Friday, June 14, 2024

Shedding light on the Dark Store retail business model

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Almost every aspect of traditional retail has undergone massive transformations in the last few years. The recent rise of online shopping and overnight doorstep delivery options have changed customer expectations, with around 49% of people focusing on product availability well ahead of price and quality factors. It has expedited the need for phygital retail model to stay afloat and substitute gaps in offline footfalls with online interactions.

As a measure to maximize sales and meet orders, retailers are turning to “dark stores” as the last fulfillment centre to move their products to consumers. Dark stores, also called micro-fulfillment centers, are mini warehouses from where orders can be picked up and delivered to customers. It is basically a physical retail space that has been shut down and transformed into a fulfillment centre. The space is not open for in-store shopping, allowing larger space for inventory and quickly fulfilling orders.

Transitioning to dark supply centers

As stay-at-home and social distancing became the normal norm these past years, some brands have forced shutdown stores and transformed them into locations that facilitate order delivery and pickups.

Leading brands like Whole Foods, Walmart, along with many OEM and fashion brands, have already adopted this trend. These dark stores have streamlined the supply chain networks of brands and provided an effective alternative to reduce the strain on the primary fulfillment hubs.

The roots of dark stores originate in the pre-pandemic era, where the target brands use a hybrid approach and send items from the stores to deliver online/e-commerce orders.

The idea is to establish fulfillment centers in populated towns cities to reduce the delivery time and provide a more connected and convenient buying experience. The three most common delivery options provided at a dark store are in-store pickup, curbside pickup, and home delivery.

Variations of dark stores

By 2023, even fulfillment centers will likely undergo transformations as retailers innovate to meet the increasing delivery demands on the fly.

Moving on from simple digitization, brands will need to leverage automation with customer and retail analytics to predict customer preferences and buying patterns, especially at the hyper-local level.

Multiple dark store variations, through delivery, are enabling brands/manufacturers to enter markets where they do not have any physical presence via a method called “ghosting.” They are using shared retail space with other brands to fulfill orders and expand their brand reach.

Establishing permanent dark stores

The rapid growth in online shopping has pushed retailers to find solutions for automation and order fulfillment quickly. With these advanced systems in place, dark stores can become permanent fixtures in the retail ecosystem going forward. Shoppers today are more tech-savvy and have experienced delivery, curbside pickups, and online shopping. Dark stores will help fulfilling this ever-growing need of these digital shoppers.

Another tactic here is that retailers can use parts of their physical stores as fulfillment centers, allowing in-store customers to enter only part of the store or taking products off the shelf to fulfill online orders. This will allow them to boost their reach and engage with alienated customers, and at the same provide a quality experience to the in-store shoppers.

By 2025, India’s consumable market is expected to hit around $1 trillion, while southeast Asia’s online grocery market is projected to reach $11.9 billion – a prime opportunity for brands to amplify the establishment of dark stores.

Challenges ahead

The establishment of dark stores will come with its share of challenges.

  1. Permanent dark stores can disrupt the supply chain and will require better and bigger infrastructure.
  2. Need for technology integration is putting pressure on the existing IT infrastructure of the retailers.
  3. There is intense competition in the market, where even the local mom and pop stores are providing customers with doorstep delivery.
  4. Multiple overnight delivery apps have opened, especially in the grocery and FMCG segments.

To be truly effective, stores need to re-evaluate their entire micro-fulfillment strategy and automate wherever possible.

Going dark is just the start

These dark stores may represent what customers and brands could expect as a feasible, functional modification to the traditional retail store concept. But retailers must also recognize that even the digitally-native customers at some point will want the traditional shopping experience.

The dark store is an untapped retail capability that can help improve consumer experience and provide easier access to essential items. Furthermore, it can support and elevate brand activation strategies locally.

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