How Will Micro-Fulfillment Centers Change the Retail Industry?

By January 2, 2020March 30th, 2021No Comments

Micro-fulfillment centers (MFCs) are small warehouses that are compact enough to place almost anywhere, and they are designed to fulfill online orders fast and efficiently, close to where customers live. To satisfy the expanding demand for e-commerce fulfillment, click-and-collect, and home delivery, MFCs seek to transform last-mile delivery logistics so that on-demand e-commerce can become a profitable and scalable business model. 

Consumer Demands 

The modern-day grocery store was developed in 1916 by Clarence Suanders when he launched his grocery chain, Piggly Wiggly. It offered customers a full-service store that displayed items on shelving, with price tags, and available for customers’ inspection. It linked fulfillment and marketing, and the business model has stayed relatively unchanged since that time.  

The definition of a grocery store, however, may be changing from “a place to shop” to “a place of convenience at the right moment within people’s lives.” In fact, four factors are responsible for creating a new normal:  

  • Urbanization. Fifty-four percent of the world’s population live in urban areas, and this number is expected to rise to 68% by 2050.
  • Instant Gratification. Consumers have become increasingly impatient waiting on their stuff to be delivered. They want it now.
  • Access to Anything. Consumers expect online retailers to offer a seemingly unlimited variety of products.
  • Convenience. Consumers  demand a fast and easy ordering process and free delivery. 

Supply Chain Challenges 

In addition to the challenges that evolving consumer demands create, retailers also must contend with evolving challenges in the supply chain: 

  • Lack of Space. Industrial and logistical real estate vacancies are at near record lows.
  • Shortage of Labor. The labor crunch is trending worse every year as  a result of the baby-boom generation aging out of the workforce just as the younger tech-centric generations enter the workforce, uninterested in manual labor.
  • The Need for Speed. Retailers are under pressure to increase click-to-door speed to satisfy the consumer desire for near-immediate delivery. 

In the past, retailers in all categories could differentiate themselves based on the brands they carried, the assortment they offered, and how they priced their products. This is no longer the case. In the new marketplace, speed and convenience have become the fourth pillar of retail differentiation. 

The rise of e-commerce is the result of this drive toward speed and convenience. Retail stores are now brick and mortar as well as virtual.  In many cases, stores are only virtual, marketing is digital, and the entire store is online in the customer’s hand. Retailers are seeking to adapt, and one way they are doing so is embracing MFCs because they offer certain key advantages:

  • Their hyperlocal placement means they are close enough to where shoppers live to dramatically reduce last-mile delivery costs.
  • They require a significantly lower initial investment. Several MFCs can be built for the cost of one huge automated distribution center..
  • They offer retailers the flexibility necessary to make targeted and strategic decisions about its automated e-commerce fulfillment. 

Additionally, MFCs make e-commerce accessible to a broader range of retailers by lowering the major cost barriers: 

  • Lower picking labor costs through automation
  • Lower last-mile costs with hyperlocal placement
  • Lower real-estate costs by condensing into smaller spaces

The Last-Mile Battleground

For retail industries in which profit margins are slim, last-mile logistics have become the battleground for a competitive advantage. MFCs have the potential to shift the entire landscape on this battlefield. By building in dense urban settings where more than half the population lives, retailers can reduce the cost of last-mile delivery by simply shortening ship-to-door distance. Retailers who can lower last-mile related costs will be at a competitive advantage. 

The growth of MFCs does not happen in a vacuum, however, and retailers must consider the impact of other factors such as the expansion of small format urban stores and last-mile delivery by robots. These factors and others have prompted variations on MFCs, such as “dark stores” and converting some space inside store buildings into MFCs. 

Swift Robot in micro-fulfillment centers.

A Competitive Advantage

MFCs change the path of a product.  At the store level, product moves from the warehouse to the store’s backroom, and then to the store floor. Online orders then oftentimes require the product to move from the store floor back to the backroom before it is sent out for delivery. MFCs simplify this path, requiring a product simply to go from the MFC  to the store’s backroom, and then to the customer’s door. Sometimes, the trip to the backroom is unnecessary because the backroom is the MFC. 

Changes are already being seen in the grocery industry. Demand for online ordering and direct-to-consumer grocery delivery have created a shift with grocery store center aisle products. While consumers may still want to select their produce in store, many have realized that significant time can be saved by allowing someone else to shop for pre-packaged goods.  Since 2003 Americans are spending less time shopping. Consumers spent 12 hours per month shopping in 2003, as compared to 10 hours per month in 2018. As a result, grocery stores are shrinking the center of the store and enhancing the experience associated with the perimeter where fresh produce is on display. 

It is only a matter of time when  hyperlocal MFCs will become a foregone conclusion in the operating plans of grocery stores of the future. Centralized fulfillment simply cannot get products to consumers fast enough. New methods for picking, packing, and shipping are essential to maintaining a competitive edge in the shifting market.  Industry experts predict that the principles of MFCs and related automation are most likely to be incorporated directly into local retail stores through on-site micro-warehousing because of the following:

  • Grocery stores are already full of inventory that can be used for e-commerce.
  • Goods-to-person fulfillment automation is more accessible than ever with low-cost mobile picking robots that are more cost-effective and reliable than manual labor.
  • Retailers can reduce last-mile delivery costs. 

While retailers and brands have been built on consistency, name recognition, and loyalty, the marketplace has changed. Consumer expectations and behavior are different and evolving, and they are driving retailers to change and  adapt or be left behind.


Additional Reading

Robots in Retail
Micro-Fulfillment may be coming to a grocery store near you. See how it works.
Robots & Long-Tail Strategy: Growing Your Business Without Adding Labor