Micro-Fulfillment Can Save Retailers From the Online Grocery Money Pit

Unless major grocery brands want to go the way of once-hallowed department stores, they need to adapt to e-commerce quickly. But simply offering online grocery services isn’t enough. 

Try as they might, grocers will only lose more money as online penetration increases, consumers increasingly prefer on-demand fulfillment, and labor costs continue to climb. And whether you try to justify these expenses through cost allocation, or transfer prices, any accounting magic equates to putting lipstick on a pig.

Instead, retailers need to find a way to reduce the cost of fulfillment. The best way to do that is to use micro-fulfillment centers, which are small, automated facilities that retailers can use to quickly fill orders within existing stores or other real estate assets.

The Margin Challenge

Grocers already face the challenge of trying to succeed in a notoriously low-margin business — net profit after taxes sits at only around 1%, according to FMI. So even if a customer spends a few hundred dollars on groceries, the retailer only nets a few dollars. 

E-commerce can compress margins even further and often turns them negative. Typically, a customer does the work themselves of getting to and from the store and spends their own time picking out groceries. Yet if a grocer has to pay an employee to fulfill online grocery orders, they lose over $10 on every order that's delivered, according to Jeffries, which we explore in our new grocery report that we published at Fabric. 

That’s why the rise of e-commerce has hit grocery so hard, and retailers might seem to have a losing hand no matter how they play. Either they:

• Eat the losses, which will only accumulate as the share of online grocery orders increases and as fulfillment must be completed faster.
• Outsource these tasks to a third-party like Instacart, which means the grocer has less control over customer relationships, data, delivery quality, etc.
• Ignore online grocery while competitors like Amazon, Target, and Walmart take market share away.

So how can retailers make online grocery fulfillment profitable — especially as same-day delivery becomes the norm? By reconciling the two opposing forces of location and fulfillment method.

How Micro-Fulfillment Combines the Best of All Worlds

While some grocers are trying to use automation within large, centralized warehouses to make online grocery more cost-efficient and scalable, these facilities generally cannot support two-hour delivery windows or even same-day deliveries, as they are simply located too far away from most customers.

For example, some grocers have decided to build large regional automated fulfillment centers for e-commerce. The main issue with such regional centers is that they are not close enough to customers to meet the same day click to fulfill requirement - and even if they can, it is not cost effective to do so given the magnitude of the last mile for such operations. Plus, these large regional automated warehouses cost tens of millions of dollars and take years to complete. That’s quite the investment and commitment to make in a rapidly changing market. In the new world of click and have to have it now - 2 days is 2 late, next day - no way, today - yes please.

Instead, micro-fulfillment centers provide efficiency through automation to keep costs down, while also being located within existing real estate assets in cities or towns, close to customers. By shrinking down the last mile and still reaping all the benefits of centralized automation, retailers can meet the growing consumer demand for speed and stay profitable. 

In fact, according to a P&L from Jefferies that we share in our new report, micro-fulfillment provides the highest margins—12-16%—of any type of grocery operation. These facilities can also be set up within 100 days, so grocers can quickly start to meet customers’ expectations.

Do you agree that micro-fulfillment combines the best of all worlds by making automation possible in convenient locations? Download the report and please let me know what you think.