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Transforming 2021

The future of retail is hiding in an abandoned mall

The warehouse is moving closer to customers' houses as ecommerce eats the world of retail.

The future of retail is hiding in an abandoned mall

Microfulfillment centers could help retailers compete with the largest ecommerce companies.

Photo: Scott Eisen/Bloomberg via Getty Images

Ecommerce has decimated American malls. But soon, it may also be their savior — sort of, at least.

Long before the pandemic kept people at home in front of their computers, buying everything they needed to see out lockdown online, malls were on the decline and ecommerce was on the rise.

"It's kind of that Amazon effect, where shipping used to take a week for your retail order," said Mitch Hayes, the VP of retail and ecommerce at Swisslog, a logistics automation company. "And Amazon has now said, 'We can get anything to you pretty much next day.'"

To get to a place where most retailers can reliably compete with — or even surpass — Amazon's delivery schedules, experts argue that products are going to have to get closer to the customer. But as the population density of the U.S. continues to rise, getting close to customers means building fulfillment centers in smaller spaces, which goes against the giant outer-city warehouse model that retailers have relied on for decades. To get smaller and nimbler, retailers are having to turn to automation that fits anywhere — like malls.

And it's starting with groceries.

Speeding up groceries

A few years ago, companies started to realize that they could pay people to walk around grocery stores, pick up a week's worth of shopping, and drive it to a customer's house. Around the same time, retailers realized that, without too much rejigging of their stores, they could offer customers the option to buy products online from their local store and pick them up without even having to get out of their car.

Grocery orders tend to be fulfilled quite quickly, given that groceries don't typically like to sit around in unrefrigerated areas for too long. Even before the pandemic, e-grocery and curbside pickups were on the rise, but they skyrocketed during lockdown. Because of the logistics of trying to move Instacart shoppers, as well as regular shoppers, through a store, most grocery stores can fulfill about 100 online orders, according to Steve Hornyak, the chief commercial officer at Fabric, a company that specializes in building automated fulfillment setups that can fit in small spaces, called microfulfillment centers (MFCs). The problem: "Their demand is five to 10 times that," Hornyak said. "And what they're doing is pushing customers' [orders] out or losing customers, because they're at full capacity."

In the past, the solution to a problem like this was to just build more distribution centers and get more drivers delivering to stores. But in most parts of the country, the available infrastructure means that there's still going to be a bottleneck on the roads to get truckloads of goods to local distribution centers and out to stores. This is part of the reason why companies have been investing in microfulfillment centers in recent years. The concept allows retailers to retool existing properties to more efficiently store goods, sell them, and prepare them for online orders all in one place. "The network is already built, it's called their stores," Hornyak said.

"The inventory has to be close to the population in order to make money," Swisslog's Hayes said. "I'm in just north of Cincinnati, there's certainly ways that they could hold inventory in Indianapolis and still get it to me in a very quick amount of time — but it's going to cost an arm and a leg."

Swisslog's fulfillment robots in action.Image:Swisslog

The answer instead is to rely on last-mile delivery options in urban areas, and use the floor space grocers already have. To do that, grocery chains are looking at companies like Fabric, Takeoff Technologies and Attabotics to better use the spaces they have. The back room storage space of many grocers holds their excess inventory, but is set up to move products onto shelves for consumers to grab themselves and check out. But a change is on the horizon: By taking all of that inventory and moving it into mechanized totes that can move through a three-dimensional robotic storage system, the backroom can transform from a holding pen to a fulfillment center.

These intricate, automated structures allow grocery store workers to call up everything they need for a customer's order. The totes containing various items move through the system, going to the worker picking the order, who can then place them all in bags and get the order ready to ship out in a matter of moments. And unlike a human who's walking through a grocery store for the first time that day, the MFC knows exactly what's in stock when it's time to fulfill an order. Fabric's Hornyak said that a 10,000-square-foot center could pick about 25,000 items per day, and that for small orders of about three to five items each, that's about 5,000 to 8,000 orders processed each day. "The order density is absurd," Hornyak said. "It's 5 to 10x what a traditional warehouse or retail location can do."

