Are Micro-Fulfillment Centers The Key To A Frictionless Digital Retail Experience?

Chief Revenue Officer at Trax, a global provider of computer vision-powered in-store execution solutions, analytics and services for retail.

Consumer packaged goods brands and retailers have adapted to a new normal over the past few years in response to a changing consumer landscape and increasingly volatile supply chain. Consumers have also made significant changes to their shopping habits, demonstrating an increased preference for buying day-to-day grocery items online with the expectation of same-day pickup or delivery options. These changes, when combined with a workforce shortage, put further strain on an already fragile retail ecosystem.

One adjustment retailers have made to keep up with the increase in digital traffic is the adoption of micro-fulfillment, “a strategy that places small-scale warehouse facilities in densely populated urban locations closer to the consumer to improve delivery times,” according to Warehouse Anywhere. Many retailers have taken a proactive approach by building on-site micro-fulfillment centers (MFCs) to keep up with online demand without depleting in-store shelves.

The “Warehouse of the Future” is becoming a common buzzword in industry news with discussion about its ability to cure these emerging retail pain points. But is the warehouse of the future a one-size-fits-all solution?

What is the warehouse of the future?

The ability to quickly deliver orders has completely changed how consumers shop and how stores manage their inventory. MFCs provide the agility necessary to keep up with online demand and the ability to be set up in just a few months. Also, automated systems, such as computer vision solutions for inventory monitoring, can be installed without expanding the facility’s footprint. Today, MFCs are serving multiple retail trade classes — including grocery, convenience stores, drug stores, general merchandise and department stores.

Forward-thinking retailers, including Kroger and Walmart, have realized the potential of micro-fulfillment centers, opening several of their own in the last couple of years. As a result of this investment, Kroger can support delivery services in central and south Florida in as little as 30 minutes from ordering. Kroger’s new facilities have also enabled an expansion of their delivery service for the first time in the Northeast.

For Walmart, the building of micro-fulfillment centers has been part of a larger last-mile delivery strategy. The strategy has paid off, with the mega-retailer increasing pickup and delivery capacity by 20% last year, with plans to expand by an additional 35% in 2022.

What are the key drivers pushing retailers to build on-site fulfillment centers?

There are a variety of reasons brands are opting to build micro-fulfillment centers during this tumultuous time for the supply chain. The benefits of these centers help mitigate some of the pain points for customers, as well as increase the speed at which shelves are restocked in-store and online.

For example, MFCs allow retailers to retain data related to online purchases, making them well-suited for the deployment of predictive technologies that can keep in-demand items in stock. Also, by leveraging automation in conjunction with the physical workforce, micro-fulfillment centers help to reduce the time it takes to gather and pack an order, which increases overall productivity and reduces the cost to fill each order.

According to CB Insights, micro-fulfillment can drastically lower overhead costs associated with an order because these centers are typically built in more densely populated urban areas. This makes last-mile delivery more efficient and cost-effective by reducing transportation costs and increasing delivery speeds. In many cases, this is why micro-fulfillment centers are becoming a natural evolution of the supply chain.

Prior to the pandemic, only 4.3% of grocery sales were online, according to Mercatus. It is now estimated online grocery orders will account for 21.5% of total grocery sales by 2025, making e-commerce a driving force for grocers and retailers to invest in “closer-to-home” technology like MFCs.

In general, consumers have become accustomed to a more instantaneous shopping experience. From same-day grocery delivery to same-day buy-online-pick-up-in-store, the ability of grocers and retailers to provide a seamless and speedy shopping trip — with minimal substitutions — is a key deciding factor for many consumers.

Do retailers need to build micro-fulfillment centers to be competitive?

The decision to invest in and build a micro-fulfillment center is just one of many options for addressing the rise in e-commerce and omnichannel shopping. It all boils down to ensuring customers get the products they want when they want them.

While micro-fulfillment can solve some challenges of a changing retail environment, retailers should never underestimate the importance and power of having real-time, accurate data about on-shelf inventory. It is important for grocers and retailers to stay ahead of the curve and adopt automated methods for understanding what’s on the shelves in the store and in the warehouse.

Retailers should be evaluating technology-based solutions like computer vision and artificial intelligence to develop a digital version of the physical store. Doing so informs out-of-stock alerts so that stores can quickly replenish items that are running low.

In turn, consumers are more likely to find everything they need in a single trip without substitutions. In addition, retailers can be in a stronger position to offer a robust e-commerce experience to their customers by avoiding the “substation” problem, which occurs when customers are able to order items that are not on the shelf at the time of the order.

Micro-fulfillment centers may not be a one-size-fits-all solution to the rise in e-grocery, but they do address some of the problems that have emerged over the past few years. The retail ecosystem is ripe for disruption, both inside and outside of the physical store, and retailers need to get on board fast with rapidly evolving technologies to keep pace.

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