Dark Stores Solve for the Fragility of Supply Chains. But Are They Possible for All Retailers?
With COVID-19 restrictions driving a shift to online shopping, shipping and logistics were a nightmare this past holiday shopping season. However, for some retailers, “dark stores” have proven to be a key tactic for combatting the madness.
Dark stores are physical store locations that have been turned into fulfillment centers, taking pressure off the supply chain and helping retailers deliver products to customers in a timely fashion. COVID-19 has highlighted the fragility of supply chains and how even the smallest disruption can trickle down and deteriorate the customer experience. Trade agreements, weather and, of course, strict health and safety protocols can all severely affect delivery times, and many retailers are unwilling to accept this risk for much longer.
In fact, major players like Whole Foods and Macy’s have already implemented a dark store strategy. Dark stores are poised to take a prominent spot in the future of retail, allowing retailers to push the boundaries of delivery and speed — but they have some major downsides to consider as well.
Pushing the Boundaries of Last-Mile Delivery
Dark stores are most beneficial to industries where order timeliness is critical. While food immediately comes to mind, there are strong use cases for pharmacies and apparel as well. Although clothing isn’t an urgent need, dark stores can aid retailers in their efforts to compete with bigger players. Amazon.com and Walmart both offer one-day shipping and have experimented with 30-minute drone delivery.
As evidenced by the popularity and influence of Amazon Prime, customer expectations solidify quickly. Now, waiting longer than two days for a package seems arduous. How soon before one- or two-hour delivery becomes the baseline expectation? Retailers must constantly innovate to match market leaders’ pace of innovation, and dark stores stand as one of the most viable options.
However, before diving into the idea of adopting a dark store strategy, consider where your business is now in terms of logistics capabilities and whether it can realistically cater to shipping expectations set by Amazon. While Amazon-owned Whole Foods constructed entirely new dark stores to serve as massive distribution centers, a more realistic approach is adopting the dark store model in a limited capacity. For example, some retailers simply convert brick-and-mortar stores into micro-fulfillment centers while still operating traditionally.
So You Opened a Dark Store. How Do You Operate Last-Mile Delivery?
Opening a dark store is only the first step. The biggest and perhaps most difficult step is actually operating last-mile delivery.
Amazon has a proprietary shipping operation with a massive air and ground fleet — a feat out of reach for most retailers. For small and midsize retailers especially, there's little chance of building out a last-mile shipping operation without relying on a third party. Many retailers have already done so with success, offering one- or two-hour delivery in partnership with third-party delivery services. For example, in 2020, Best Buy partnered with Instacart to offer same-day delivery.
However, while there are many benefits to these partnerships (most notably, that they allow you to enter the dark store space and keep up with competitors), there are major drawbacks to consider:
- The partnership could cannibalize your customer base. Once customers are comfortable with the third-party delivery service, they might instead go straight to the third-party app to buy the product rather than visiting your stores, apps or web properties.
- You could lose control of the customer experience — and data. Relying on a third party to handle transactions and delivery means you could lose out on valuable customer data and promotional advertising dollars.
- You could give competitors an advantage. You could not only lose out on data, but also hand it over to a competitor. For example, Target not only works with Shipt as a last-mile delivery solution, but also owns it. Therefore, Target owns the data of those competitors that use Shipt.
Dark stores could soon become a core retail strategy solving for the fragility of supply chains. However, the concept is far from perfect, and for small and midsize retailers, there are many factors to consider before investing in a dark store. However, with hybrid options like micro-fulfillment centers in current brick-and-mortar locations, there's potential for retailers of any size to adopt the model and reap the benefits.
Tom McFadyen is the CEO of McFadyen Digital, a global digital commerce agency with a 30-year history of e-commerce and marketplace innovation for more some of the world's top brands.
