Micro-wave: The pros and cons of local, smaller fulfilment centres

By Ben Sillitoe

Sainsbury’s-owned general merchandise retailer Argos is in the process of opening sites it is calling local fulfilment centres (LFC), which will enable 90% of Argos customers to get their products on the same day – via home delivery or collection in store.

The second of 32 planned LFCs will soon open in Leeds and the retailer is on a recruitment drive accordingly. The hunt for staff at these sites will continue over the coming years, partly helping counter the jobs lost as over 400 standalone Argos shops close during the same period.

Argos’s local fulfilment approach is just one of several examples of decentralised warehousing as the eCommerce market grows. It’s the latest iteration of a movement that has been in motion for several years, emphasised by Argos’s ‘hub and spoke’ model and the shift by many to distribute online orders from stores, such as Waitrose and Sainsbury’s, and Harvey Nichols, as we heard at IMRG’s recent Delivery Summit 2021.

Greener?

I was initially prompted to write this piece after seeing an Accenture report suggesting changes to last-mile delivery can reduce traffic congestion and air emissions in cities. It concluded micro fulfilment centres (MFC) would likely make retail supply chains greener.

The methodology of the report, which used Chicago, London, and Sydney as example cities, involved analysis such as MFC prevalence, population density, average distance travelled per parcel, delivery vehicle mix, and consumer demand projections. Accenture noted if MFCs were used for just half of the eCommerce orders in these cities, delivery vehicle-related emissions could drop by 16%-26% by 2025.

Individual companies and cities will measure in their own ways the impact last-mile delivery has on emissions, but Accenture’s study is in depth and offers a compelling argument for the use of micro warehousing.

As André Pharand, a managing director at Accenture, said “the carbon footprint of the last mile has long been an environmental and societal challenge”. He argues taking action now can make it “more efficient, less expensive, and more sustainable”.

Faster and efficient?

With Waitrose and Sainsbury’s both announcing delivery partnership extensions with food delivery specialist Deliveroo this week, rapid fulfilment is clearly top of mind at some of the largest UK retailers.

Alecxa Julia Cristobal, marketing content writer at digital payments provider AsiaPay, says: “Building micro-fulfilment centres or smaller distribution warehouses speeds up the process of delivering items to their consumers.”

Rory O’Connor, founder & CEO of delivery management software provider Scurri, adds: “Online shopping shows no signs of slowing down, and for that reason, fast-paced fulfilment will be a great advantage this year.

“However, to make it work, retailers need to think about working with several different carriers and the right delivery partners to offer the range of delivery options customers expect. We know fast delivery builds trust with customers and leads to repeat business for many companies.”

Offering multiple delivery options is a key target for many retailers in terms of improving consumers choice, but it can have internal benefits too.

Christophe Pecoraro, European managing director at PFS, an eCommerce solutions provider, says retailers can improve their chances of getting products where they are required if they make split inventory provisions, “if the volume of orders is large enough in both locations”. 

He also suggests MFCs needn’t be permanent; they can be used for peak periods and operated like pop-up sites.

“Employed to test new markets and verticals, perfect alongside the rise of social commerce, these temporary operations are much cheaper to set up and run, whilst providing relief to a primary distribution centre,” Pecoraro notes, adding they require “a minimal investment” compared to more permanent warehousing.

Mel Tymm, industry principal at online solutions provider Maginus, says “ease and convenience” supported by “fast, flexible and customisable delivery” has become an important theme of the last 18 months in retail.

“To better serve customers who will continue to expect next day or even same day delivery, retailers are beginning to understand the need to be as close to the consumer as possible,” she comments.

“Therefore, while few retailers have currently adopted a micro-fulfilment approach with small, local distribution centres (DC), it will undoubtedly become central to delivery processes over the next few years.”

In-store Fulfilment

Cheaper?

Tymm adds that local DCs “can significantly reduce costs for retailers” too.

“Smaller hubs serve a small radius of customers within their towns or cities, compared to a typical large-scale, centralised warehouse that delivers country-wide,” she explains.

“This means the last mile can be optimised and fleets will become far more sustainable by avoiding long, repeat journeys. Costs can be driven down even further if smaller DCs are multi-tenanted.”

For Ciaran Bollard, CEO at eCommerce platform provider Kooomo, MFCs might reduce costs in the long run, but the tech needed to track and manage decentralised inventory might mean they are “slower to get off the ground”.

“Having said that, MFCs can be trickled into a retailers logistics strategy where they have the capacity to deal with sudden spikes in demand,” he adds.

“Retailers who stock seasonal gifts such as candles, gift sets or beauty products might be a good candidate for micro-fulfilment. Things that run out relatively quickly and where the trend can easily change.”

And if costs are a key factor in retail real estate planning, as they inevitably always are, perhaps businesses will start considering utilising their existing assets in different ways.

Rachel Gilbey, managing director for general merchandise at logistics company Wincanton, explains: “Property that’s been seen as a ball and chain for retailers may actually become a key differentiator in an experience-led and convenience-driven high street.”

“Consumers want shorter lead times for click & collect and environmentally sustainable urban deliveries; leveraging property assets as micro-fulfilment hubs embraces this and embeds eCommerce in this future.”

Kevin Mofid, head of industrial & logistics research at property company Savills, says several factors must be weighed up when assessing micro-fulfilment. Availability of warehouse space in general is being squeezed, he says, which means prices will start to rise – while buildings that are on the market will need refitting for their new purpose.

With greater emphasis also placed on shifting fleets to electric vans, units will also need a power supply over and above what is traditionally offered as many companies will look to charge vehicles on site,” Mofid comments.

“Overall, if the right property in the right location can be sourced for a decentralised delivery operation, then clear efficiencies can be gained. However, given the level of demand and the lack of supply it can be the case that potential efficiencies are eroded when considering properties away from optimal locations.”

Summary

Barley Laing, UK managing director at Melissa, which helps retailers verify addresses and contact details, says: “As the pandemic supercharges online shopping it’s becoming more important that retailers have fulfilment centres in appropriate locations – even smaller ones in town or city centre locations – to serve their customers.

“The closer they are to customers the speedier the delivery and also the processing of returns, which helps to maximise the customer experience while reducing costs.”

There’s a lot to consider here for retailers, not least the new acronyms associated with this shift to more localised fulfilment.

But whether a business wants to call them a CFC (customer fulfilment centre) like Ocado, a LFC a la Argos, a MFC, or a local DC, it’s clear the overarching concept of storing goods closer to the end customer is gaining industry favour.

By Ben Sillitoe

Published 29/04/21

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