'Order to shelf' - What will it take to completely remove warehouses from the back of superstores?

It's a question that I get asked. My stock answer is that Whole Foods in the US has been doing this successfully since 2017 and they've managed to 'claim back' 1000s of sqft of profitable trading floor, but in practice, other than Target, few other retailers have been able to successfully make this work. So why have Whole Foods got it right and others are struggling to get the concept to float?

The answer lies upstream in the supply chain capability to service stores on a more granular level than operationally makes sense for most retailers.

Put simply, the business case doesn't stack up if you'll excuse the pun. Moving the breaking down of cases and 'shelf readying' merchandise further up the supply chain only makes sense if you can unlock a broad end-to-end business case that sees future trading floor expansion as part of the investment and the reality is that clawing back trading space on the fringe of a store only makes sense both when the store is being refurbished/relayed or when the retailer is in rapid estate growth in new geography - neither of which is happening particularly frequently for most big players in the market right now.

But there's also another very large boon. In Whole Foods’ recent Q4 earnings call, executives noted the technology was responsible for a 9% reduction in store-level inventories.

Apply this through the supply chain and this element of the business case can easily be worth more than the complex 'additional selling' topic.

Greenfield distribution opportunities

Having said all this, the same logic applies to the supply chain as it does to stores, and, if the business isn't in rapid growth or entering a new geography you're unlikely to have the opportunity to open a greenfield logistics facility and invest in the automation to achieve the granular level of picking. More likely you will be thinking about how to extend the life of what you have right now.

If you're a logistics executive and you're are at the stage where you're contemplating investment in a new facility then you absolutely should be working with your store stakeholders to find ways to incorporate both of these concepts into your investment case as it will help support your requests for capital investment far more than savings in rent and improvements in productivity but there is also another way.

Combining online capability investments with local store replenishment

Most grocers are still in a state of rapid growth online, and whilst growth as been volatile for the last 4 years we are seeing increasing needs for investment in new warehouse automation to support eCom supply chains. The technology often invested in to support eCom is highly likely to also support 'Order to shelf' capabilities for stores, and the good news is that stores can take deliveries at times when customers don't want them, the two operating models work well side by side and help optimize the operation.

Selecting automation that does both tasks

In practice putting this kind of operating model together needs some careful design and is well beyond the capability of many popular automated systems in the grocery online such as 'Autostore type' of 3D storage and picking solutions. The technical reason for this is that the order line quantities sizes for the store replenishment are significantly higher than e-commerce and this works against you when you need to 'dig' to retrieve slower-moving SKUs. 3D technology works well when demand falls on a typical Pareto curve, but can't deliver the sheer horsepower of a ASRS shuttle system which wins out right when it comes to high volume of mixed order types, and dealing with uncertainty over future volumes.

In summary, most retailers continue to struggle with the economics of pushing 'shelf-ready' merchandise further up the supply chain, as the business case doesn't always justify the investment.

This is particularly true when store expansions or new greenfield logistics opportunities are not part of a retailer's strategy. For logistics executives, combining eCommerce investments with in-store replenishment automation is a powerful way to future-proof operations and strengthen capital investment cases.

Further reading

Automation opportunities in North American grocery | McKinsey

Why groceries invest in automated ordering and store replenishment | Grocery Dive

Is order-to-shelf technology the future of retail distribution? | Food Dive