Dedicated Fulfillment.....The Future for Online Grocers?

As the online grocery space continues to experience unprecedented growth, grocers are and will be looking to technology in order to meet this customer demand with an operating model that supports current and future needs.

Kroger just announced an exclusive strategic alliance with Ocado, the world’s largest dedicated online retailer based in the UK. This partnership signifies a shift in the online grocer space. While grocers have been making vast improvements to offer eCommerce, this partnership supports a new, growing trend. Until now, the primary fulfillment method for grocers has been in-store pick. But, in order to scale and meet the increased demand, this new model has begun to emerge as a future operating solution. One that provides scale and profitability.

Why did Kroger, one of the largest grocers in the county choose Ocado? Simply put, to compete with Amazon & Walmart. The industry stalwarts and online pure plays like Freshdirect and Peapod have demonstrated the benefits of grocery eCommerce fulfillment from dedicated fulfillment centers.. Similarly, Ocado has proven dedicated fulfillment as a profitable eCommerce solution and has further revolutionized the space through the use of robotics technology. They have done this with “automated fulfillment” via a Smart Platform. Together, Kroger and Ocado will operate 20 dedicated facilities in the next 3 years.

Ocado is unique in that it leverages the retailer’s strengths while layering on top of it the technology and operating system needed for future growth. This puts the promise of a consistent omni-channel experience in the hands of the grocer.

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Will this signal a bigger change in the grocery world? We believe yes. According to Forbes, “while in-store pick is an easy way to start, it is highly inefficient from a labor standpoint and difficult to scale - in busy eCommerce stores, pickers can get in the way of shoppers.”

The in-store pick model has a very quick stand-up and can leverage under utilized productivity in the stores. But you run the risk of overcrowding your stores and depleting inventory. This will continue to be a challenge when considering the long-term viability of that model.

However, it doesn’t mean all grocers have to leap into fully automated warehouses.  A first step using manual pick methods in dedicated fulfillment centers, dark stores, or even simple warerooms attached to a store, can provide significant efficiencies in grocer eCommerce fulfillment.  Pick and pack fulfillment applications that leverage the data inherent in the operation of a dedicated fulfillment center can aid operators to batch and route orders through dedicated fulfillment spaces and increase operating efficiency even more.  And further advancements in fulfillment technology combined with automation are improving every day and can be incrementally added to the operation to reduce travel times, reduce order fulfillment times, and shrink the real estate footprint needed for dedicated fulfillment.  The cost barriers to these technologies are also coming down, making it feasible for even a small retailer to have a dedicated fulfillment space.

The quality of the customer experience benefits from dedicated fulfillment given real-time visibility into inventory that greatly increases order accuracy.  Operators are more able to manage the quality of their perishables in this environment as well. Given the speed at which Grocers are rolling out eCommerce, we expect to see the dedicated fulfillment model see rapid growth.  What is clearly going to be important, is for a retailer to have a technology platform and operating model that can support and scale with different fulfillment formats. This capability will allow the retailer to most effectively match customer needs, cost performance and ability to drive to a profitable omni-commerce model.

Danielle Petersen