Grocery Delivery Goes Small With Micro-Fulfillment Centers

Source article: Jennifer Smith @ wsj.com (Jan. 24, 2020)

The robots are trying to get deeper into your grocery order.

Workers check groceries in bins at a Takeoff Technologies micro-fulfillment center at a Stop & Shop supermarket in Connecticut.

Grocers looking to fill online orders more quickly are testing micro-fulfillment systems that can spit out as many as 4,000 orders a week but can still be housed in the back of stores or in urban areas where space is at a premium. The store owners are evaluating whether automation can help tamp down costs while speeding up deliveries and they are turning to a new set of startups aiming to make e-commerce fulfillment more efficient in a small footprint.

U.S.-Israeli robotics startup Fabric, which builds automated micro-fulfillment centers for retail customers, is starting construction on its first U.S. grocery site this quarter. The project, for a regional grocer in the Southeast that it wouldn’t identify, will be about 10,000 square feet, Fabric Chief Commercial Officer Steve Hornyak said. By contrast, regional distribution centers serving grocery chains typically can be 600,000 square feet or more.

The company expects to have up to six smaller fulfillment centers in various stages of construction for grocery stores in the U.S. this year.

Online orders still account for a fraction of the domestic grocery market, about 3.5% of overall food and beverage sales, according to market researcher Forrester, but sales are rising quickly. Food and beverage is the fastest-growing U.S. e-commerce segment, according to research firm eMarketer, with an estimated $22.63 billion in sales last year and projected to nearly double by 2022, to $40.04 billion.

The growth has food retailers scrambling to retool operations as they take on tasks customers once handled themselves, from picking out groceries to taking them home. The shifts echo broader logistics trends tied to e-commerce, as retailers looking to speed delivery move inventory closer to big population centers and use automation to build more compact distribution operations.

Grocers face big challenges in getting a piece of the growing market, however. The delivery of perishable food products leaves little room for error and low margins in the grocery business leave little to invest in upgrades.

Supermarkets are weighing short-term strategies, such as sending employees through the aisles to pick online orders, against costly investments in large centralized distribution centers that use robotics to cut down on handling and other expenses.

Grocers are weighing whether automated micro-fulfillment centers, such as this one built by Takeoff Technologies at a Stop & Shop supermarket, can help reduce costs and speed deliveries of online orders.

Micro-fulfillment centers provide another, potentially less costly option. Takeoff Technologies Inc.’s 10,000-square-foot systems, for example, cost around $3 million and can be up and running in about four months, said Chief Operating Officer Laura Scott. The centers hold some 15,000 different products and require about a dozen workers to operate, including some manual picking.

“With a $3 million investment, and a supermarket or retailer being able to offer 95% of what their customers are buying and fulfill it 10 times as fast as they can picking in the store, the economics are really good,” Ms. Scott said.

The company has five sites in operation with customers including Albertsons Cos., Wakefern Food Corp. and Koninklijke Ahold Delhaize NV’s Stop & Shop LLC, she said, with more in the works.

The mini sites are part of a broader push toward automation in the grocery sector as online ordering and home delivery have gained traction with customers.

In recent years, established U.S. online grocers such as Ahold Delhaize’s Peapod unit and New York-based FreshDirect LLC have invested heavily in big, highly automated facilities with miles of conveyor belts.

Kroger Co., the largest traditional U.S. grocery chain by revenue, plans to build as many as 20 largely automated warehouses through a partnership with the U.K.’s Ocado Group PLC. Ocado began as an online-only grocer and now also licenses its technology to supermarkets around the world, with agreements to build between 40 to 50 warehouses in countries including the U.S., Japan, France and Canada.

The Kroger facilities are expected to range in size from 20,000 square feet to more than 300,000 square feet.

Ocado Chief Executive Tim Steiner said smaller sites don’t benefit from economies of scale and are better suited for convenience-store type services that offer a smaller array of products at a higher price point.

Although micro-sites have the advantage of being closer to the customer, “the potential savings there in delivery fees are a fraction of the incremental costs of operating it,” Mr. Steiner said. Operating large-scale, heavily automated facilities “means we can get groceries into a customer’s kitchen for less operating costs than our competitors can manage a store.”