Dark stores enable fulfillment of online orders from physical distribution centers that may or may not ever let customers enter but that nonetheless enhance many aspects of the retail experience, from convenient delivery/pickup to a greater breadth of products from which to choose.
What Is a Dark Store?
In short, a dark store is a brick-and-mortar store that has been repurposed to fulfill online orders in either the short term or long term, a new retail business model that began gaining traction at the start of the pandemic. With physical stores closed and so much shopping shifting to the web at that time, brick-and-mortar locations needed a way move the inventory sitting on their closed shelves and compete with digital counterparts. Their response was to position some brick-and-mortar locations as mini fulfillment depots, where goods could be picked up by and delivered to customers who had originally purchased them online.
- For traditional brick-and-mortar retailers, dark stores represent a new business model that allows them to compete more effectively against web-based retailers.
- For consumers, dark stores make it simple, fast and convenient to receive goods that they ordered online.
- Dark stores operate as fulfillment depots for online purchases. They use a combination of home delivery, curbside and in-store pickup to quickly get orders into the hands of their customers.
- To manage their complex logistics and fulfill large volumes of orders, dark stores need to make extensive use of automation and data analytics.
Dark Stores Explained
Dark stores first took hold in the United Kingdom, as retailers repurposed their stores to fulfill online orders, and they are variously known as dark shops, dark supermarkets or dotcom centers. These outlets are usually located in suburbs or on the outskirts of cities, where real estate is less expensive. They generally consist of large warehouse-like facilities, but in some cases, they also include places where customers can inspect and collect items they ordered online.
How Dark Stores Work
Dark stores are intended to make it simple for online shoppers to receive the goods they purchased. Some are set up with aisles and shelves, just like a regular store, but without any promotional signage or displays. Employees known as pickers cruise the aisles, gathering items to fulfill customer orders.
Other dark stores look more like warehouses and may be automated to varying degrees. Robots may be used to both assemble and prepare orders, or the stores may use autonomous carts to gather items for packers who then ready the orders for delivery.
There are also stores that employ a hybrid or ‘semi-dark’ approach. At these outlets, shoppers can pick up their online orders but can also roam the aisles to select other items.
Some dark stores operate around the clock, packing orders overnight and replenishing stock in the afternoons. Customer pick-ups and deliveries take place during conventional daytime and evening shopping hours.
Why Are Dark Stores Popular?
Dark stores started coming into vogue as retailers struggled to accommodate the restrictions placed on consumers during the pandemic. As people were told to stay home and avoid crowded places and store fronts were closed for months, the popularity of online shopping surged at the expense of brick-and-mortar locations. Traditional retailers needed a way to compete with web-based retailers and attract new business, while some online retailers needed to establish a physical presence. This gave impetus to the dark store concept, which allows consumers to shop and receive their items without having to engage in much social contact. Dark stores also allow retailers to offer their customers greater convenience, more immediate gratification and a better shopping experience.
The Benefits of Dark Stores
For retailers contending with a major shift in shopping patterns, the dark store model offers numerous advantages, from additional space that helps drive broader product selection, to round-the-clock operation and flexible fulfillment and return options. Here’s a rundown of nine such key benefits.
- Additional capacity and decreased shipping costs: By reducing aisle space in favor of storage area, dark stores provide retailers with additional capacity. This allows them to increase their sales density per store, and also creates the opportunity to ship from closer locations to the delivery destination.
- More extensive product selection: Since they have fewer capacity limitations, dark stores permit retailers to stock a greater range of items. They also tend to be bigger: The average U.S. retail store is just under 50,000 square feet, but a typical dark store ranges between 100,000 to 200,000 square feet. The additional storage and shipping space allows retailers to have more inventory on hand. Clothing and shoe stores, for example, can keep odd-sized items at the ready, while grocery stores can carry more unusual products that sell in smaller volumes but offer higher margins.
