Hyper-local or hype?

WITH LABOUR shortages across UK warehouses pushing up wages, more and more companies are turning to automation for the first time, or automating more of their operations. Much of the shift towards e-commerce during the pandemic is likely to be permanent and its different order profile, coupled with increasing consumer expectations for fast and flexible delivery, make automation the cost-effective solution. As a result, global warehouse automation revenue is predicted to grow by almost 12% a year over the period 2019-2024.

Hyper-local fulfilment 

The growth in online spending is forcing some structural changes in the retail industry that are proving painful, as retailers grapple with how best to get products to customers as quickly and cost-effectively as possible. One approach gaining some traction here is hyper-local fulfilment, by which is meant positioning inventory close to customers to ensure rapid delivery or pick-up. The proving ground for hyper-local fulfilment is the grocery industry, where start-ups and mature players are taking quite different approaches to its implementation.

Superfast hyper-convenience 

Snapping at the heels of the 'big four' UK supermarkets and the German-owned discounters are a bunch of on-demand, start-up grocers that offer delivery in as little as 10 minutes. If you don't recognise the names of the players in the superfast hyper-convenience sector, as it is known, you probably don't live in a big city. Urban dwellers will be more likely to have heard of brands such as Getir, Dija, Weezy, Gorillas, Zapp and Jiffy. As you might expect, the infrastructure needed to meet this kind of delivery promise, even in densely populated areas, comes at a high price – and consumers are not necessarily willing to pay it. Hence these start-ups are currently operating in the red, rather than the black.

Valet shopping

The traditional bricks-and-mortar supermarket chains are watching the progress of these start-ups with a close eye. The most popular means of meeting e-grocery demand for the big players has so far been in-store picking (a form of hyper-local fulfilment) by dedicated staff, sometimes known as 'valet shoppers'. The advantage is that fulfilment takes place near to the consumer, thereby minimising delivery costs or avoiding them altogether in the case of click-and-collect. There are disadvantages with this approach, however – picking staff are competing with store shoppers in congested aisles, and shops are designed for leisurely browsing rather than rapid order picking. As the volume of online grocery orders has increased, these drawbacks have become more apparent in the form of higher fulfilment costs and lower customer service levels.

Micro-fulfilment centres 

These issues are fuelling interest among supermarket chains in micro-fulfilment centres (MFCs). Grocery retailers having already installed MFCs globally include Walmart, Kroger, Woolworths, Ocado, Carrefour, Albertsons and Ahold Delhaize. In an MFC solution, a small-scale, high-density automated goods-to-person system is installed – either taking some space within or attached to an existing retail store, or in a 'dark' store that serves online customers in a small area. Micro-fulfilment centres enable grocers to combine the efficiency of automation with proximity to the customer. Typically under 10,000 sq ft in size, an MFC is a relatively low investment for state-of-the-art automation and, crucially in such a competitive market, can be constructed in a just a few months.

MFCs improve profitability

In an MFC most of an order is picked by the automated system – with manual picking usually reserved for frozen products and fresh fruit & veg – and then orders are consolidated and delivered by staff. In this way, orders can be ready for delivery or collection in under an hour from order placement. The cost savings are large, a significant benefit in a sector where margins are traditionally wafer-thin. According to research by supply chain consultants, MWPVL International, an online grocery order worth $100 costs $10.78 (excluding delivery) to pick in-store by a valet shopper but only $2.86 to fulfil using a back-of-store MFC solution. This means that an MFC solution has the potential to lift an online grocery business out of operating at a net loss. 

Beyond grocery

Research firm Interact Analysis predicts that the micro-fulfilment market will grow at a compound annual growth rate of around 60% in the period 2020 to 2026, with the grocery sector expected to account for 70-80% of this market. MFCs outside of the grocery sector are currently rare, but not non-existent – the technology has been used in the health and beauty retail sector. However, the grocery sector has some characteristics that make it more suitable for micro-fulfilment and account for it being the testing ground for this logistics concept. Firstly, online grocery customers generally want same-day home delivery or pick-up, compared to a general expectation of next-day or two-day delivery for other goods. Secondly, they typically place a grocery order once or twice a week, much more frequently than orders for general merchandise or clothing. Thirdly, there are dozens of items in a typical e-grocery order, compared to just one or a few in the vast majority of non-grocery e-com orders. This unique order profile strengthens the investment case for micro-fulfilment in the grocery sector in a way that it does not for other retail sectors. However, a pooling of non-grocery retailers' needs in a shared hyper-local solution could be justified. This is already happening – albeit not with MFC technology yet – in the US, where Fillogic is opening 'micro-hubs' within shopping malls to offer a range of logistics services. Micro-fulfilment is not the answer for all types of retail but its scope may well spread beyond the grocery sector in some form.

Choice of MFC technology

Within the grocery sector, it will be interesting to see how many MFCs come on stream and how quickly, as well as the precise technology deployed in them.

Although automation is not the focus for the on-demand grocery start-ups yet, this rapidly growing segment may invest in micro-fulfilment in the future. With a different order profile to the traditional bricks-and-mortar grocers – featuring a lower SKU count, fewer items per order and a very short delivery window – these on-demand firms have greater scope for batch picking. The traditional grocers, on the other hand, require technology designed for discrete picking and high throughputs, such as shuttle storage systems.

Mike Burke, president, AMHSA

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