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Micro-Fulfillment Is Tech’s Next Innovation “Big Bet” for Malls, Retailers, and Restaurants

Posted April 1, 2021 in Business Technology & Digital Transformation Strategies
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Innovation doesn’t always mean grand invention. Sometimes reimagining the supply chain can yield big results and redefine a company’s future.

Even before the pandemic, online retail and rapid food delivery struggled to service “the last mile” to the doorstep. Surging demand from “stay/work/live-at-home” consumers compounded the problem and stressed even the most reliable delivery services.

On Cyber Monday last year, UPS imposed shipping restrictions on Gap, Nike, Macy’s, and others to cope with record deliveries and capacity shortages. Restaurants and grocers faced similar challenges in disrupting kitchens and straining margins to process, prepare, and deliver small orders.

However, in crisis resides opportunity. Repurposing failing or abandoned malls as mini-distribution hubs stabilizes both overextended supply chains and troubled commercial properties. As companies blur c-suite lines, micro-fulfillment also fast tracks tech leaders to the nexus of strategy, operations, and technology. Execution discipline is always paramount to innovation success.

Only the Beginning

Employers and workers have quickly grown comfortable with remote work. The COVID vaccine won’t change that. With people at home much more, food deliveries and online shopping are here to stay, too. A recent report concludes that demand is expected to rise across all shopping segments and consumer groups. Morgan Stanley estimates that US home food deliveries could reach US $350 billion by 2025. But, are companies ready? Not yet.

A few simple app swipes or mouse clicks can create havoc for the business on the other end. Delivery speed and custom orders strain company capabilities to manage inventories, maintain technology, ensure data security, and meet health and safety standards. In turn, customer loyalty hangs in the balance as companies race to affordably match logistics with demand.

Micro-fulfillment is far more than supply chain redesign. It requires tough strategic decisions about target customers and how to serve them. To what extent do companies really want to be in the home delivery business?

Shopping Malls’ New Life?

Empty mall retail space provides an ideal solution for fractured supply chains. Malls are often located near highways and suburban population centers. They have loading docks for bulk receiving, inventory management infrastructure, and large parking lots fit for small delivery vehicles. Amazon, FedEx, and DHL have already explored converting abandoned retail spaces into local distribution centers. Mall owners in need of cash flow and lease agreements to meet bank debt covenants are listening.

For instance, CloudKitchens, a restaurant startup, repurposed empty mall locations into “ghost kitchens” to serve delivery customers only. UberEats, DoorDash, and other services use parking lots redesigned as order pickup queues. The model has wide appeal as fast food and casual dining restaurants rely more on delivery.

In Philadelphia, local culinary entrepreneurs and chefs share a warehouse ghost kitchen. Would established chains like McDonald’s, Chipotle, Starbucks, and Panera be willing to swap in-store customer visits for offsite app-driven assembly lines?

These isolated operations allow existing shops to focus on in-person, takeout, and drive-thru service without the disruption of food couriers and online order spikes at peak dining times. Also, allowing only employees on site considerably reduces the risk of COVID-related closures.

A similar model works well for retailers cobbling together orders of popular items for same-day or next-hour delivery. Speed, accuracy, and product selection via technology replace the customer retail experience. Such digital transformation requires tactful coordination of customer shopping interfaces with back-end order fulfillment.

Micro-Fulfillment Requires Mega Commitment

Launching and running micro-fulfillment centers will not be easy. It is a transformation, not a reengineering project. In many ways, it’s like managing a completely different business, requiring significant technological investment, oversight, and expertise.

Tech leaders are critical to micro-fulfillment’s prospects. To be successful, it all starts with a credible business case that candidly addresses the right questions. Technology must be central to every answer. Here are a few topics likely to be on the agenda:

  • Strategy. What is the larger plan to differentiate from competitors and provide value to customers? To what extent will e-commerce and direct delivery account for sales and margins? What are the consequences of not moving fast enough to gain market share and solidify customer loyalty?

  • Supply chain partnerships. Are supply chain vendors and distribution networks adequately prepared to support the new initiative? Does micro-fulfillment change packaging, shipment timing, and other procurement needs? What prioritization and commitments can be guaranteed to support the new hubs? Gap, Nike, and others faced an unforeseen holiday season crisis once UPS bypassed their shipping needs.

  • Technology integration. Micro-fulfillment is not simply a move to smaller warehouses. It requires automation, robotics, and fully integrated IT support. In addition to data security, systems must connect customer apps with analytics, inventory management, financial records, and decision support. Supply chain redesign needs a fully funded technology plan with top talent dedicated to its implementation and ongoing operation.

  • Financing. Strategic imperatives need adequate funding. Micro-fulfillment requires massive new outlays for technology, physical infrastructure, equipment, inventories, and staffing. Will sales yield sufficient margins and generate adequate cash flow to justify such expenditures? Is the company debt structure positioned to secure necessary loans? Can costs be creatively shared with vendors and supply chain partners? When will the investment generate free cash flow, even by the most optimistic estimates?

Of course, even with great answers to these questions, business plans too often overpromise and underdeliver. If c-suite executives and rising leaders codesign the plans, they must be prepared for the mega commitment to execute. Without real accountability, micro-fulfillment will overconsume resources and underdeliver results. That’s a very costly proposition, and it only postpones the demise of malls and merchants.

Innovation’s Timeless Challenges

A decade ago, eBay acquired GSI Commerce for $2.4 billion and rebranded it eBay Enterprise. GSI Commerce was an e-commerce platform that hosted websites, managed order fulfillment, and provided customer care for well-known brands and brick-and-mortar stores including Levi Strauss, the NFL, and Zales. eBay Enterprise was disbanded and sold in pieces for far less about five years later.

It may have been an idea ahead of its time. Perhaps the next supersized “big bet” is a consolidator operating out of suburban mall locations that efficiently shares e-commerce and logistics services across retailers?

The at-home consumer does not seem phased by unmarked vehicles delivering bags and boxes filled with meals, goods, and groceries — as long as the order is correct, complete, and on time. Whether it’s merchants working alone or together, the restaurant and retail evolution continues. Some call it an apocalypse, but maybe it’s better characterized as a sea change moving much quicker and sooner than ever anticipated.

If well timed, funded, and executed, micro-fulfillment could be the next big bet that delivers wins for consumer businesses and commercial property owners. However, innovations on this scale fail when they aim solely to fix the present. The timeless real innovation question is: are leaders ready to shape the future or allow it to define them?

Photo by Andy Hall on Unsplash

About The Author
Noah Barsky
Noah P. Barsky is Associate Professor at Villanova University School of Business in the executive and graduate business programs. His research and teaching focus on performance measurement, business planning, risk assessment, and contemporary financial reporting issues. Dr. Barsky develops and delivers executive education programs for various Fortune 100 companies, global professional services firms, and industry associations. He has authored… Read More