroger plans to open an automated fulfillment center just over the state line in Pleasant Prairie, Wis., in late 2022. Others are opening locations in Chicago neighborhoods where customers can pick up orders but can’t peruse the shelves themselves.

Grocers are turning to micro-fulfillment centers as labor costs soar and customers stick to online ordering habits developed during the pandemic. Currently, grocers fill online orders not from warehouses designed for that purpose, but from regular grocery stores. Store employees fill the orders, jostling with shoppers as they hustle through the aisles. The labor-intensive system makes online order fulfillment more costly than traditional store operations, a big problem in the low-margin grocery business.

Experts say automated micro-fulfillment centers could transform the cost-efficiency of online orders. But building such an operation takes a minimum investment of about $4 million and can cost as much as $100 million.

Jewel-Osco spent $7.6 million on its Westmont center, which can process 1,000 orders for pickup and delivery a day, 10 times more than the adjacent grocery store can handle. Getting to that level will depend in part on customers’ willingness to drive farther to pick up groceries or to spring for third-party delivery. The fulfillment center is built to serve customers within a 20-mile radius, almost five times the store’s 4.5-mile market area.

The 20,000-square-foot facility uses technology from Massachusetts-based Takeoff Technologies. Containers of groceries are shuttled automatically through conveyer belts and elevators to an employee who sorts the goods. Robots scuttle along the floor, lights flashing green, moving completed orders to a staging area. Another employee takes the bags to delivery drivers or to waiting customers who ordered for pickup.

There are labor savings, but the capacity increase was the main motivator for Jewel, says Aimee Constantine, senior director of e-commerce fulfillment optimization. Another benefit: Online orders don’t have to be filled from store shelves.

“We’re able to move most of that picking to the back room,” Constantine says.

Jewel parent Albertsons opened its first micro-fulfillment center in Northern California in 2019. The Westmont location is the company’s fourth and its first at a Jewel.

Customers flocked to online grocery shopping over the course of the pandemic, and grocery retailers that didn’t already offer the service scrambled to catch up. In August 2019, 1.8% of U.S. grocery spending—or $2 billion—was online, according to analytics firm Brick Meets Click. This October, 12.1% of U.S. grocery spending originated online, amounting to $8.1 billion.

As more orders go online, that means more of a grocery store’s volume is being shopped by its employees instead of the customer. That cost pressure is motivating retailers to invest in automation, says David Bishop, partner at Brick Meets Click.

Grocery operators are saying to themselves, "'OK, we ran out there, we got online, we’re getting the sales, that’s great’” Bishop says. "'But now we’re losing money on those orders. Now we have to address that issue.’”

Reducing additional costs associated with online fulfillment is critical in the grocery business, where operating profit margins typically range from 4% to 8%, according to a case study from Foley Retail Consulting. Major grocers are working to eliminate the cost difference between filling online orders and serving customers in stores.

Grocers also face competitive pressure to up their online game. E-commerce giant Amazon gained ground in grocery during the pandemic as many consumers got over their reluctance to let somebody else pick out their avocados. Venture capitalists also noticed and are plowing money into grocery delivery services.

Turkish grocery delivery service Getir launched in Chicago in November, fueled by $1.1 billion in funding. Getir promises 10-minute delivery from “dark stores” operating as fulfillment centers.

Fresh Street, a Chicago-based grocer that caters entirely to online shopping, recently raised $4 million and is also planning to open next year. Its first warehouse will be in Lincolnwood, and customers won’t be allowed to shop its aisles, either. It will be pickup only.

Not every grocery store operator buys into the micro-fulfillment center or dark store model. Foxtrot and Go Grocer fill delivery orders from their Chicago-area stores. Go Grocer co-founder Gregory Stellatos says the 16-store Chicago chain’s customers aren’t keen on getting produce from a building they’re not allowed to enter.

“There is a lot of apprehension for individuals to purchase fresh product from a place they are not familiar with,” he says.

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