Dark stores and test centers: Using physical retail to advance e-commerce

American consumers have spent years shifting their purchasing power toward e-commerce. That steady march became an all-out sprint in 2020 as the COVID-19 pandemic strangled foot traffic at brick-and-mortar businesses from coast to coast. 

Now, even with some pandemic restrictions rolled back and people receiving vaccines, retailers face a permanently changed landscape. And for brick-and-mortar businesses, the number one predicament may be what to do with their physical footprint.

Many businesses have already unleashed impressive innovations to deal with this new normal, finding technology solutions that can shore up physical storefronts and pivoting their real-estate holdings into e-commerce assets. One key example: “dark stores,” dedicated pickup-and-delivery hubs that don’t offer any in-person shopping—more on that mysterious sounding trend later. First, what’s happening with e-commerce as a whole?

Retail consultants with McKinsey & Co. estimate that e-commerce as a share of U.S. retail spending jumped from about 16 percent in 2019 to more than 30 percent in the first quarter of 2020—a leap equivalent to 10 years’ worth of growth in just three months.

That growth is also upending consumer habits. McKinsey reports that three-quarters of shoppers have sampled new retailers or brands during the pandemic, and 60 percent of those consumers said they would probably stick with those new companies after COVID-19 fades from the scene.

Brick-and-mortar businesses have been forced to adapt quickly. “We saw five years of projected growth in pickup and delivery in five weeks,” Walmart chief customer officer Janey Whiteside told the National Retail Federation (NRF).

Some businesses had to stand up new e-commerce operations seemingly overnight. NRF reports that Tractor Supply Co., a supplier of home and agricultural goods, launched its first mobile app, curbside pickup, and delivery during the pandemic.

Others sped up existing plans: Gap Inc. opened a new distribution center two months sooner than expected, while Lowe’s implemented curbside pickup almost a year early.

“The time horizon in which we make decisions, act, take risks and launch products to market has shrunk from months to weeks now,” said Farhan Siddiqi, chief digital officer of grocery operator Ahold Delhaize.

Remaking physical retail brings a long list of logistics challenges as well. According to commercial real estate firm CBRE, 2020 holiday spending is expected to result in more than $70 billion worth of returns, about three-quarters higher than the average of the previous five years. That translates into dramatically increased reliance on third-party shipping and logistics companies, squeezing their capacity.

Underlying all this change is a dramatic reduction in foot traffic to storefronts: Analysts estimate that Black Friday visits by in-store shoppers were down more than 50 percent compared to the year before. That leaves retailers wondering how to best position their real-estate footprints, or whether to keep them at all.

Brick-and-mortar businesses have looked at ways to creatively use their physical space for years, and those experiments took on new importance amid the pandemic.

The following leading-edge examples offer some insight into how businesses of all kinds may rethink their real-estate commitments in the post pandemic world.

Some major retailers have turned their stores into shipping centers that fulfill e-commerce orders, otherwise called “dark stores.” This trend started before the pandemic, but rapid changes to foot traffic and online ordering could have even more businesses considering this step.

• Walmart has tested the dark-store concept for a few years, opening their latest example in mid-2019 in a suburb of Chicago. The 40,000-square-foot center—formerly a grocery store—looks like a traditional Walmart inside, but customers can pull up outside to get their orders loaded up.
• Grocery chains such as Stop & Shop and Hy-Vee are also testing out the dark-store concept in order to speed order fulfillment. Whole Foods, for example, converted six grocery stores to “dark” stores focused solely on delivery and pickup in spring 2020.
• Macy’s has also shifted some physical stores. It began testing the concept in 2020 at stores in Delaware and Colorado. The so-called “omni service center” model allowed customers to pick up orders, return unwanted purchases, and pay their Macy’s credit-card bills, with all traditional shopping done completely online.
• Nordstrom, an upscale retailer, has rolled out “Nordstrom Local” stores in cities such as Los Angeles and New York. These miniature Nordstrom locations offer online order pickup, “express” alterations to garments and some limited customer service.

