Are Dark Stores the
Future of Retail?

Dark stores are micro-fulfilment centres designed to provide hyper-local deliveries for online and call-in orders. The trend to establish dark stores have picked pace in competitive markets, especially among FMCG, OEM, and grocery brands. However, like other good things, dark stores also come with their fair share of challenges, including the need for technology and retail automation infrastructure.

While the pre-pandemic boom in e-commerce had already pushed retailers to innovate in the space of in-store customer experience, the last two years of the start-and-stop environment have upended the very concept of brick-and-mortar space. Beyond the trend of click-and-collect shopping experiences, buying patterns have been reshaped with the rise of one-day deliveries, local shopping, or curbside pickups. Customers are more demanding than ever with an urgency of instant delivery, diverse product selection, and more competitive pricing.

Around 49% of customers today focus on product availability well ahead of quality and price factors. This has expedited the need among retailers to quickly fulfil orders with intraday rush delivery options. To achieve this, retailers are establishing Dark Stores as the last mile fulfilment centre to deliver their products to consumers effectively.

Dark stores, also known as micro-fulfilment centres, are mini warehouses from where product orders can be picked up and delivered to buyers. It is basically a brick-and-mortar retail space that has been shut down and converted into a warehouse. Retailers can either convert the entire store into a fulfilment store or transform a part of their traditional store into a dark store to fulfil online orders. Dark stores allow larger inventory space and are instrumental in providing quick deliveries in tier-2 and tier-3 cities. It is one of the cleverest retail solutions that have helped retailers expand their reach across markets at reduced costs.

Transitioning to dark stores

As call-in and online orders become common among consumers, some brands have had to shut down their stores due to reduced footfalls. They had to transform their stores into locations that facilitate order procurement, pickup, and delivery. Leading grocery, OEM, and fashion brands have already adopted this trend of retail sales management in the new normal. These dark stores have helped streamline the supply chain and logistics network of brands and also provided a smart alternative to alleviate the strain on primary fulfilment hubs.

However, the concept of dark stores originated in the pre-pandemic era. The target retailers leveraged a hybrid store model and sent items from store inventory to deliver e-commerce/online orders. The idea is to set up fulfilment centres in densely populated markets to reduce the delivery time and orchestrate more connected and convenient buying experiences. The three most common delivery options available at a dark store are in-store pickup, curbside pickups, and home delivery.

Variations of dark supply centres

As the retail industry progresses ahead, even these dark stores will likely undergo transformations as brands innovate to meet the increasing delivery demands on the fly. Moving beyond digitization, retailers today need to deploy automation with retail analytics to predict consumer behaviour and buying patterns, particularly at the hyper-local level. Multiple dark store variations are enabling retailers or vertically integrated brands/OEM manufacturers to establish a presence in uncharted markets via a method called Ghosting. It is a method through which retailers use shared retail space with other brands to fulfil online orders and expand their brand presence

Setting up permanent dark stores

The rapid growth of online shopping and the need for contactless doorstep delivery has accelerated the need among brands to find retail automation solutions for streamlining inventory management, ensuring supply chain transparency, and quick order fulfilment. Retail analytics combined with retail automation will make dark stores a permanent fixture in the retail ecosystem going forward. Shoppers today are digital-savvy and have experienced easy home delivery, curbside pickups, and BOPIS. Therefore, with an uncertain covid-19 situation and the fear of new contagion variants, customers are likely to persist with these shopping habits in the future. Furthermore, many stores may implement social distancing measures and allow entry to customers on an appointment basis or on a number system to keep both in-store promoters and customers safe. Dark stores will help ease all these transitions and protect the health and safety of the retail promoter while also maintaining a steady sales volume.

Another tactic here is that retailers can convert a part of their brick-and-mortar stores as fulfilment centres, allowing in-store customers to shop in only a part of the store and take products off the shelf to deliver call-ins and online orders. This will enable retailers to expand their reach in newer markets and establish a sales-driven relationship with alienated customers while providing quality in-store shopping experiences to their walk-in customers. By 2025, India's consumable market size is projected to hit the $1 trillion mark, while southeast Asia's online grocery market is set to reach $11.9 billion, providing a ripe opportunity for brands to fast-track the establishment of dark stores.

Challenges ahead

Setting up dark stores will come with its fair share of challenges in the future. Permanent dark stores will disrupt the supply chain and will require bigger and better retail automation infrastructure. Successful execution of micro-fulfilment stores will require technology integration putting pressure on the existing IT infrastructure of the brands. Simply expanding the delivery breadths and pickup options will not be sufficient in a hyper-competitive marketplace where even the local mom-and-pop stores offer doorstep contactless delivery. Multiple overnight delivery apps have cropped up in metro cities, particularly in the FMCG and grocery segments. Retailers need to re-evaluate their physical store strategy and deploy retail automation wherever possible.

Going dark is just the beginning

The establishment of dark stores might represent what customers and brands could expect as feasible, functional adjustments to the traditional brick-and-mortar concept. However, retailers will also have to consider the fact that even the most digitally-native customers will want the traditional in-store shopping experience. Dark stores are an untapped retail capability that has the potential to bolster customer experience and provide easier access to essential items. Furthermore, it can also support and enhance brand activation strategies locally.

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