Shedding light onto the dark store concept in Asia: Can it work for retailers?

Even before the COVID-19 crisis began, retail was facing several financial issues that could make it difficult as an industry to weather recession. Many retailers faced challenges in revenue growth, compressing margins, slowing asset turnover and financial balance.  When the pandemic hit, many retailers felt their cores shaken as foundations cracked under pressures of global lockdown and lack of technology adoption.

As consumers turned their attention online, eCommerce took over the void left by offline retailers. However with the rise of eCommerce, one area that came into light were dark stores. Dark stores are essentially traditional retail stores that have been converted to local fulfilment centres. Largely it is utilised as an operational space for eCommerce purposes.

In these stores, instead of customers walking around looking for their favourite bag of chips, pickers and packers do the job for them fullfilling grocery orders left by online customers.

This is opposed to the usual offline retail supermarkets where walk-in customers are served as a primary target audience, explained David Lim, VP of marketing at Happy Fresh – an online grocery store with ambitions to have more than 100 "dark stores" across Southeast Asia in the near future. Currently HappyFresh has businesses in Indonesia, Malaysia and Thailand and has shoppers handpick groceries for customers from partner retail chains.

Adding to the conversation, Stuart La Brooy, VP of Sephora, Southeast Asia and Oceania shared that the growing convenience and penetration of eCommerce has been the main driver of these dark stores. The COVID-19 pandemic lockdown measures gave eCommerce a booster shot, unlocking more urgent investment in to dark stores as physical retail foot traffic collapsed. The threat was further compounded also by the growing pressure pure play eCommerce retailers such as Amazon, Lazada and Shopee with competitive prices and free delivery.  

Wisening up the tricks of these marketplaces, many retailers decided to adopt similar models and convert their physical stores in to local supply hubs to compete against these pureplay eCommerce players.

Do dark stores make sense in Asia?

In Asia, the concept of dark stores really started to pick up in the past 18 to 24 months as pandemic peaked in the region, said Lim. During the difficult time, dark stores enabled companies to have ownership of stock/inventory for better control quality and speed of service.  Specific to the grocery industry, Lim added that many online grocery services wanted to play their part and alleviate the pain points of obtaining groceries in urban cities such as Jakarta, Kuala Lumpur, Bangkok and Singapore.

“With consumers seeking convenience in their daily lives across various tasks and chores, this  sent a message to service providers to disrupt what we understood as normal; this was especially accelerated by the Covid-19 pandemic,” he said.

Moreover, given that the channel is purely online, there is no need for brick-and-mortar cost. Hence the underlying assumption for many retailers was that at scale, the dark store operational model will reduce costs and potentially pass those benefits to customers for a more compelling value for money proposition. Many retailers also took the downtime presented by the pandemic to experiment in the retail space, with most opting for a hybrid model operation, said La Brooy. This meant they kept their stores open to walk in members of the public and also offered a click and collect option on orders.

Calling fully dark stores are “a bit more extreme”, La Brooy added that these stores are likely to form when the physical foot traffic is marginal and the retailer sees a significant cost advantage converting the store to a point of distribution for their eCommerce fulfillment.

“In Singapore, where geographically we are quite concentrated and real estate costs are high, I think most firms would prefer to shut down a low traffic stores and invest in a centralised or dedicated distribution centre,” he said. In comparison, in Malaysia and other countries with a larger geography and more varied real estate costs, LaBrooy says retailers are more likely to leverage satellite stores in outlying regions in to 100% eCommerce fulfillment.

“This would allow brands and retailers to expand their coverage to even more customers for lower cost, and they already have the existing infrastructure in place and ready to go to service the store,” he added.

Abhishek Sahay, senior director, new verticals (APAC), foodpanda shared that dark stores or “cloud stores” have been a big part of its strategy since the establishment of Pandamart in operation in Singapore in 2019 and in Malaysia since 2020. Currently the Pandamarts in these markets carry over 5,000 products ranging from snacks and alcohol, home cleaning products, to maternal care items.

 “As speed and convenience become a top priority for customers, it has become increasingly important to deliver faster and more reliably,” added Sahay. Moreover, with customers now relying heavily on ultra-fast and on-demand deliveries, Sahay added that pandamarts are located strategically and optimised to serve customers around the vicinity.

“Data and technology form the foundation of each cloud store, determining its location, product mix and even store layout for maximum picking efficiency means customers can get the products they want at a touch of a button in the shortest time possible,” he added.

Beyond groceries

While groceries definitely make up a staple part of the catalogue in a dark store, interestingly dark stores have also paved the F&B industry where there is now a rise in cloud or ghost kitchens. These are kitchens where restaurants expand their ability to deliver to  by opening up kitchens, sometimes with multiple brands cooking in the same space that do not serve walk-ins.

There is also an argument for non-perishable goods when we consider delivery costs and time, said La Brooy. “Hybrid retailers can leverage their physical stores as a network of distribution points that can offer faster and lower cost delivery to customers than pureplay eCommerce retailers, and that can be a huge advantage for impatient or thrifty shoppers that is hard to compete against,” said La Brooy.

Meanwhile Lim added that it is important to notice that dark-stores can have different step-ups and that very much depends on what shopping mission a business covers/focuses on.

In Happy Fresh’s case, its  multi fulfillment centers (MFCs) or dark-stores have three main elements:
1) Capacity for 15,000 SKUs (as opposed to 1,000 for the 10-15min Q-commerce players)
2) Ability to drive all categories with three rooms of various temperatures (fresh, frozen and ambient)
3) Larger size of 700sqm-1,200sqm to deliver a larger number of daily orders and consistent replenishment cycles (ability to scale)
“We already see this translating into higher basket size as compared to other online grocers, with a great contribution by fresh produce (about 30% of total sales) while driving customer satisfaction, engagement and sustainability in the long term,” said Lim.

However, he added that there definitely is room for other industries and verticles to adopt the concept with the shift in consumer behaviours.

“Consumers are becoming more and more demanding in the conquest for convenience, wanting their purchase where they want it when they want it. This calls for a need for businesses to transform and disrupt the normalcy of commerce as a whole and I have already seen some fashion businesses moving toward this direction,” he added.

The future of retail

While dark stores may seem attractive from a financial point of view, the role of physical stores is still crucial explained La Brooy. In fact, on the contrary many eCommerce brands such as Amazon are now experimenting with physical locations

“Do not underestimate the importance of a physical store in your marketing strategy. In many cases across many categories, the retail experience is crucial to helping your customer decide what they want to buy,” he said. Even if they eventually purchase online, and the experience they have in the store has a tremendous impact on where they eventually purchase and which brand they eventually choose.

“I don't see a scenario where dark stores will replace retail. Things will definitely continue to be hybrid (or omnichannel) in nature overall with both physical and digital experiences being essential. People love the convenience of being able to engage with a brand or retailer on their terms based on their needs. Neither of these things will go away any time soon, but what we'll see is a shaking out as businesses adjust to the changing needs of their consumers in the specific market and category they operate in,” he said, adding:

Dark stores are a clever way for physical retailers to turn the tables a bit.

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