Are stores the answer to last-mile delivery?

Discussion
Amazon shoppers fulfill orders on Super Bowl Sunday morning - Photo: RetailWire
Feb 22, 2022

A recent McKinsey study detailed a wide range of inefficiencies from using stores for online fulfillment as well as the risks the method presents to the in-store experience.

Having pickers in aisles, either for online or pickup fulfillment, may create a “warehouse feeling” for regular shoppers, according to the study. Sharing checkout lines may increase wait times for shoppers.

In-store pickers may likewise be slowed working around and waiting at checkout alongside shoppers. Picking efficiency suffers compared to pulling product from an optimized dark store or micro-warehouse.

Costs per order tend to be higher for traditional stores versus dark stores. The greater cost was attributed to the higher wages generally earned by in-store associates vs. warehouse staff and the space constraints caused by in-store consumer traffic that prevent optimized store layouts. The average time order picking at a traditional store can exceed 15 minutes, whereas grocery retailers using a dark store sometimes promise a maximum of ten minutes between consumer purchases and order handover.

Finally, from an inventory standpoint, using dark stores tends to reduce the risk of selling the same product twice from shared online and offline inventory.

Nonetheless, having physical stores supports consumer engagement, brand building and pickup, McKinsey notes. It also provides a significant halo effect on local e-commerce sales. Converting a regular store to a dark store in an area with a direct competitor can lead to consumer churn.

Dark stores optimized for fast order picking and dispatching may be the best option to support high-density urban areas, according to the study authors, but a chain may be able to deliver faster from a store nearby to a customer.

While online delivery is still believed to be largely supported by regional warehouses, ship from store has accelerated due to the pandemic, with Target, Best Buy and Dick’s Sporting Goods among those now fulfilling well more than half of online orders from store inventory.

Brian Cornell, Target’s CEO, said last year of the chain’s omnichannel push, “Our goal was to use our proximity, nearly 1,900 stores within 10 miles of the vast majority of the U.S. consumers to offer the fastest and easiest digital fulfillment in retail.”

DISCUSSION QUESTIONS: How confident are you that stores will prove to be the answer to speedy last-mile fulfillment? Do the benefits offset the risks to the in-store experience, inherent picking inefficiencies and other shortcomings?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"I think that the scale of what will be required for last-mile delivery, when mature, should not be underestimated."
"Yes. Creating a store/warehouse for the last-mile delivery system is nothing but smart and practical."
"Wouldn’t a specialty retailer love to see their store jammed by order pickers?"

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33 Comments on "Are stores the answer to last-mile delivery?"


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Mark Ryski
BrainTrust

As Target and Walmart have proven, leveraging existing physical stores for last-mile fulfillment not only offers customers a good experience, it also doesn’t kill profit margins. It’s true that dark stores can be optimized for fulfillment but, as pointed out in the article, it offers a very cold customer experience. I think that a well functioning in-store fulfillment service provides a much more meaningful customer experience.

This all said, as the article rightly points out, it can be a challenge to deliver a great store experience and act as a fulfillment center. Retailers like Target and Walmart are providing that it’s not only possible, it’s essential.

Dr. Stephen Needel
BrainTrust

One of the few times I’m going to disagree with you, Mark. I just came from shopping at Walmart. An argument broke out between two customers and a picker who was blocking the aisle (because of a support column). The picker finally moved, but this problem is going to continue as pickers become more common (seeing this in my Kroger too). It may be essential – but it may not be possible in stores with a fair amount of traffic in a confined part of the store.

Mark Ryski
BrainTrust

Fair points Steve. There’s no doubt that in-store fulfillment is causing new friction points, like in the good example you shared. To me this comes down to how these conflicts are managed. Fulfillment staff shouldn’t be confrontational with customers — fulfillment staff should work around customers.

Dr. Stephen Needel
BrainTrust

You would think, wouldn’t you? 🙂

Bob Phibbs
BrainTrust

The more that is demanded of the store staff, from navigating around last-mile third-party shoppers to fulfilling their own online orders while the store is open, the more the store becomes little more than a warehouse. Either make it a dark store or a real store but don’t think customers don’t notice. And putting more dark stores in the heart of downtowns is bound to lead to backlash as well.

