Is Whole Foods’ e-grocery business headed down a dark path?

Discussion
Photo: Whole Foods
Sep 03, 2020
Matthew Stern

Amazon.com could be entering a new phase of its e-grocery business as it opens its first dark store dedicated to Whole Foods’ e-grocery fulfillment.

Amazon will be opening the location in Brooklyn, NY, according to USA Today, but will not give the general public access to the facility’s long shelves of products or large grocery coolers, nor will customers be able to pick up from the store directly. Product will be exclusively picked for delivery drivers and some bike delivery people.

While Amazon had been planning the dark store before the novel coronavirus pandemic hit, the crisis has dropped the retailer into the deep end of e-grocery fulfillment.

Being the nation’s biggest destination for online orders — grocery and otherwise — went from being Amazon’s biggest advantage to a major challenge early on in the pandemic. An unprecedented influx of orders for food and other essentials due to panic buying, uncertainty and fears about the safety of physical grocery shopping led to roadblocks for the one-time leader of order fulfillment. At one point in April, Amazon even had to waitlist new online grocery customers.

Is Whole Foods’ e-grocery business headed down a dark path?
Photos: Whole Foods

The logistics challenges extended to Whole Foods as well. Near the peak of the first coronavirus wave in New York, Amazon closed a Whole Foods store in Manhattan to foot traffic and ran it exclusively as a dark store for online fulfillment.

The chain also made other Whole Foods locations in major markets dark or semi-dark, including the Inner Harbor location in Baltimore, which went fully online-only, and the San Francisco SoMa location, which closed to the public after 1 p.m. every day, according to another USA Today report. Grocers like Kroger and Walmart made similar moves, converting some locations to pickup-only.

Amazon has returned four of those six converted Whole Foods locations to normal grocery operations, according to USA Today.

Proponents of dark stores for e-grocery fulfillment tout the model’s advantages over the high distribution costs and long wait times of e-commerce fulfillment through traditional warehouses. They also see advantages in having floor space planned out and exclusively used for online order picking.

In grocery, and especially in perishables, long delivery times can lead to additional problems, such as food spoilage.

DISCUSSION QUESTIONS: What should it signal to retailers that Amazon considers a dedicated dark store to be a good strategic move for Whole Foods? What factors determine if dark stores are the right move for grocers to fulfill e-commerce orders? Will dark stores outlast the pandemic-driven e-grocery boom, and what will their place be?

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"Amazon developing dark stores for grocery should forecast a significant change in the grocery business."

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25 Comments on "Is Whole Foods’ e-grocery business headed down a dark path?"


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David Naumann
BrainTrust
David Naumann
CEO and President, Cogent Creative Consulting
2 months 24 days ago

Innovative grocers were testing dark stores prior to the pandemic as a way to improve the efficiency and profitability of online orders. With the dramatic increase in online grocery orders, dark stores are becoming more attractive. Automation in robotics to pick products in dark stores is also making the decision more compelling. We will see more grocers opening dark or semi-dark stores where it make sense.

Herb Sorensen
BrainTrust

In chapter one of the second edition of “Inside the mind of the Shopper” (2017) there is a section titled “What Does the Ideal Self-Service Retail Store of the Future Look Like?” After noting that “Retailers need to realize that a large portion of their store is already dark in the sense that shoppers make very little use of it,” I laid out a detailed, step by step process for incorporating more explicitly “the dark store” in the store of the future.

Jeff Sward
BrainTrust

I don’t think this is just about perishables. Of course time is a factor in fresh food, but distance is a factor in all deliveries. Grocery margins, and all retail margins, are already slim. It sounds like Amazon is being as surgical as possible in managing the raw costs of implementing deliveries — all deliveries. So yes, get ready for Amazon implementing a brick-and-mortar presence in all sorts of creative avenues.

Suresh Chaganti
BrainTrust

I see this as a continuous process of calibrating to what they need. Clearly the grocery delivery wars have become hotter. It has been rumored that Amazon wanted to buy J.C. Penney to improve last-mile delivery, with those stores operating as micro fulfillment centers. Whole Foods being a grocery store has existing infrastructure for storing and delivering short shelf life products.

Based on the growth objectives they have, this could be a short term solution for them as they build/acquire more dark grocery stores/micro-fulfillment centers. Obviously there is a trade off to temporarily close a thriving location (assuming they were) to use it for warehousing and logistics.

Neil Saunders
BrainTrust

Dark stores are one solution among many in terms of grocery fulfilment, They work well in locations, like urban areas, where there is a high order density. However, in very expensive locations they are not always feasible. They are also costly to run if they are not fully automated. As such, I don’t think dark stores are a panacea for online grocery, they are just one piece in the puzzle.

Bob Amster
BrainTrust

“Expensive locations,” and “high order density” are the key phrases here. Otherwise it is a BOPIS-only building. This is a wait-and-see for me.

