The newcomers of the new normal logistics: q-commerce and dark stores
Updated: May 27, 2022
Nowadays, shopping online has become part of almost everybody’s routine. During the COVID-19 pandemic, e-commerce sales skyrocketed, compressing ten years of digital penetration in only three months. According to McKinsey&Company, in 2019, the pre-pandemic period, e-commerce represented approximately 25% of total retail sales, while it is now expected to account for about half of all retail revenues by 2024. The peak during the pandemic, in fact, has not been a “peak” - strictly speaking - as it has resulted in a more permanent condition. It effectively kicked-off the online purchase of more and more different products and, among others, of food.
In Italy, e-grocery recorded a +132% growth in 2020 compared to the previous year, bringing it to hit numbers that were expected five years down the road. Moreover, a study conducted by Nielsen projected that online grocery sales will reach $100 billion worldwide and make up approximately 20% of total grocery retail by 2025.
This demand boost has favoured the expansion of the "quick commerce" or "q-commerce", i.e., grocery deliveries with orders fullfilled within 10-20 minutes. The necessity for these super quick deliveries enabled the pop-up of a large number of warehouses located in city centres, known as “dark stores”. Dark store’s logistics stands out from traditional operations, requiring new and innovative methods of planning and delivery.
What is a dark store and how it operates
Even if the term may seem mysterious, dark stores are simply micro-warehouses, similar to classical retail stores with shelves and racks, but without shoppers. From dark stores, online orders are rapidly fulfilled and, because of the central location of these warehouses, are delivered to clients in just few minutes. When a customer order comes through, the assistants in the dark store pick and pack the items immediately, then, the order is shipped either directly to the customer’s address or at a convenient collection point indicated at the moment of the purchase. Sounds simple? Well, it is actually only one part of the complex logistics surrounding dark stores.
The outbound logistics, i.e. the operations we just described, is the most visible one: from dark stores, items have to be shipped and reach the delivery point in a short time and in perfect conditions. But, how do the goods stored in the dark stores get there? The answer is inbound logistics, the more operationally complex aspect of dark stores. Autonomously, using vehicles owned by the company, or with the help of external suppliers, goods are shipped from bigger stores located outside the city centre to the dark stores.
While large regional warehouses may improve service levels and the economics of picking and packing, smaller urban ones can offer a faster response and make much more efficient use of delivery vehicles. So to make everything work out efficiently, inbound logistics needs to coordinate with the orders received by customers, the availability of goods from suppliers and the outbound shipment process. The planning of inbound logistics is not at all simple, especially if done manually.
Benefits and risks for quick-commerce companies
Is the reality of dark stores here to stay? Maybe. The secret of their success is having the same offering as a normal shop but with a much higher service level. From the consumers’ point of view, dark stores allow this shopping experience to be remarkably attractive, it is quick, effortless and contact-free. From the retail companies' point of view, the attractiveness of such a model is less evident.
On the bright side, the intrinsics of the business model allow for:
Larger audience. The products may be potentially available 24/7 to everyone, resulting in more clients and more revenue.
Wider range of products. Compared to a typical retail shop, the space saved from the absence of consumers can be used way more efficiently and to store more and different goods to sell.
Improved inventory management. Due to dark stores' smaller dimensions in comparison to traditional warehouses, it is easier to track inventory levels. Moreover, using both inventory tools and the huge amount of data deriving from consumers’ demands in real time, it is possible to control stock levels much more effectively, avoiding and reducing out-of-stocks and overstocks.
However, managing a quick-commerce business through dark stores is not exactly like a walk in the park. The main challenges to tackle are:
Profitability. Such a high service level requires a lot of staff, hence a q-commerce company needs to make enough gross margin on the single order to cover, among other costs, the one of the personnel involved. This has been a real challenge for these companies as retail typically carries low margins and q-commerce is (in)famous for its small average baskets.
Network design. An optimised network design is fundamental to offer the best service, pricing, and overall experience. Locating warehouses optimally allows companies to reach consumers quickly, lowering costs and increasing customer satisfaction.
