If last mile delivery is the gas guzzler for online retailers, Micro Fulfillment Centers (MFC’s) could be the four-stroke engine that helps them gain efficiency. But who will win the market? Third parties or owned / operated MFC’s of retailers?

The micro-fulfillment model uses automated warehouses to reduce the last-mile distance to the customer, making deliveries cheaper, faster, and easier. The strategy is to place small-scale warehouse facilities in densely populated urban locations closer to the consumer. That reduces last mile costs and delivery times to meet the two-day or less shipping time that has become the norm. For groceries, the bar has been raised from same-day to same hour delivery.

A grocery store’s profit margin is roughly 1% to 3% per order, making it up in volume. Last-mile costs represent 41% of the total supply chain costs for any product and are more than double any other category of logistics spend, such as parceling or warehousing. This can be a strain on grocery retailers’ margins when shipping high volumes.  It is perhaps why grocery retailers are opting to have their own MFC’s in their real estate rather than working with third-party fulfillment providers. Dark store companies are in trouble. They are going the same way “pop-up” platforms are going. Remember pop-ups? That bubble popped.

Earlier this month, Get Fabric disclosed that it was focusing on selling its warehouse automation platform rather than building more specialized small distribution sites as it did in New York and Dallas. At least that’s what its customers want.

Walmart is one such client of Get Fabric. Walmart has roughly 4,700 stores across the United States and 90 percent of Americans live within 10 miles of one of its stores. It, therefore, makes much more sense for Walmart to augment its stores with MFC’s and put unused retail space to use than adding the number of distribution centers. And it is not just Walmart. Kroger teamed up with Ocado Solutions to provide in-store fulfillment for curbside picku;, Albertsons has partnered with Takeoff for in-store, robot-assisted MFC. Target is planning to build nine automated “sortation centers'' over the next year in its own locations to speed up its fulfillment of online orders. In 2021, Target’s physical stores fulfilled 95% of its online orders.

Does this mean the end of third-party micro-fulfillment?

MFC’s typically occupy a space of 2,000-5,000 sq ft. Apart from the physical facility itself, they also rely on inventory and order management systems to maintain sufficient inventory availability and to process online orders. The national average rent for industrial space is up 11.8% year-over-year in 2022 and fuel surcharges among less-than-truckload carriers are 42.1%.

On one hand, big retailers have already embraced MFC and prefer to own the operations to have the customer touchpoint in their control. On the other, with an increasing number of customers demanding deliveries on the same day, small retailers would want to turn to micro fulfillment to meet the demand. Since it can be prohibitively expensive for small retailers to have their own chain of MFC’s, it  makes more sense for them to let third parties handle the real estate and fulfillment ops while taking advantage of the shorter delivery times that micro fulfillment enables.

But some questions remain unanswered:

• In this economy, will shoppers expect same-day shipments and be willing to pay for it? MFC’s were one of the many ways to level-up with Amazon.
• With Amazon Warehousing and Distribution, for sometime at least, Amazon sellers can optimize their non-Amazon fulfillment effectively. When Amazon opens its last mile capabilities to non-Amazon merchants, where would that leave third-party MFC’s? It’s never a good idea to play the Amazon arbitrage.
• As retailers become more self-reliant and as brands gravitate towards retail distribution, how much room do third-party MFC’s have to play?

Here is a quick estimate of the potential market in terms of the number of merchants and their order sizes.

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The market for micro fulfillment can be significant despite large retailers building their store-based fulfillment operations.  Micro-distribution centers are best for brands that ship a lot of the same kinds of items that are not bulky and are not highly specialized and bespoke. But what works for brand ld may not work for independent micro-fulfillment platforms.

Go micro go, but watch the intersection.