- Greater product availability: Given their larger inventories, customers are more likely to find what they’re looking for at a dark store than in a typical retail outlet. And since their operations are geared to picking and fulfilling orders that are placed online, dark store operators can maintain much tighter controls over their stock levels than in-store retailers, which also contributes to better product availability.
- Greater store efficiency: Due to greater automation and more intensive use of data analytics, dark stores are more efficient than traditional storefronts. By adopting robotics and other advanced technologies to help store, select and ship goods, these outlets can deliver more items, more quickly, with fewer workers.
- Better quality for fresh goods: When dealing in perishable goods, such as meat and fresh produce, dark stores can provide better quality. Many consumers are averse to buying perishables online due to their short product life. But dark supermarkets are adept at managing stock rotation and utilize separately chilled operating zones, resulting in higher-quality fresh foods. Goods are only exposed to ambient temperature for a matter of minutes while they are loaded into vans, and life lengths for all items are guaranteed. This gives these depots a clear advantage over conventional grocery stores.
- Fewer delivery errors: Dark stores commit fewer errors when assembling orders, resulting in greater customer satisfaction. This is largely due to scanning technology that prevents conveyor belts from moving trays to the next station unless they have been loaded with the correct goods. If a product is out of stock, the system automatically identifies the closest possible substitute from the typically large range of items on hand.
- Round-the-clock operation: Many retail outlets are subject to laws that regulate their hours of operation, but this generally doesn’t hold true for dark stores. Since they are unrestricted, dark stores are free to operate around the clock 365 days a year. With orders prepared and shipped 24 x 7, customer waits are shorter and pickup times are more convenient.
- Centralized route planning: Dark stores that use vans to deliver their goods can make use of GPS systems in tandem with data analytics to implement centralized route planning. Drops per van are maximized, while goods are delivered in the shortest possible time. This contributes to greater store efficiency and a better customer experience.
- Ease of introducing new items: With much more shelf space available to them, it’s easier for dark store retailers to try out new merchandise and add to their product selection.
The Challenges of Dark Stores
There are, however, several downsides and risks to the dark store model. These include:
- Potentially higher transportation costs. If not dropshipping from the closest location, these costs come from the need to provide home delivery from, and transport click-and-collect orders to, the dark store facility. Goods handling costs are sometimes higher as well — especially for retailers who deal in perishables. Taken together, these can offset some of the savings achieved through greater dark store efficiencies.
- Cannibalization of in-store sales. For many retailers, an online order gained is an in-store sale lost, yet the fixed costs of operating a traditional self-service outlet remain the same. This means that over time, the profitability of a retailer’s brick-and-mortar locations will decline.
- Increased competition and customer-base erosion. Once consumers become accustomed to buying certain items online, it is very easy for them to switch to an alternative source for their products. Selling points that previously allowed a retailer to hold onto its customer base and control the customer interaction — such as convenient store locations, familiar store layouts and superior customer service — are no longer relevant or play out very differently in the online world.
Dark Store Order Fulfillment: How Does It Work?
Dark stores improve order fulfillment in several ways, depending on their customers’ preferences and the type of goods or merchandise they provide. The three most common methods are:
- Ship to customer delivery, which became hugely popular at the start of the pandemic, when people were homebound and online shopping surged. Since then, consumers have become accustomed to the ease and convenience of having their orders delivered to their doorstep and now prefer this way of shopping for many items. Most dark stores provide home delivery; it has become virtually synonymous with the dark store concept.
- Curbside pickup is also utilized by many dark stores, especially dark supermarkets and others that sell perishable goods — this grew significantly during the pandemic. When this method of fulfillment is employed, the dark store usually provides dedicated parking spaces for customers and a store employee brings the order to the car, so that the person receiving the order doesn’t have to leave the vehicle. This approach is both convenient for consumers and makes it easy for the store to follow customers’ social distancing practices, if any. Regardless, it’s likely to stay.
