How are Automated Dark Stores Transforming the Retail Industry?

With the upsurge in e-commerce and retailers investing aggressively in a hybrid, multichannel strategy, the need for alternative last-mile logistics and fulfillment channels has risen markedly.

With customers expecting near-instant deliveries, retailers are leveraging a network of location-based micro-fulfillment facilities to fulfill orders quickly and through the most optimal and time-efficient routes. This speedier, more effective delivery channel is what many are calling Q-commerce, or Quick-commerce, something that’s already being used by around 36% of all online shoppers ^[1].

Dark stores: Architecting omni-capable retail

From the very onset of the pandemic, retailers have been adjusting to significant shifts in consumer behavior, the breadth of which ranges from channel preferences to consumption patterns. But the underlying impetus common to all these shifts is the demand for speedier deliveries.

To capture the whitespace created by this fast-multiplying cohort of online shoppers expecting accelerated fulfillment, retailers have pivoted to “dark stores” – small-scale fulfillment sites that are closed to the public but are positioned closer to customers’ homes to allow for faster delivery and pickup.

Another key reason why dark stores are gaining prominence is a worldwide 58% average increase in “hybrid customers” opting for BOPIS (Buy Online Pick up in Store) service in 2021 ^[2]. Further, estimates suggest that by 2024, click-and-collect sales in the US alone are set to reach $140.96 billion ^[3].

Dark stores are designed to simplify fulfilling online orders. Some retailers have turned conventional stores into dark stores that operate as warehouses and distribution centers to meet the increased demand for online ordering.  For instance, a major European retailer set up checkout-free online-only supermarkets, catering exclusively to online orders made with express delivery options. These stores have led to a 22.2% surge in the retailer’s online grocery sales ^[4].

By transforming typical storefronts into dark stores, businesses can use the space as a retail distribution hub or outlet focused solely on serving online customers. Dark stores, like ship-from-store fulfillment, can help retailers improve their overall physical architecture and logical operations to support optimal picking routes and capacity.

AI in dark stores: Winning micro-fulfillment

Dark stores bring warehousing capabilities closer to customers, resulting in lower-cost, high-speed delivery choices. With AI, retailers can develop intelligent, responsive micro-fulfillment centers by automating warehousing processes through RPA and leveraging manual resources in more business-critical roles. In fact, ML-enabled location intelligence is already helping retailers identify strategic locations for dark stores by analyzing movement data, visualizing order heatmaps, and mapping intelligent delivery zones to ensure speedier, cost-efficient fulfillment ^[5].

Here are key capabilities that AI can help retailers unlock through dark stores:

1. Replenishment forecasting

2. Space optimization

3. Personalized fulfillment

4. Enhanced stock visibility

1. Enabling replenishment forecasting with predictive analytics

Maintaining adequate stock is a key objective for retailers. AI-driven predictive systems offer real-time POS integration, while an advanced replenishment system can alert stores of out-of-stock items and replenish them promptly from off-site storage, reducing the risk of lost orders and buying friction. For instance, a global beverage retailer incorporated AI in the inventory management system to fully automate stock planning, movement, restocking, and fulfillment, helping them get an almost 100% accurate projection ^[6].

2. Achieving space optimization with smart shelf management

Recently, an electronics retailer set up an AI-optimized dark store with nearly half the store space freed up to fulfill e-commerce orders only. This made up 43% of their total sales during the holiday quarter, 18% up from the previous year ^[7]. Based on localized demand estimates, an AI-integrated aisle system that uses demand data can optimize shelf space per product, ensuring efficient inbound product flow as well as localized product positioning, ensuring that high-demand items for each shop are easy to pick.

3. Enabling personalized fulfillment with intuitive CDPs

AI-enhanced systems can generate insights from consumer data such as buying habits, brand preferences, and order patterns such as shopper anniversaries, holidays, etc., to alert dark stores to customize their pick and pack processes. Add in the proximity edge that dark stores have, and retailers get to offer value-added services (VAS) ranging from custom labeling to product bundling, contributing towards personalized fulfillment and enhanced delivery experience.

4. Enhancing stock visibility with RFID tagging

Dark stores that leverage Radio Frequency Identification (RFID) tagging enable real-time visibility into inventories, SKUs, and supplies. With RFID, hybrid stores allowing for curb-side services can facilitate faster checkouts, as in the case of an international sports-equipment retailer that combined RFID and scan-and-go technology to enable self-checkouts for customers via kiosks. According to research, retailers that use RFID can expect their top-line sales to increase by up to 5.5% ^[8].

Outlook: A retail beyond channels

A dark store requires real-time and precise inventory visibility, along with a Distributed Order Management (DOM) system that helps make the stock available and accessible at the shortest notice. To achieve this, retailers need to enable it with new capabilities, such as demand sensing, dynamic supply allocation, and capacity planning at each location. However, these capabilities must be underpinned by scalability. Demand sensing, for example, can assist retailers in allocating inventory and routing orders effectively between locations, whereas dynamic supply allocation can automate the pick-pack-ship process within a dark store for efficient and accurate order processing.

Similar to conventional brick-and-mortar stores, the role of dark stores, too will evolve with shifting contexts, such as a potential increase in consumer demand or new logistical service offerings. For retailers, it is critical to get the right ‘Phygital’ infrastructure in place and remain resilient to adapt to changes.