• Industrial

The Future of Grocery Fulfillment

By Chris Copenhaver, Ken Reiff, and Ben Conwell

Grocery supply chains are some of the most complex in the industry. Product shelf life, fragility, and temperature requirements present unavoidable challenges within the grocery supply chain. Yet, groceries serve one of the most ubiquitous demands of any supply chain. Everyone needs sustenance, and as a result, these supply chains must meet the demand.

The reality is this vast demand for groceries, along with the many complexities present in servicing this demand, instills caution in grocery distributors who have been hesitant to try new technology and risk disrupting the supply chain. Growing competition within the market is now driving innovations in logistics to answer the demand for direct-to-consumer grocery supply chains.

The competition between online grocery delivery and in-store pick-up is the new game in town. Companies are competing to become the most affordable, reliable, and timely option for customers, while ensuring high quality deliveries that are fresh or sourced locally. Maintaining a sustainable footprint is another consideration, and companies are looking to limit CO2 emissions, reduce driving mileage, and utilize local sources for produce as well.

Competing Delivery Options

One of the newest innovations is the micro-fulfillment center, also known as an MFC, that allows for small fulfillment centers to exist in heavily populated areas, including inside grocery store stock rooms. These automated systems make it possible to pick and pack a grocery order for delivery or pick-up in a matter of minutes. Meijer recently announced the installation of an MFC at one of its retail locations that utilizes technology developed by Dematic.

Another recent development in the grocery industry is the highly-automated online supermarket at scale. British company Ocado is an online-only supermarket that started making deliveries back in 2002. In 2015, the company’s annual sales exceeded $1 billion euros. Early this summer, Ocado announced a partnership with US grocery brand Kroger. The partnership includes a 335,000-square-foot automated grocery facility in Ohio. This is the first of 20 of these warehouses the companies plan to open over the next two years. The planned facilities will house cutting-edge automation and robotics that can assemble an order of 50 items in a matter of minutes. Kroger’s partnership demonstrates another nuance in the world of grocery distribution and fulfillment tactics.

Walmart is working to capitalize on the significant increase in grocery demand its experiencing from customers. Grocery sales have represented more than 55 percent of the retailer’s total sales in recent years, and as a result, the company has tested a variety of grocery innovations. These include free online grocery pickup, unlimited grocery delivery subscriptions, and most recently, InHome grocery delivery, which brings grocery deliveries right to a customer’s refrigerator. For Walmart, its extensive real estate grocery footprint offers a significant advantage for its particular delivery innovations and will continue to provide the infrastructure necessary to test these services.

In response, companies like Amazon are seeking to compete for these customers and recently eliminated delivery fees all together for its AmazonFresh program, making grocery delivery for Prime members free.

What’s Better – MFCs or Online Supermarkets?

MFCs and online supermarket models are two very different supply chain solutions, and each presents a different set of benefits and challenges. While MFCs offer the buy online and pick-up in-store option, rent is often higher for these retail centers. Yet, online supermarkets with lower warehouse rent face the challenge of increased transportation costs due to delivering further distances.

There are several differences between these two fulfillment strategies that make each successful:

Micro-Fulfillment Centers Online Supermarkets
Benefits Benefits
  • BOPIS and delivery services
  • Crowd-sourced last mile
  • Less investment per location
  • Less space needed with ~10,000- square-foot footprints
  • Can further leverage existing retail space
  • Speed of assembly and speed to market
  • Broader inventory assortment
  • Delivery only – product still must travel an additional time
  • Lower rental rates utilizing warehouse space
  • Warehouse could be utilized to quickly replenish stock for retail locations
  • Potential for huge growth once consumers buy-in
  • Grocery delivery could be differentiator from competitors
Drawbacks Drawbacks
  • Limited inventory assortment
  • Higher rental rates utilizing retail space
  • Unproven concept with fragmented technology
  • Large building footprint
  • Higher transportation costs
  • Longer delivery distances and lead times
  • Large investment to get ROI
  • Large cooler/freezer space hard to find or costly to build
  • Online grocery shopping still needs consumer buy-in

The Takeaway

So, which fulfillment structure is better? There isn’t a right answer. Both fulfillment strategies work to benefit consumers in different ways. While some consumers may like to order all groceries online without dealing with the hassle of the grocery store, others prefer to shop at a particular store and even pick out the groceries themselves. Similarly, companies often have different goals and certain infrastructures already in place that better support one model over the other.

As new technology emerges, consumers have only seen the very beginning of what digital grocery shopping can look like. We’ll learn a lot as an industry in the next 5 years, and with more time, we may have a better idea of which model is more effective and efficient in grocery distribution. In the meantime, every option will be tested, and only time will tell which strategy prevails.

 

Chris Copenhaver and Ken Reiff are co-leaders of Cushman & Wakefield’s Food & Beverage Advisory group. They specialize in helping clients navigate the unique challenges faced by the food and beverage sector, including: bakery, vegetable processing, refrigerated distribution, perishable food processing, dairy facilities, milling, meat processing, canning facilities, beverage, confectionery, ready-to-eat, and breweries/distilleries.

Ben Conwell is a Managing Director and Leader of Cushman & Wakefield’s eCommerce Advisory Group. He is an expert in newCommerce, a Cushman & Wakefield initiative that provides seamless, full-service solutions for today’s ever-evolving retail landscape.

Contributors: Tray Anderson,  Bethany Clark, Bryan Jensen (St. Onge Company), and Erin Bruner

  • Industrial

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