- In-store pickup is another order fulfillment approach used by many dark stores. In this case, the outlet typically has a dedicated pickup area inside the building, often near the front entrance. Sometimes changing rooms or other areas where customers can inspect their purchases are also provided. This approach allows the store to reduce its shipping expenses and can be convenient for shoppers, who don’t have to navigate a large store to pick up their items but can still try them on or look them over before taking delivery.
Are Dark Stores Right for Your Business?
Operating a dark store is a great option for any retailer that needs to fulfill and rapidly deliver a large volume of online orders. However, some retailers of high-end or hard-to-find merchandise (think jewelry, for example), may be immune to online shopping trends — at least for now. For them, the dark store concept is not a good fit.
Other retailers may feel compelled to provide home delivery of online orders, but the location and distribution of their customer base may mean that converting to a dark store is not the optimal solution. That’s because dark store facilities are often located on the outskirts of large cities where land is more plentiful and cheaper, but may be a considerable distance from the majority of the retailer’s customers. This raises their transportation costs, while traffic congestion impedes their ability to compete by offering same- or next-day delivery.
For many smaller urban retailers — and even some larger ones — there are dark store alternatives that may be better suited to their business.
Best Dark Store Alternatives
If a dark store model doesn’t pass muster for a particular retail business’s warehouse management style, micro-warehouses and urban fulfillment centers are the main alternatives.
Micro-warehouses located in urban settings are gaining popularity. These serve as local distribution centers that receive and prepare retail goods for last-mile fulfillment. Networks of such warehouses give a retailer greater proximity to its customers, letting it deliver orders quickly while limiting its transportation costs. In some cases, those costs can be reduced further by replacing delivery vans with alternatives such as scooters and cargo bikes that are less expensive to operate and better suited to an urban environment.
Another option is urban fulfillment centers located inside or adjacent to traditional retail stores. Often extensively automated, these centers are designed to work in tandem with the traditional outlet, helping to preserve and even increase the value of the retailer’s existing store assets.
How to Ensure Your Dark Store Is Profitable
Ecommerce may be growing rapidly, but not every foray into dark retailing is successful. Here are six steps retailers should take to ensure that their dark store operation is profitable.
- Make sure there is adequate demand. To be profitable, dark stores need to fulfill a large and steady stream of orders. To gauge whether a given area will support that level of demand, retailers can make use of third-party marketplace and loyalty program data. A good rule of thumb is that retailers should refrain from opening a dark store until they can account for at least 80% of the demand needed to break-even.
- Choose a less expensive location on the outskirts of a densely populated area. Since dark stores are not generally open to the public, there’s no point to locating them in city centers. Instead, top priority should be given to airport, rail and highway access for rapid product replenishment and distribution. Some stores may also need to consider whether there’s sufficiently convenient customer access for curbside pickup. Outlying locations in industrial areas are often ideally situated and will be much less expensive than prime urban real estate.
- Optimize the store’s layout for packing and shipping efficiencies. While shoppers don’t enter most dark stores, space planning is still vital to achieving a rapid order turnaround rate — which is key to dark store profitability. Dark store floor plans will vary from retailer to retailer, depending on the type of merchandise they sell. Some will group similar items together as in a traditional store to help employees quickly assemble orders, while others separate them to reduce the likelihood of the wrong product getting shipped. Either way, the products that are purchased most frequently should be placed at the front of the store, wherever is closest to the shipping area, to speed packing and delivery. These most-popular items may vary throughout the year based on such factors as seasonal preferences and ties to holidays like Halloween or Christmas.
- Stock the widest possible selection of products. A good floor plan makes it easier to carry the widest possible range of merchandise. The broader the product selection, the larger the customer base that can be served and the easier it becomes to sustain a high volume of orders. Also, having more items in stock improves overall turnaround times and increases customer satisfaction — which, in turn, helps build and sustain the store’s customer base.
- Ensure that merchandise is actually in stock and available for delivery. A potential downside to carrying a large selection of products is the customer disappointment and defections that can occur when some of those items are out of stock. To minimize this risk and maximize the upside of being known for a broad product selection, dark retailers need to maintain appropriate levels of inventory for all of the merchandise they offer.
