Foodboro Memo: The Emergence of Dark Stores

📈 WHY GOING DARK IS A GOOD THING FOR GROCERY STORES

• What are Dark Stores?
• How It Started?
• How’s It Going?
• By the Numbers
• Looking Down the Aisle
• The Road Ahead

👤 WHAT ARE DARK STORES? 

Dark stores may sound like ominous, cold, foreboding places but this concept is one of the most promising developments in connecting the physical and digital world, especially for groceries.

A dark store is essentially a store designed for pickers that is optimized for online ordering and delivering. This means rather than have customers wandering the aisles doing their own shopping, employees (mostly human, although in some cases, robotic) inside the store are retrieving items that customers selected and paid for online (either via a website or an app) and then packing them up for delivery (either through third-party couriers or through pick-up.)

As you can imagine, the layout of a dark store is different from a traditional retail one. There’s no need for merchandising displays or point of sale racks and no “pay for play” on the shelves either. Instead, goods are arranged for picking efficiency with the goal to get the orders fulfilled and out to the customer as quick as humanly (or robotically) possible.

The location of a dark store is often different from a traditional store too. Grocery stores and super market locations are usually chosen based on traffic studies and car accessibility. But since dark stores have no customers, they are usually further out from city centers near their warehouses, yet still close enough to offer same-day delivery, making them ideal for both suburban and urban customers.

Dark stores, if done right, can take all those pesky parts of the grocery store experience—long lines, wasted time walking up and down the aisles, seeing items out of stock, parking constraints—and give customers that frictionless “push button, get food” experience.

📈 BY THE NUMBERS

• Online grocery sales will increase by a whopping 53% this year.
• Ecommerce food and beverage sales are expected to hit $32 billion this year.
• Online grocery sales currently represent just 2 to 4% of the total grocery market—it is expected to grow to 20% of total grocery retail by 2025, according to PitchBook.
• Amazon’s online grocery sales tripled year over year, thanks to the pandemic.
• Instacart, $325 million Series G and an additional $200M Series H in October, putting them at a post-money valuation of $17.7 billion.
• Door Dash, which started as a delivery service from restaurants and has moved on to groceries and more, is about to IPO with a valuation of $32 billion.
• Farmstead App raised $7.9 million in Series A funding.

🧐 HOW IT STARTED?

Coronavirus made everyone online grocery shoppers at one point or another. And the likelihood of us remaining online grocery shoppers long after the vaccine arrives is high. So retailers will need to keep up with this new shopping habit and new demand. Enter dark stores.

Dark stores were actually alive (especially in Asia) long before the c-word came and turned everything upside down. Indeed, last October the bigger retailers were giving these pick and pack spots a whirl.

But the pandemic and its strain on the existing grocery store supply chain and shopping experience pushed retailers to press fast forward on digital optimization, which meant not only turning current customer welcoming stores dark, but also building new dark stores from the ground up.

From a real estate perspective, coronavirus gave retailers the opportunity to turn their physical stores, which had been shutdown by government mandates or by choice, into mini-fulfillment centers thereby keeping them open. Employees can pick and pack much faster from within a dark store when they don’t have actual customers to wrestle for bananas.

Dark stores became a non-negotiable stop gap strategy for grocery chains in 2020.

🛒 HOW’S IT GOING?

• Whole Foods has been optimizing much of the space in its stores for delivery, but they (under parent company, Amazon) also opened a dark store in Brooklyn this fall, with more expected.
• Amazon Fresh, Walmart, Kroger and Stop and Shop have all begun the dark stores process in various forms.
• Meanwhile, FreshDirect has been operating a dark store pretty much since it began and it keeps growing. (Watch this video for how they do it.)
• Even DoorDash, which has offered up last-mile delivery services for retailers, has delved into the dark store game with DashMart, an online store “owned, operated, and curated“ by DoorDash, that’s available for delivery in eight cities with more to come.
• Then there’s Farmstead, a new grocery delivery service and warehouse software program that partners with national distributors and local merchants to get groceries to consumers, all from an app. Growth during the pandemic for their San Francisco-based service has enabled them to raise a good chunk of cash (see below) and begin expanding to new cities in the Bay Area and beyond, like Raleigh, North Carolina. (Learn a little bit more about Farmstead mission from their CEO here.)

👀  LOOKING DOWN THE AISLE

• Pantry basics and other food staples do better in online shopping vs. IRL shopping and that is expected to remain true for dark stores.
• Impulse buys like an energy bar at check-out or a random block of cheese and a wine with an artistic bottle are yet to be replicated digitally.
• AOV is up as the increase in digital shopping has also created an increase in cart size, which is a very interesting opportunity for makers & grocery marketplaces.
• Makers need to prioritize digital packaging. How you appear not only on the merchants online ordering page but also on your social & owned and operated website has never been more important. How your product looks in a shopping app, and not just with photos but videos, demos, recipes, uses and more has never been more important.
• You’ll also need to pay close attention to are your search keywords and your Google Adwords, Walmart keywords, Instacart keywords, etc.
• Monitoring your online reviews within the dark store apps or sites will also be crucial. If you’re already selling on Amazon, you’ll have a leg up on how this process works. But if not, then you’ll need to get up to speed.
• Innovation will bring about ancillary opportunities for makers. One such opp could be curated shopping lists, from personal shoppers or even grocery influencers and celebrities. These (internet) famous people could create a shopping cart for customers filled with their favorite goodies, kind of similar to a musical playlist on Spotify. Then the customer would have their cart fulfilled by a retailer’s dark store nearby.
• Ultimately, you’ll still a product that tastes great and is backed by a strong digital branding strategy.

🛣 THE ROAD AHEAD

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