Converting in-person shopping locations to distribution centers can benefit retailers by giving them a third option beyond subsidizing a struggling store or trying to withdraw from a costly long-term lease or land ownership. “Every chain in the world will be doing this in the future. And the future is now, because COVID-19 has pushed the timeline up for a number of these kinds of initiatives,” Cambridge Retail Advisors managing partner Ken Morris told Fast Company.

Related: 7 lessons brick-and-mortar businesses can learn from the delivery boom

Some companies have started offering food delivery from restaurants that exist solely to sell delivery and takeout, without a “real” front door for customers and no in-person service. Referred to as “ghost kitchens,” the idea has expanded into nonfood retail as well.

• DoorDash, the online restaurant delivery service, opened a ghost kitchen in late 2019 in the San Francisco area, offering food from several different restaurant brands, ranging from gyros and chicken to burgers and ice cream.
• Brands like Cloudkitchens are enabling restaurants to expand without the significant brick-and-mortar investment. Instead, Cloudkitchens builds out ghost kitchen infrastructure, from which restauranteurs can rent and customize a space that is optimized strictly for delivery.
• Delivery companies have also started offering “ghost stores” which essentially function as convenience-stores with dispatched drivers dropping off quick essentials someone might have previously walked to grab from the corner market. DoorDash’s version of this idea is called DashMart.

The benefits of ghost kitchens for restaurants are obvious, including reducing physical footprint and labor costs by simply not having tables and chairs to clean and serve. Experts note that customers benefit from ghost kitchens, too by gaining more flexibility to customize orders and check out restaurants that are usually too far away or generally out of their price range. It’s all made possible by innovation in mobile ordering and online delivery networks.

Some businesses believe a blended model that mixes traditional shopping and online fulfillment is the key.

• In the fall, Walmart announced it was converting four stores to “test centers” that would try out new types of shopping and fulfillment services, with the idea of perfecting new concepts before they’re rolled out across the company’s 4,700 stores. These blended stores test concepts such as offering more of the store’s physical inventory for online shopping, improved in-store navigation to help workers fill orders, and augmented-reality apps to help workers see which items are ready to be moved to store shelves.
• Grocery stores are also combining online-ordering fulfillment centers with their existing physical stores. The grocery chain, Albertson’s partnered with a logistics partner called Takeoff Technologies, which uses robots to pull orders from shelves in its micro fulfillment centers.

Retailers who see their physical stores as a primary asset can benefit from a hybrid approach because it allows them to add value to an existing system that makes up the core of the business. “Our existing footprint is already within 10 miles of 90 percent of the population,” Walmart e-commerce chief Marc Lore said.

Pandemic lockdown orders that quickly crippled in-store sales eventually gave way in many locations to reopening plans with reduced indoor capacity. But amid that disruption, many brick-and-mortar businesses were forced to reevaluate what their physical businesses would look like in the years ahead.

The economic disruption led to a wave of closed stores and broken leases, with Bloomberg reporting that a record number of retailers sought bankruptcy protection to exit leases and close thousands of retail stores. Accounting firm BDO reported that the pace of store closures in 2020 broke the previous year’s record of 9,500 by August. 

The trend of shrinking footprints predated the pandemic and is unlikely to reverse once the crisis eases. The United States is generally considered to be “over-retailed,” with experts estimating the country may have more than 40 square feet of retail space per resident, compared with less than 3 square feet per person in Germany.

A BDO survey of retail-company chief financial officers shows that brick-and-mortar businesses are already thinking ahead, with 40 percent planning to rethink how much real estate they occupy in 2021. “Whether by rebuilding their infrastructures, transforming their business models or rightsizing their assets,” the firm said, “retailers must sharpen their focus and go all in on strategically investing in what matters most.”

The quick thinking and  agility of U.S. retailers during the pandemic shows that, even when circumstances are dire, decisive bets are possible. And carrying that attitude forward into the new normal of post-COVID-19 life will certainly pay dividends.