Are Dark Stores the Future of Post-Pandemic Grocery?

It’s no secret that the way we live has changed since March, when local and state governments began issuing stay-at-home orders, thanks to COVID-19.

Little did we know that masks would become part of our everyday wardrobes, social distancing would become sociable, normal behavior and that anything involving large crowds, from sporting events to retail stores, would become a thing of the past—at least temporarily.

Enter the concept of a “dark store,” a converted supermarket or former supermarket space converted into an e-commerce warehouse. These stores offer no retail—no cash registers or merchandising—but can meet online demand more efficiently than picked stores. In some cases, they offer a solution for units that might have failed in the first go-round.

Dark stores are one of several options retailers have begun turning to as e-commerce volumes grow beyond what can be efficiently fulfilled from an operating store. The COVID-19 crisis has caused that switch to happen much more suddenly than expected, with sources saying online volumes in 2020 are likely to resemble what was projected for 2023 or 2024. That’s prompted retailers to react quickly, with several making temporary conversions and others reversing decisions to close stores by turning them into operating dark units instead.

One way that Whole Foods Market has responded to COVID-19 is by designating a handful of its urban center locations as online-only stores. Stephanie Ferragut, a spokesperson for the Austin, Texas-based retailer, “only five of our locations have thus far been designated to go online-only.” The online-only locations offer customer pickup as an option but have been set up mainly to serve delivery orders.

Whole Foods’ Bryant Park location in New York was one such store, as is its Chicago location in Lincoln Park next to DePaul University. The grocer, which had delayed the openings of its new East Austin, Texas, and Castle Rock, Colo., stores due to COVID-19, used the locations temporarily as online-only. The stores reopened to the public in late June. Whole Foods’ San Francisco SoMa neighborhood store was also previously closed to in-store shoppers, but has since opened to accommodate customers in-store until 1 p.m. daily, after which it focuses on grocery delivery. Most recently, Whole Foods opened a new warehouse unit in Brooklyn, N.Y.

“Several other Whole Foods Market stores nearby can accommodate in-store shopping,” Ferragut says, adding that despite risks presented by the pandemic, Whole Foods recognizes that many customers still prefer the in-store shopping experience.

After designating two locations as dark stores, Giant Eagle announced in mid-June that it had reopened its Garfield Heights, Ohio, store to in-store shoppers, but will continue to offer curbside pickup between 8 a.m. and 8 p.m. for customers who prefer it.

Climbing the Ladder

Like Whole Foods and Giant Eagle, Stop & Shop has also begun moving to online-only stores on a limited basis.

In May, the Ahold Delhaize subsidiary announced it was reopening its Brockton, Mass., store at 683 Belmont St., and designating it as an online fulfillment and pickup center. That store was designated to close in March but found new life as a fulfillment center, beginning to offer pickups and deliveries out of the unit May 7.

The Quincy, Mass.-based retailer said its facility is equipped to process hundreds more online orders each week, and that its move to reposition the Brockton store has led to the hiring of 50 new permanent employees.

Stop & Shop more recently announced it was adding three new warerooms—mini-warehouses located in expanded back rooms or space adjacent to stores—to a fleet of 21 such units already in its Northeast trading area. That accompanied an expansion of Instacart service from a stable of crowdsourced shoppers who shop from stores.

Warerooms typically comprise 8,000 to 10,000 square feet, with warehouse-style shelving stocking around 8,000 fast-moving SKUs, which are “topped off” with portions of orders—typically temperature-sensitive and fresh items such as deli orders—from stores. Stop & Shop currently picks from 21 warerooms in its Northeast geographies. They typically serve clusters of stores.

Scott DeGraeve, co-founder of the Denver-based e-commerce firm Locai and a former executive with Ahold’s Peapod brand, said workers can pick about 150 units per hour in a wareroom—a rate about 2.5 times more efficient than picking from stores. Speaking in a recent webinar, DeGraeve described warerooms as a first step toward still-more efficient solutions such as larger dark-store conversions or microfulfillment centers retailers can use as demand scales.

