What is the Dark Store Theory?

Ecommerce business is growing from strength to strength, this in-turn is also creating a highly demanding customer who seeks faster and frequent deliveries without lapses. For companies, this is a significant opportunity and a challenge as to how they can overcome the “last-mile delivery” hurdle. A superior last-mile delivery engages and retains customers and research suggests (reference 1) customers are willing to pay more if they are satisfied with the delivery services.

Introduction

A primary solution to this riddle is “Dark Stores” as the name suggests these are not meant to attract customers rather they function as fulfilment centres for e-commerce companies. At times, they can also function as “click-and-collect” centres where a customer can collect items ordered online. To put it in context, Dark stores are mid-sized warehouses catering to an online business that is meant for storing, sorting and handling orders. This D2C (Direct to Consumer) model is enabling quicker services like same-day delivery.

This model came into existence in the UK, from where it has spread across to the world. Generally, dark stores appear like supermarkets with aisles and shelves containing items, but are not meant for customers and would have workers called ‘pickers’ fulfilling orders displayed on a tablet connected to the shopping trolley.  

Usually, such centres operate from non-descript buildings having good road connections and are located away from main business centres of a city or a town. However, there are fulfilment centres located amidst densely populated regions to shorten delivery times and provide a convenient delivery experience. 

Most popular companies that are known to operate dark stores belong to online grocery, clothing brands and home goods that allow savings on overheads. Moreover, dark stores are inexpensive to operate not only because of the cheap rental but also because of the reduced picking cost.

Understanding the Necessity of a Dark Store

Now that we understand the concept of a Dark store, let’s examine the events that contributed to the culmination and growth of dark stores one by one:  

• Rising Cost Associated with Deliveries: It is no secret that deliveries do eat into the margins of e-commerce players and many of them are absorbing the costs associated with ‘last-mile delivery’. This can be remedied by the implementation of dark stores wherein costs associated with deliveries are known to reduce by 23%.(reference 2) Further, the same study has revealed that if 50% of deliveries are done through dark stores, it could improve profit margins by decent percentage points.
•  Customer’s Brand Loyalty: Today the customer has a range of choices at his disposal for online shopping and he is not tied-down to a brand. This has made the customer shift loyalties to a brand offering better or faster service. This calls for online players to take drastic steps and incorporate measures that improve delivery times and prevents erosion of market share. By nature, dark stores are designed in a manner to facilitate faster picking and improve efficiencies. 
• Unproductive Approach: Traditionally, retail chains operating with an omnichannel approach are known to send ‘pickers’ to one of their retail stores to fulfil an order. But, this has been observed to be unproductive due to the number of shoppers the ‘picker’ has to jostle & physically negotiate with to fulfil an order. This has brought in the need to create exclusive fulfilment centres or dark stores.
•  Conversion of Non-performing Stores: In the West, there is a rise in e-commerce and a gradual slowdown in traditional retail. As mentioned before, online shoppers today demand faster deliveries and better shopping experience. In such a scenario, big traditional retail chains are focussing on ramping up their e-commerce strategy by converting their non-performing stores into online fulfilment centres.

Advantages Offered by Dark Stores

The adoption of e-commerce as an integral part of our life means that many e-commerce companies would be compelled to incorporate dark stores as part of their overall strategy. And it does come with its own advantages as well:

• Additional Capacity: Unlike a traditional retail store, a dark store setup allows picking, packing and delivery of goods with the possibility to accommodate a high volume of online orders.
•  Full-Range Items: Normally a typical dark store would vary anywhere between 100,000 to 200,000 square feet allowing storage of full-range of items. For instance all soup flavours or specialist range products (premium, ethnic, locally sourced).
• Preserves Quality: Groceries come with a short life and it is critical that they are stored and delivered as fresh as possible. A dark store will have separate temperature zones that ensure freshness and with quick delivery, the quality is preserved.
• Improved Picking Accuracy: The scale of operations in a dark store makes it imperative to integrate automation. Hence technology ensures the right goods get scanned and picked and the system will even offer substitutes when the merchandise is out of stock, without leaving it to human discretion.
• Round-the-Clock Functioning: A 24/7 operation schedule ensures that the customers are delivered at the most appropriate of times.
• Centralized Route Planning: For deliveries, the routes for a dark store are centrally planned to ensure maximum deliveries take place within the shortest possible time.
• Possibility for New Goods: At times space and logistics constraints do not allow newly launched products/ goods to be stored in a conventional store, this impediment can be overcome with a dark store.

Challenges Associated with Dark Stores

Dark stores can disrupt the supply chain and new infrastructure would be required.

 Automation associated with dark stores will bring in additional one-time costs.

 Maintenance of the entire physical infrastructure will require collaboration with a full-time facilities management company.

Selecting an ideal location that can accommodate a large vehicle fleet and with good access to a large local pool of labour.

 Creating a layout that optimizes picking efficiency through pallet pick location, rear fill shelving, and grouping of products as slow/ fast/ medium/ bulky.

 Availability of labour to match fluctuating demands can be a factor determining fulfilment of orders in an efficient manner.

Selecting the right technology for automation that complements manual sorting which could be incorporated as and when required.

Constituents going into the Creation of a Dark Store

• Right Layout: Space optimization is a key component to a dark store where there needs to be an ample amount of space to accommodate products in sizable quantities. Improved storage efficiency can be achieved through time and motion studies.
•  Well-Defined SOPs: It is vital to understand the product proposition before a dark store is designed and SOPs play an important role in defining the same. Plus, the nature and size of product assortments can be integrated into the SOPs.
•  Inventory Replenishment Planning: Inventory must be replenished swiftly through an order management system that sends real-time inventory updates to the website. This can prevent lost sales emanating from out-of-stock items. 
• Time & Motion Studies: Such studies can help reduce manpower count and provide efficient output by optimizing internal processes such as order fulfilment time, order accuracy, picking data along with ergonomics. This helps determine the ideal time associated with each internal process.
•  Formulated Guidelines: The store management must be in possession with a set of dos and don’ts that provide guidelines on efficiently running the dark store warehousing operation.   
•  Planograms: With a planogram in place the dark store would be able to place more items on the shelves and address consumer demands better. Overall, it would decrease out-of-stock events and improve revenue and customer satisfaction.
•  IT Integration: The transition from a retail to dark store model does involve carrying over legacy systems and installing new systems such as order management systems (OMS) and auto-replenishment systems (ARS) for procurement. It is best served by engaging with a retail consulting company who can oversee and advise on the process.

Conclusion

Although the idea of a dark store supermarket is yet to fully take off in India, there have been instances of some online players getting started on this idea. The accelerating rate of internet penetration is likely to give 50% of the population (reference 3) in India access to the internet. In such a scenario, the adoption of e-commerce is an emerging reality due to the convenience associated with the practice. This is especially true for online grocery that is picking up pace in the online space. This domain is most likely to see the adoption of dark stores on a wide scale.

Overall with the ‘new normal’ in place and with social distancing norms getting enforced by most retail outlets. More people are opting for online deliveries which increases pressure on existing systems and creation of dark stores at a large scale may be a not-too-distant possibility.

We at YRC are equipped to provide all services pertaining to the setting up of a dark store. Our experts are equipped with experience at providing you with the latest and knowledge and expertise in dark store implementation and management. We are capable of providing services starting with the preparation of SOPs to designing the layout to maintaining a dark store. YRC is providing such services in India and across the world helping online companies to stay updated with all the prevailing best practices in the industry.