Gaurav Pant
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Mon, August 31, '2020

The Micro-fulfillment Imperative.

Grocers need to solve their digital unprofitability problem.

The Micro-fulfillment Imperative, Blog

Exponential Growth

We’ve seen an unprecedented amount of growth in the Grocery industry - digital sales have grown exponentially from about 2.7% of sales last year to close to 20% now. The majority of this growth has happened in just the last three months! We’ve seen three years’ worth of change in the last three months!

No one really knows where digital grocery sales will stabilize, our model (currently) puts the number at 14.6% which is still a 5x growth over last year. Irrespective of where we net out, it's clear that digital grocery sales will continue to be a part of the ‘new’ consumer behavior.

Unprofitable Growth

This isn’t all good news for Grocers though. While this surge in topline sales has been a shot in the arm in these trying times, all of these digital sales have been unprofitable. To be clear, online grocery delivery is unprofitable. We’ve fielded surveys, conducted interviews, analyzed actual transactional data and all of them paint the same picture. Grocers have to significantly reduce their cost of fulfillment per order for their online business to work.

Micro-fulfillment as an Answer

The current store and labor model isn’t built to support the new challenges of the online business.

The prevalent model is shaky at best, in an already capacity and possibly inventory constrained environment having shoppers and pickers (your own or third parties) compete against each other to pick products is both bad customer experience and an expensive one. Assuming that digital sales don’t go away and shoppers continue to use new delivery modes such as curbside, grocers have to fundamentally alter how they approach the problem.

Which gets us to the problem, and a possible solution. There are multiple dimensions to this, first and foremost is inventory (visibility, accuracy, storage, replenishment). Second is the product integrity, deciding which products can or can’t (eggs!) be fulfilled at scale. Third is the role of the store in digital fulfillment, do we want all our stores to have the capability to fulfill orders? Should we have a dark-store / mini-warehouse or dedicate a large store to do fulfillment? How should all store layouts change to enable this? Fourth is the labor model, this covers picking, customer communication, and software/hardware maintenance. Fifth and final is the technology (cube, shuttle, floor)-- the model you choose is a function of how you are re-imagining your store, the overall fulfillment experience, and of course cost.

Based on your business model and footprint, there are multiple ways you can approach this problem, and there are a number of solutions that can help. Irrespective of what solution you choose to implement, here are three factors to keep in mind when coming close to a decision. First, be prepared for wear and tear and replacing parts of the system, build that into your financial model. Second, continuously leverage data and AI / ML capabilities to improve your overall process. Third, have the ability to plug in and out new systems or data-feeds that can help drive other parts of your supply chain, simply put a modern technology architecture that is open and microservices-based.