- Automate and use data analytics to govern store operations and logistics. With the aisles free of customers, dark stores can employ robots to gather merchandise and assemble orders, shortening delivery times and driving down labor costs. At the same time, inventory and order management software can be used to manage the complex supply chains and intricate logistics required to keep a steady stream of merchandise coming in and orders going out. Making use of these systems helps avoid product shortages as well as surpluses. This allows inventory to be turned over more quickly and with fewer product substitutions, leading to heightened customer satisfaction.
The Future of Dark Stores
Automation and analytics will play an outsized role in the future of dark stores, as retailers innovate to meet burgeoning consumer demand for 24-x-7, near-immediate delivery. This will lead to many variations on the dark store model. For example, some fast-food and grocery chains are already experimenting with so-called “ghosted” facilities — nearly 100% roboticized fulfillment depots — that focus exclusively on readying orders for home delivery. Others are trying out “smart supermarket” and similar concepts that integrate online and in-store shopping into a single, seamless customer experience.
To feed their automated delivery operations, all of these approaches require keeping in stock a broad selection of goods from a far-flung network of suppliers. That means that dark retailers must always have complete visibility into all of their inventory at all of their locations. This necessitates the use of advanced software solutions to manage and maintain these inventories.
How Can NetSuite Help?
NetSuite offers cloud-based business management software that can help retailers maximize the profitability of their dark store operations.
Dark store logistics are far too complex to keep tabs on inventory manually or with spreadsheets, which are inefficient and error-prone. NetSuite software, on the other hand, makes it easy to track inventory across multiple locations. NetSuite Inventory Management provides a single, accurate and real-time view of inventory across all warehousing locations and sales channels. This multi-location view allows retailers to avoid stockouts, but also free up cash by reducing their overall inventory levels. Optimizing inventory with NetSuite’s software lets dark store operators delight customers with high product availability and minimal substitutions, even as they keep a tight rein on their inventory costs.
To further enhance their customers’ experience, dark retailers can make use of NetSuite’s multichannel order management solution. This software supports a variety of fulfillment options, including direct ship from warehouse, store fulfillment and drop shipment. Orders are tracked and routed to the most economical or geographically appropriate location, reducing mishaps while decreasing shipping costs and transit time. Customers, in turn, are able to buy, receive and return their orders wherever and however they prefer — a level of convenience that increases customer satisfaction and loyalty.
Dark retailing lets traditional brick-and-mortar retailers swim with instead of against the ecommerce tide. Retailers can differentiate themselves with broad product selections, multiple fulfillment options and rapid-fire order delivery, even as they slash their operating costs and significantly boost their store efficiencies. As dark shopping evolves, it will doubtlessly assume many new and creative forms, but the owners and operators of today’s dark emporiums will be well positioned to participate in tomorrow’s innovations.
Dark Store FAQs
Why is it called a dark store?
When retailers began converting their brick-and-mortar outlets into fulfillment centers for online orders, they referred to them as dark stores because they were closed to the public. They operate more as warehouses and delivery depots than traditional stores. Some are also nearly entirely automated, allowing them to — literally — operate in the dark.
What are dark stores in logistics?
To fulfill orders rapidly and efficiently, dark stores employ complex logistics. They receive and track products from many different sources and prepare them for delivery. Using inventory management systems and predictive analytics, they can anticipate orders so that moments after a customer completes a purchase online the item can be shipped or readied for pickup.
What’s the benefit of dark stores for a traditional store?
The dark store idea is to create a retail distribution hub or warehouse designed to prepare and deliver goods purchased online. As consumers migrate from in-store to online shopping, the dark store model allows traditional retailers to remain viable by fulfilling orders placed on the web. These fulfillment centers also give web-based retailers a way to establish a physical presence. Dark stores are popular with consumers because they provide immediate and convenient delivery.