Accurate demand forecast. An effective forecast system, able to predict the demand variation due to, e.g., planned promotions or seasonality, is paramount to fulfil consumers demand and maximise profits. Forecasts inform activities such as replenishment, minimising the risk of stock-outs and improving waste management.
Replenishment planning and delivery. Dark stores require flexibility and efficient operations, characteristics that could be put to test by ineffective suppliers or inefficient internal planning. Wrong allocations of orders may seriously affect costs and, hence, profits.
Most notable European q-commerce companies: Gorillas and Getir fighting against the fate that hit some of their US-based counterparts
Dark stores are multiplying in European cities, hundreds are already presented and dozens more have been opening in the past months. Among the others, Gorillas and Getir are two of the several start-ups that are trying to make dark stores a flourishing business.
Getir is a Turkish firm, launched in 2015. It has raised more than $1.8 billion as of March 2022 listing Tiger Global and Sequoia Capital among its investors. 2021 was a year of exponential growth for Getir. After the Covid-19 pandemic, it expanded rapidly in 2021: firstly Britain in January, then the Netherlands in May, Germany and France in June, and it bought the competitor Blok to expand to Spain, Italy, and Portugal in July. One of Getir’s biggest competitors in Europe is Gorillas. This startup was founded in 2020 and has raised a total funding of $1.3 billion, closing the latest series C round in October 2021. Even if so young, Gorillas has the highest number of dark stores in Europe (180, according to Reuters).
Despite this, complications have started to arise for these strong players. In particular, on May 24th 2022, Gorillas has announced the layoff of 300 employees (half of the Berlin HQ workforce) and the pull-out of several markets (Italy, Spain, Denmark and Belgium) in order to lower costs and strengthen its position in its focus markets. After the outbreak of war in Ukraine, together with the general sentiment of being on the verge of yet another economical crisis, the markets are expected to become extremely cautious and reward mainly low-risk and profitable businesses. Gorillas reportedly took this decision to make sure the company could navigate this period of uncertainty and eventually emerge as the sole player in Europe. Getir followed closely after few days, announcing on May 25th the reduction of its global workforce by 14%.
On the other side of the Atlantic though, many similar quick-commerce businesses have already had an epilogue. Buyk and Fridge No More were two fast delivery start-ups operating in the US, which both went bankrupt in March 2022 within a week of each other. Both Buyk and Fridge No More were Russia-founded companies, with Russian investors who claimed that, mainly because of the USA sanctions against Russia, they could not financially support these two start-ups anymore. However, the reason for their closures seems deeper and somehow a premonition of the serious issues that we are starting to see in Europe. Firstly, the increasing competition led to a price war, undermining their profitability. Secondly, their business models seemed mostly based on venture capital funding without having a well-organised and efficient logistics planning - which resulted in them burning a lot of cash without a clear path to profitability. To give an example from Fridge No More, employees reported that, sometimes, they had to ride their company scooter very far from the company’s dark-store to deliver only a box of cereal, or a single apple.
Will Gorillas, Getir and the other q-commerce companies be able to avoid the same fate of Buyk and Fridge No More and strenghten their business model, navigate the crisis and keep growing? We do not have the certainty, but we have some ideas on what could help them.
What’s next: how to deal with the complexity of dark store logistics
As mentioned, dark store logistics have undeniable advantages but also dangerous risks to avoid and challenges to overcome. It is clear that the success of such an ambitious business model will depend on how efficient a company can be in its operations.
We have good news though, Cargoful can help improve dark stores logistics operations making use of cutting-edge technologies to optimise this complex planning. With our solutions, companies can directly manage the shipment from external suppliers, increasing replenishment efficiency and lowering costs. Our smart software can optimally allocate the orders to the fleet, maximising the utilisation of the vehicles while ensuring to meet all the deadlines.
Technology is a powerful instrument to tackle the logistics ‘new normal’: find out more and contact us for a demo!