“By adding new warerooms, additional locations for pickup and expanding our partnership with Instacart, we’re accelerating our e-commerce capacity,” Stop & Shop President Gordon Reid says. “Creating a seamless omnichannel experience was a strategic priority for us prior to the pandemic, and with the increased demand we’ve seen over the last several months, it’s more important than ever that we deliver improved digital solutions and online fulfillment for our customers.”

Dark stores, DeGraeve added, can accommodate a larger selection—about 16,000 items, including chilled and frozen, by using store equipment or walk-in coolers—and improve pick speeds to about 200 units per hour. Another important distinction between warerooms and larger dark stores is the latter’s ability to use loading docks to accommodate higher inbound and outbound volume.

Still more productive—given the volume—can be microfillment, or robotic mini-warehouses built inside or adjacent to stores. These units are typically 10,000 to 12,000 square feet  and can accommodate about 8,000 items at what DeGraeve called “extremely high” productivity rates seven to 10 times more efficient than store-picked orders.

“This will provide major gains in your productivity but that’s balanced against the cap-ex associated with bringing that on,” he said. “The nice part is that cap-ex continues to get more and more attractive as we see more come online.”

Curt Avallone of Takeoff Technologies, a Waltham, Mass.-based firm, told WGB that Takeoff’s existing microfulfillment center business had grown at least 80% since the start of the pandemic. 

According to New York-based eMarketer, going into 2020 grocery was already the fastest-growing online product category. Online grocery saw growth of 18.2% in the prior year, to $19.89 billion in sales, and there’s evidence that the pandemic may hasten further growth.

Mike Eardley, president and CEO of the International Dairy Deli Bakery Association, Madison, Wisc., thinks the coronavirus will boost consumer adoption of e-commerce as a first option, and sees microfulfillment centers as a bigger part of the picture.

“Given the vast amount of products retailers offer, real-time logistics that sync the amount of product to an online shopping platform can be challenging,” Eardley says. “Companies that have more limited varieties and inventories of products, whether food or nonfood, may find it easier to manage their online shopping programs. Convenience and shopping experience go hand in hand when it comes to customer satisfaction.”

But Eardley says one of the biggest draws of the physical store over e-commerce has been fresh departments. He thinks the special value that in-store bakeries and deli counters provide is difficult to replicate via e-commerce.

“Fresh departments are key components in delivering an engaging in-store experience,” Eardley adds. “The pandemic may have temporarily altered the way many consumers shop. If they’re able to purchase all of their favorite foods through an online platform, many likely will [be] confident purchasing online.”

Supply Chain and Wholesalers Shift Gears

“Everything up to now has been so consumer driven,” says Keith Daniels, a supply chain expert and partner with Carl Marks Advisors, New York. “I think everyone knows by now that online grocery sales have gone through the roof. Online ordering for delivery and pickup is up 40% overall.”

“There has been considerable upheaval in grocery, but mostly for the good,” says Daniels, who adds that the biggest stores, such as Walmart, Kroger and Amazon, have benefited the most because of their own proprietary systems. He says while overall retail declined 22% from February to April, grocery grew about 12% in the same time.

Meanwhile, food distributors that serve the restaurant sector saw much of their sales evaporate overnight. With less volume to move, some of the larger food distributors have partnered with grocery wholesalers, leveraging their own large refrigerated spaces for the benefit of retailers and the retail supply chain.

“We saw early on in the spring a protein shortage, with chicken and pork, for example. There are still stock issues,” Daniels said. “As meat production plants came back online, bigger retailers were able to shore up their distribution, getting their products back to the aisle quicker.”

Daniels adds that there is more automation going on behind the scenes. “We’re seeing some retailers use automated robots and foggers to disinfect the stores overnight,” he says.

Overall, however, Daniels thinks that if dark stores are indeed a temporary phenomenon, as some suggest, the retail industry will continue to transform.

“Everyone is trying to adapt, and we’ve also seen retailers like Whole Foods leverage their stores to become the new fulfillment centers for growing e-commerce,” he says. “But we may also see more grocers move to become like Amazon, using pick to light systems to better fulfill their orders.”