Melissa Minkow
BrainTrust

All of the issues mentioned can be solved for so that stores are still a useful and efficient last-mile answer to delivery. These are challenges that just need to be ironed out as this model becomes more mature. I still think stores are a great resource for last-mile delivery, as many are too large for current shopping behaviors but are convenient locations to support omnichannel paths to purchase.

Dave Wendland
BrainTrust

You’re so right, Melissa. Last-mile delivery from stores remains in its infancy with many, many kinks to work out. But, I consider it to be an incredible opportunity as operations mature and this becomes an integrated part of their strategy, rather than a mere tactic.

David Naumann
BrainTrust

Good points Melissa! I agree that store stores are the best solution for last mile delivery to minimize shipping costs. The key will be optimizing the picking processes and managing co-existing with shoppers in aisles. One option for deliveries that aren’t time sensitive is to have staff pick orders when the the store is closed at night. As demand for online delivery for larger retailers in sizable markets, we will see more retailers shift to dark stores. This is an evolving process.

Cathy Hotka
BrainTrust

My Amazon Fresh is a good example of this. Customers have to compete with dozens of store associates who are picking multiple orders with five-foot long carts that block access to product.

DeAnn Campbell
BrainTrust

You’re right, Cathy. Grocery may be one exception where store design needs to separate out the picking from the customer shopping.

Dion Kenney
BrainTrust
9 months 5 days ago

Having pickers in aisles is disruptive to the in-store shopping experience. However it is a convenient short-term solution to leveraging the benefit of stores as a component in last-mile fulfillment. Ultimately, it is likely that better and more comprehensive solutions will be incorporated, such as micro-fulfillment centers (MFCs), and “Buy Online Fulfilled by Local Warehouse” or “Fulfilled by Stockroom.” The fixed cost overhead of owning enormous warehouses, thousands of delivery vehicles, and tens of thousands of delivery staff is not feasible for the vast majority of retailers, and ultimately more efficient solutions will be found and implemented.

Jeff Weidauer
BrainTrust

Stores are already crowded with proxy shoppers, making the experience frustrating for those who are shopping for themselves, and that’s at the current level of e-commerce. As online grocery shopping grows, retailers will have to change tactics in response or risk losing their core customers.

Dave Wendland
BrainTrust

I’m actually quite confident that physical store locations are a vital part of last-mile fulfillment.

What makes sense about this solution? 1.) Proximity to consumer population; 2.) Speed and availability (without per customer shipping costs); 3.) Convenience; 4.) Investment (maximizing return on dollars committed to physical locations).

What makes this difficult? 1.) Internal infrastructure and personnel not properly equipped; 2.) Confusion among retail shoppers; 3.) Inventory availability (retailers may need to narrow assortment and focus on key items per category).

Ken Morris
BrainTrust

Why convert a store to a dark store unless it’s not earning its keep? Most shoppers still want the personal experience of shopping in a physical store. Besides, stores are already distribution centers that are closer to the customers. I beg to differ with McKinsey, but this isn’t the first time they have been wrong. Pointing out inefficiencies doesn’t mean it shouldn’t be done. MFCs housed in stores in metro areas make perfect logistics sense just as locating product close to customers makes good financial sense. There are many process solutions to the so-called inefficiencies that are pointed out above. For example, there could be a separate check-out line for in-store pickers, but it would be in the back room, not in the front of house. Otherwise, it will be confusing to shoppers. It will seem unfair, too, as the pickers would be getting a fast pass. Not even Instacart pickers want to go through a register at the front of the store during peak times to check out an online order.

DeAnn Campbell
BrainTrust

The efficiency of last-mile fulfillment is driven as much by inventory accuracy as by location. Without accurate real time tracking there is no way to design a system – in-store or otherwise – to make speedy fulfillment possible and profitable. Once you have good inventory data then a moderate store redesign can enable an environment that supports great customer experience and defuses confusion around employee picking. It is absolutely possible to design an in-store experience where customers and employees can happily co-exist.

Richard J. George, Ph.D.
BrainTrust

The challenge is to find the right balance between pickers and shoppers. As noted, the store tends to get crowded with both pickers and shoppers navigating the aisles. One option would be to limit picker hours to non high-traffic shopper visits. Such an approach may minimize the need for dark stores and still take advantage of potential high margin add-on purchases while customers are picking up the order. Dark stores don’t allow for BOPIS add-on shopping.