Ben Ball
BrainTrust

Look for Amazon to use a similar model — only more akin to a Meijer than a Whole Foods — when it begins to take over abandoned retail mall anchor space for localized distribution centers. Jeff Bezos doesn’t whisper in my ear, but I don’t believe the concept of a traditional Amazon distribution center was ever the vision for that concept. Rather it is an inexpensive way to quickly ramp up localized “mini-DCs” that will focus on FMCG order fulfillment at much lower cost than either the traditional DC or the combination retail store/fulfillment hybrid.

Lisa Goller
BrainTrust

Dark stores signal the rise of micro-fulfillment to boost e-commerce speed, agility and competitiveness.

Grocers with many physical stores could convert locations in dense urban centers into dark stores for flexible fulfillment. Dark stores give consumers prompt, appealing omnichannel options.

As e-commerce surges, dark stores will outlast the pandemic due to fast fulfillment that delights shoppers.

Bethany Allee
BrainTrust

Dark stores work if you have the volume of orders to support them and the capital to bankroll the footprint. Dark stores are key in driving down the fulfillment costs associated with curbside or online orders.

Mark Price
BrainTrust

Amazon developing dark stores for grocery should forecast a significant change in the grocery business. And increasing number of consumers during this pandemic are choosing to have groceries delivered rather than going to the store and facing risk themselves. A dark store allows for more inventory and reduced staffing compared to traditional stores, and in a business with razor-thin margins like grocery this can make a significant difference.

I believe that grocery delivery has “jumped the shark” during the pandemic and many consumers will continue to order online, as they do with most other products. Grocers must be ready to optimize to this challenge in order to be able to succeed.

Richard Hernandez
BrainTrust

Dark stores or micro-fulfillment stores were being tested before the pandemic and it does seem to improve efficiency in online orders. It actually makes sense – so much so that restaurants have also moved to dark restaurants as well since online ordering has also increased in that arena.

Andrew Blatherwick
BrainTrust
Many retailers are looking at dark store picking for online grocery. It has many advantages and is particularly advantageous in the grocery market. The need for speed, particularly when there is large proportion of short life fresh products available, is paramount if you are to deliver quality product to the end consumer. Being close to the consumer is ideal so local fulfillment is the obvious route. Using dark stores rather than trading retail stores for picking of online orders is more efficient, does not get in the way of your retail customers and enables inventory to be forecast and made available specifically for the online business and then laid out in the most efficient manner for picking. This is different from the layout in a retail environment and so better than using traditional retail units. If the volume is there to justify a dark store picking location, then that is the future and way to go. Amazon clearly has the volume to justify this and I expect it will be maintained as COVID-19 recedes, because… Read more »
Gene Detroyer
BrainTrust

At the beginning of the pandemic, Whole Foods’ online ordering and other retailers’ online ordering were a disaster by every measure. Within weeks, Whole Foods closed the Bryant Park store and converted it to a dark store. Within days, all the problems of ordering and delivery disappeared and Whole Foods was the only dependable online place to go.

We can call them dark stores or mini distribution centers. It makes tremendous business and logistical sense. I will ask the question the other way: how can a store that is built for customer shopping, in terms of physical and operational layout, fill online orders? It is a clash of two totally unrelated businesses.

Lee Peterson
BrainTrust

This feels like a bit of ignorance about the Whole Foods brand and what it means to consumers on the part of the parent giant. At least to me and anyone I’ve ever talked to, the Whole Foods in-store experience is one of the last vestiges of terrific retail experience; great service, high quality product, beautiful store design, elegantly staged music, excellent visual merchandising, friendly check out, and on and on. So there’s a disconnect about taking them dark. Amazon delivering Whole Foods product on its own makes much more sense to me. Besides, I’d be careful no matter who you are about where and when to make something consumers really enjoy go away. I believe we’ve had enough of that this year, in spades.

storewanderer
Guest
2 months 23 days ago

It may be a way to reach new customers and take market share from the other conventional grocers.

Whole Foods isn’t what it was before Amazon bought it. Product quality and freshness has suffered.

Oliver Guy
BrainTrust

Dark stores are certainly one way to add capacity, however there are potentially others that involve less capital investment. It won’t work in every case but night-time operations of picking from existing stores could well achieve a similar result.

Joe Skorupa
BrainTrust

Dark stores and ghost kitchens will definitely outlast the pandemic. The concept was experimented with prior to the pandemic in urban locations and the explosion of at-home ordering, thanks to the pandemic, has confirmed there can be ROI in the model. The keys to success will be execution with a lot of automation and customer analytics to predict buying patterns, specifically at the hyper-local level.

Brandon Rael
BrainTrust

Mitigating and getting ahead of the last mile has been a significant challenge and opportunity for the grocery industry. As the COVID-19 pandemic has become the great accelerator of digital commerce, online grocery fulfillment has added a layer of complexity to an already margin-squeezed business.