Swisslog announced late last year that it'd begun working with H-E-B, one of the largest grocery store chains in Texas. Earlier this month, Ahold Delhaize, which owns Food Lion, Giant and Peapod, among other grocery chains in the U.S., expanded its partnership with Swisslog to bring its concept to more stores and distribution centers. Hayes said that much of the rest of the year will be spent rolling out more fulfillment centers with clients.

How Swisslog envisions a microfulfillment center adding onto an existing grocer's retail location.Image: Swisslog

Coming to the rest of retail

But for many other slices of the retail industry, stores either don't have the space to keep enough inventory to fulfill online orders, or the bandwidth to pivot to serve them. This is where Fabric comes in. The company recently completed a microfulfillment center in Brooklyn, and is working on another not too far away in Long Island City, as well as two sites in process near Dallas, and one for FreshDirect near Washington, D.C. For the Brooklyn location, Hornyak said it's working with a "global household name brand" (but wouldn't share which) as an "anchor tenant" to the facility. The center will be able to fulfill orders for a range of retail clients, and much like malls have anchor stores that take up more real estate, so will these fulfillment centers.

Hornyak compared the premise for these multi-tenant centers to AWS or any other cloud provider. "It is a pure services model," he said. "You pay for capacity: how many totes you're taking up in my system, plus the volume of orders and the configuration of the order." Fabric is working with all sorts of delivery providers — gig economy apps, third-party logistics firms, local delivery companies, and the major delivery companies — giving retailers the option to work with partners they might already have in place.

While microfulfillment has seen its earliest traction in grocery, the rest of retail seems not far behind. When consumers start to be able to get groceries delivered whenever they want within a few-hour window, they'll expect the same elsewhere. "The question will come from the consumer: If I can get 20 to 30 items, why can I get a shirt that I saw online at Nordstrom tonight?"

And recent events have shown the value of moving products closer to customers. Even beyond the barren shelves many experienced at the start of the lockdown last year, communities across Texas struggled with a similar bereftness when the recent snowstorm in the region knocked out power for much of the state. "In periods like this, everyone still has access to their cell phone," Hayes said.

Others in the industry agree that they expect 2021 to be a boom year, thanks in part to latent interest ramping up. "The market is becoming educated about the power of networked microfulfillment," Scott Gravelle, the CEO and founder of the MFC firm Attabotics, told Protocol. "Non-traditional players with deep pockets are actively looking to enter the space, both on the VC side and with large established companies. Our pipeline is full."

Walmart is working on a variety of automated fulfillment setups.Photo: Suzanne Kreiter/The Boston Globe via Getty Images

"There's an inferno of same-day demand that Amazon's created," Fabric's Hornyak said. Fabric is working on bringing an MFC to a Walmart where there will likely be a glass divider between the robots and customers, so they can see their orders being fulfilled. "We'll be a giant vending machine," Hornyak said. "This is retail 2.0"

Which brings us back to the mall. For those retailers that don't have the space for MFCs and don't want to be buying additional real estate, multi-retailer facilities like Fabric's can be the solution. In Brooklyn, a formerly industrial section of New York, there are many warehouses that can be cleaned out and in the space of a couple months be turned into a fulfilment center buzzing with robots. In other areas, that might be abandoned or half-empty malls. "Typically when you're talking about microfillfilment, you're talking about odd spaces," Swisslog's Hayes said. And there's a lot of odd spaces across the U.S.

And there's no guarantee that this will catch on. People are always going to need groceries. Retooling facilities or buying new real estate is expensive and time-consuming, and having too much demand for ecommerce is a far better problem to have than not enough. Parts of the retail industry, especially grocery, are slow to change overall. "Being able to deploy your human capital into some of your new business ventures, whether that's MFCs or self-checkout, has always been a challenge," said Curt Avallone, the chief business officer at Takeoff Technologies, one of the first movers in the MFC space. "Most retailers are keeping their best people in the areas that they're currently making most of their money."

But with giant companies like Amazon and Walmart managing to squeeze quicker delivery times out of an increasing number of products across the retail industry, finding ways to compete seems paramount.

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