Shawn Harris
BrainTrust
Shawn Harris
Board Advisor, Light Line Delivery
9 months 5 days ago

I think that the scale of what will be required for last-mile delivery, when mature, should not be underestimated. The impact on communities and environment will be significant. It’s physics. Logically, stores are obvious choices for leveraging storage capacity, given proximity to demand (service level); however at scale it will not be enough as they truly will have to become warehouses with engineered standards sans the chaos of the consumer. Even the parking lot logistics will have to change to support more delivery vehicles. I don’t believe we are looking at what an optimized end-state will be for last-mile with stores sharing last-mile warehouse and consumer self-serve points-of-sale use cases.

Nicola Kinsella
BrainTrust

At the end of the day, to compete on fast delivery means you need stock positioned closer to the customer. Stores are the logical choice. And there are many opportunities to improve store fulfillment operations and protect the in-store experience, for example:

  • Pick from a back room, rather than the sales floor;
  • Pick during off hours, or low traffic times;
  • Update your sourcing logic to prioritize routing orders to stores with fewest open orders;
  • Optimize your pick strategy to reduce inefficiencies – e.g., pick by location, item, or category.

What’s more, many are totally rethinking their store layouts to reduce sales floor space and make more room for e-commerce fulfillment. And for good reason. Store fulfillment is here to stay.

Neil Saunders
BrainTrust

Stores may be inefficient in some regards, but it is also – in most cases – far more profitable to use stores for delivery. That said, stores are not the only answer. Sensible and savvy retailers will use a multitude of different methods to meet their fulfillment needs. There is not a “one size fits all” approach here.

Jeff Sward
BrainTrust

Speedy last-mile fulfillment needs to be a win/win. Not just a win for the customer and a profit drain for the retailer. A win for the retailer is going to boil down to both time and cost efficiency. Which means local. Which means stores. Brian Cornell’s comment on proximity boils it all down rather nicely. I see pickers working the aisles on every trip I take to the grocery store, and they’ve never given me the slightest obstacle in my mission. Just another shopper. Ditto Target. Delivery was pretty much a non-issue just a couple of years ago. Now it’s a major issue, and it means the retailer has to wring every possible efficiency out of the process. Which means local. Which means stores.

Ananda Chakravarty
BrainTrust

For delivery, warehouses are immensely more efficient, lower cost and can deliver much faster – even when located a bit outside local delivery areas. Dark stores and side by side MFCs can continue to be an added tool for delivery- but retailers will have to keep these as overflow services, not their primary business model for delivery. The costs are significant when it comes to managing a dark store – higher real estate, higher wages, and more significant local impact in the community. An automated dark store costs in the range of $8 million to $10 million. Warehouses with far more capacity can be just above this amount. The lost marketing factor for actual store and customer engagement adds in another intangible amount deterring stores as a final last-mile delivery solution.

Brian Delp
BrainTrust
9 months 5 days ago

Macy’s has been running a “Store to Door” program for many, many years, utilizing store inventory. I think this is one reason why their e-commerce sales and penetration is so strong. I’m not sure if this is the answer to last-mile fulfillment, however it certainly does expand the offering to customers and allow stores to increase their turn. One challenge Macy’s faced with the program, which is worth noting, is how to motivate stores to fulfill this way. Macy’s has sales quotas for associates which did not initially translate with store fulfillment so associates were less motivated to handle a store-to-door sale. Managers have to consider the inventory needed for the in-store shopper and if it is worth dedicating staff towards a sale that requires more time.

Shep Hyken
BrainTrust

If you use a typical retail store for last-mile fulfillment, you have changed the model. Retailers choosing to turn physical stores into distribution centers must be aware of inventory issues, just to start. Staffing is another issue. You need pickers and packers. The big players; Walmart, Target, etc., seem to have perfected the system. I always like to “watch and learn” from those that are doing it right.

Andrew Blatherwick
BrainTrust

The report seems to have taken the worst of store picking and the best of dark store to prove their case. Modern inventory systems can manage the issues of in-store and online ordering, systems can also remove the need for queuing at checkouts for online order picking. As stated by Target, when you have stores and assets within 10 minutes of all U.S. consumers, similar to European retailers like Tesco, Sainsbury’s, etc., then it makes sense to use them for online order picking. It utilizes the asset to its maximum and when well managed does not detract from the customer experience. Consultant modeling does not always reflect the real world.