The average trip to the grocery store, especially to the larger ones, now has almost as many Instacart and store employees shopping as regular customers. This has created congestion in the aisles and added more friction to the grocery shopping experience.

With the increase of digital commerce, Whole Foods/Amazon could get a leg up on the competition by leveraging dark stores that are strictly for fulfillment purposes. Dark stores require far less capital store investments and can serve several local communities. They are here to stay, especially as consumer behaviors have shifted to more digital engagement.

Ken Morris
BrainTrust

Dark stores and more importantly micro-fulfillment centers (MFCs) are the future of grocery. Automated MFCs with robotic technology can pick upwards of 17,000 orders a day, seven days a week, 365 days a year with few workers per shift. Most vendors can deal with ambient, chilled and frozen and do it in a small footprint at a reasonable cost. The question is, do you go with a dark store or a hybrid semi-dark location? I see a future where the hybrid model dominates with the robotic MFC picking ambient, frozen and basic chilled while the customer browses deli, produce, meat, fish and prepared foods to select items requiring more individual taste. This shift in buying habits is here to stay post-pandemic and grocers need to prepare for it now.

Ananda Chakravarty
BrainTrust

Amazon is seeking a better distribution method for groceries – specifically reducing delivery times or lowering logistics costs – or, most likely of all, experimenting to see if dark stores are one way to do either of these. Dark stores have been around for years, and they serve many purposes. For retailers to take advantage of these, they need to evaluate the cost structure of converting, maintaining, and growing dark stores with the benefits of reduced delivery time and lower delivery costs – these will be unique to each store, but may have some nuances across a specific retail chain. Will dark stores last? Yes. Will they be significant? As much as other fulfillment, distribution, and sortation centers. The real question is: How competitive would Amazon’s dark store grocery logistics be against the Walmarts, Targets, and nimble specialty firms dedicated to the task – and can they squeeze out the additional delivery times or costs to make it worthwhile?

Brett Busconi
Guest

The indication of Amazon putting in dark stores is something that should be obvious to other grocers. #1 – the acceleration of online ordering caused by the pandemic is real. #2 – this is not going to be shoved backward, and much of this activity will only continue to grow now that the uninitiated are “in the club.”

Dark stores will have a place moving forward, even after the pandemic-related dust settles. Making the distribution points faster and more efficient is a strong play for those who are here to stay.

Ken Lonyai
BrainTrust
So, so much to say about Whole Foods delivery failures that I just wrote an article about it. Maybe they need dark stores a.k.a. fulfillment centers because the store delivery fulfillment we experience on an ongoing basis is horrible. The latest example: the wrong type of avocados again. Strawberry mush again. Inedible apples. And … packages of ground turkey, opened and partly re-wrapped with food wrap. I called the local store that pulled the merchandise and I was given the shift supervisor to to talk to. When I got the “What do you want me to do about it?” response, I asked him to replace the needed food and send someone over with it — a two-mile trip. He said they can’t do that. In the continued resistance he turned more contentiousness and then said “I’m busy. I have real customers in the store.” The adoption of Whole Foods into the Amazon ecosystem was received by most as the start of the next level of grocery. Instead, it’s at least three steps backward. So let… Read more »
storewanderer
Guest
2 months 23 days ago

Yeah, Whole Foods quality is pretty lousy. The produce department is full of stuff that looks, should we say, over-ripe. Not much different than a marginal conventional like a Safeway but really not acceptable for Whole Foods. I bought “pasture raised” 90/10 ground beef last week; it was full of gristle and really nasty. I could not believe it. I wanted to go return it and get my $8 back but just let it go. I can get 90/10 ground sirloin of an acceptable quality (without gristle in it at least) at Walmart.

Amazon is good at hyping itself and what it does — and Amazon does many good things. Its operation of Whole Foods has not been one of those good things. However, Whole Foods was rather struggling when it was sold to Amazon. So who knows how they would be doing now had they not sold out.

Herb Sorensen
BrainTrust

In fact, Amazon has not exhibited any of their online genius, as in “Selling Like Amazon … in Bricks & Mortar Stores!” – October 25, 2013. Instead, we are still waiting (reasonably,) for the addition of Amazon GO! checkout-free technology to “bricks” retailing. But the development of their “checkout free” continues apace, with Amazon intending to provide it to other 3rd party bricks-and-mortar retailers.

Sterling Hawkins
BrainTrust

Dark stores were around pre-pandemic and I’m sure they’ll be around post-pandemic. Amazon is surprisingly behind in this area as many other grocers already operate dark stores. We haven’t found a silver bullet here, but they can make a lot of sense for higher volume areas and provide a much needed profitability boost (especially if they’re automated). Whether or not they’re a right move for a retailer has to do with 2 things: does the volume justify it and does it align with the core value proposition of the retailer. If the answer is yes on both fronts, what are you waiting for?

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