With a background in computational biology, Rueben Scriven joined Interact Analysis two years ago and leads the warehouse automation and on-highway commercial vehicle research areas. Rueben has spoken at some of the leading industry events and moderated several panel discussions on the topic of commercial vehicle electrification. He’s also appeared on CNBC to provide insight on the global electric bus market.
With the rapid growth of ecommerce and the consumer demands for next- and same-day delivery options, micro-fulfilment is gaining momentum as a feasible distribution strategy, especially in the US. Emerging as an opposing trend to the recent proliferation of centralised distribution and fulfilment centers, micro-fulfilment is gaining a strong foothold in the grocery market.
In the UK, Ocado uses a centralised fulfilment approach where online grocery orders are consolidated within its centralised Customer Fulfilment Center (CFC) in less then 15 minutes using its HIVE automation technology. Likewise, Tesco has its dotcom centralised fulfilment centers with the most recent generation using goods-to-person automation technology. This works well in the UK and other countries which have a relatively small landmass. In the US, however, it’s more difficult to centralise online grocery operations due to the size of the area in which the fulfilment center must deliver to. Consequently, the majority of online order consolidation is done within the stores themselves.
In-store picking has the logistical benefits of being closer to the customer resulting in lower transportation costs. The downside is that order pickers compete with customers creating congestion and leaving items out-of-stock more frequently. Furthermore, store lay-outs are designed for customers – not pickers – resulting in lower order picking efficiencies.
However, with the demand for online grocery sales expected to grow at a CAGR of 17.8% between 2019 and 2023, it will become increasingly difficult to consolidate orders using an in-store picking approach without wasting significant staffing resources. Furthermore, the growth of third-party online grocery platforms, such as Instacart, is causing additional congestion within brick-and-mortar stores.
A small solution for a big problem
Micro-fulfilment centers, built in the backend of brick-and-mortar stores, combine the automation used in centralised fulfilment centers with the location advantages of being close to the customer. With Amazon rolling out next-day deliveries across its entire US Amazon Prime network and Walmart and Target trialling same-day delivery options, being close to the customer has become more important than ever. Although the market is still in its early stages, we estimate that in 2023 micro-fulfilment centers will account for approximately 20% of the total demand for US grocery warehouse automation in revenue terms.
Who’s Providing the Technology?
In April, 2019, Takeoff Technologies signed a $150m deal with Knapp AG to build 50 micro-fulfilment centers for grocers across the US which will process approximately $1.5b e-commerce sales, according to Lucia Brower, Takeoff’s chief of staff, during a press release at ProMAT earlier this year. Thirteen sites are expected to be built by the end of this year, while the rest will be built in 2020. In the past two years, Woolworths, Wakefern Food Corp, ShopRite, Ahold Delhaize, Albertsons and Sedano’s have all partnered with Takeoff Technologies which holds the first mover advantage.
Fabric (Previously known as CommonSense Robotics)
Israel-based Fabric develops and implements micro-fulfilment automated solutions for grocery stores claiming to enable its partners to fulfil customer orders in under an hour. Unlike Takeoff Technologies, Fabric develops its own automation equipment using an AMR-shuttle hybrid to retrieve items and deliver it to an order picker. In July 2019 the start-up announced it had partnered with one of Tel Aviv’s largest grocers which will see it install an underground micro-fulfilment solution with three separate temperature zones.
In 2018, Walmart announced it had partnered with Alert Innovations which uses its Alpha-bot –an AMR-shuttle hybrid –to fulfil orders in its supercenter in Salem, New Hampshire. Assuming the trial is successful, we could see a larger scale roll out of the technology across the US.
Earlier this month, Dematic announced the commercial viability of its micro-fulfilment solution geared towards advancing retailer’s omni-channel distribution strategies. The solution uses Dematic’s Multi-shuttle system along with ambient, cold and frozen temperature zones. US grocer Meijer is the first company to implement Dematic’s micro-fulfilment solution and the installation has already began.
Chinese Online Grocery Stores
The online grocery market is heating up in China with Meituan’s entrance into the market in March 2019; Alibaba and JD.com had already incorporated grocery into their comprehensive product offerings. Meituan uses physical satellite ‘service stations’ to fulfil online orders, facilitating 30-minute deliveries within a 3km radius of each station. Alibaba uses a similar network of satellite stores and also offers 30-minute deliveries within a 3km radius of its stores. As the competition for online groceries heats up in China, we forecast a growing demand for micro-fulfilment automation solutions and potentially further down the line, end-to-end integration with autonomous last-mile delivery robots.
What will a micro-fulfilment site look like?
A typical micro-fulfilment automated solution would cost approximately $4m to build and have a footprint of approximately 10,000 square-feet housing roughly 15,000 SKUs. Whilst this represents the number of SKUs in a typical Tesco store in the UK, it’s only a quarter of the SKUs found in a Kroger’s in the US. For large stores, such as Kroger’s, slow moving SKUs will likely be picked from within the store. Most micro-fulfilment sites will leverage brick-and-mortar stores, however, greenfield sites in the form of extensions to current real estate may become prevalent.
The level of automation will vary from store to store with some using basic pick- and put-to-light technologies and wearables while others will adopt fully automated solutions. In the case of fully automated micro-fulfilment sites, modularity will be a key factor for the solution. With most grocers embracing e-commerce, their business models will need to be adjusted and adapted on a regular basis and an automated solution will have to be able to cope with this.
Currently, most US grocers use a combination of distribution models for online orders including in-store picking, dark-stores, omni-channel distribution centers and dedicated e-commerce distribution facilities.
However, as more consumers do their grocery shopping online and the convenience arms race between retailers leads to consumers expecting next- and same-day delivery options, US grocers will be forced to move their inventory closer to the customer to minimise transportation costs and reduce delivery times. The business case for micro-fulfilment is clear; the question isn’t whether it will take off, the question is how long it will take.