Some retailers are rethinking their micro-fulfillment strategy

The market for micro-fulfillment centers, which expanded during the pandemic as online retail sales demand grew and companies looked for ways to deliver goods to customers faster, is ebbing as merchants hone their ability to use their stores to fill online orders.

An operator of automated micro-fulfillment distribution centers in densely populated areas is cutting its workforce and shifting its business strategy as grocers and retailers shift their focus to automated fulfillment operations inside stores.

The Israel-based robotics startup, which has placed so-called micro-fulfillment centers in New York City and Dallas, is now focusing on selling its warehouse automation platform directly to retailers rather than building more specialized small MFC distribution sites. Chief Executive Avi “Jack” Jacoby said his customers wanted to use its technology in their existing real estate rather than in new facilities.

“They were telling us, ‘We understand that you’re trying to sell service, but what we want is to power your platform, or your system, with our teams on our premises,’” Mr. Jacoby said. “A large retailer, especially a grocery, they do not want anyone between them and the end customer.”

This pivot suggests that the market for micro-fulfillment centers, which expanded during the pandemic as online retail sales demand grew and companies looked for ways to deliver goods to customers faster, is ebbing as merchants hone their ability to use their stores to fill online orders.

Some companies leased vacant retail spaces for use as “dark stores” for fulfillment and delivery, while others opened smaller warehouses near population centers. The sites make heavy use of robotics to make the most efficient use of limited and expensive urban real estate.

The shift makes the niche logistics business the latest to see a business strategy that gained traction during the Covid-19 pandemic lose its momentum as consumers have resumed prepandemic buying habits. That has some retailers rethinking their heavy investments in online fulfillment.

Terry Esper, associate professor of logistics at the Ohio State University’s Fisher College of Business, said retailers have also fine-tuned strategies for fulfilling online orders that aren’t built around adding distribution centers. That includes delivering from stores and the “buy-online, pick-up-in-store” approach.

“There may be even some erosion of that micro-fulfillment model because a lot of consumers have now shown that they’re willing to pick things up from stores,” Dr. Esper said.

Rueben Scriven, senior analyst at research firm Interact Analysis, said more big-box retailers are shifting their attention to store fulfillment. Many retailers and grocers “at least think more of their fulfillment will come out from stores, and many will actually look to shift all of their fulfillment from stores,” Mr. Scriven said.

Mr. Scriven said he expects demand for micro-fulfillment centers to continue, “but perhaps not to the same extent that some people were thinking two to three years ago.”

Micro-fulfillment vendor companies focused on online grocery and retail fulfillment say their business is growing as they work with stores to build more efficient fulfillment operations.

Takeoff Technologies Inc., a micro-fulfillment system provider, expanded its business in the past year, said co-founder and Chief Executive Max Pedró. The company installs automation to help grocers, pharmacies and other stores fill online orders.

It has 23 sites running compared with 17 last year, with another 115 in the pipeline, Mr. Pedró said. Takeoff works with grocers including ShopRite, owned by Wakefern Food Corp., and Albertsons and Safeway, owned by Albertsons Cos.