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MACRO VS MICRO FULFILLMENT COMPARISON Contents AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON Contents 03 EXECUTIVE SUMMARY 08 WALMART LEANS INTO MICRO-FULFILLMENT 04 MACRO-FULFILLMENT 09 SUMMARY 05 KROGER & OCADO 10 ABOUT US 07 MICRO-FULFILLMENT AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 02 Executive Summary MICRO-FULFILLMENT & MACRO-FULFILLMENT Multiple Avenues to Building a Better Mouse Trap As grocery e-commerce sales continue to garner an increasingly meaningful percentage of the pie (online market share was 4% in the US/Canada pre-COVID and is expected to be in the 15-20% range by 20251), retailers are boldly innovating ways to improve profitability through cost effective fulfillment strategies. This has become especially meaningful as fulfillment costs represent one of the highest expense P&L line items for retailers2. Currently, two divergent philosophical approaches have emerged: micro and macro-fulfillment, which we discuss herein in the context of the grocery retailer space. These approaches each have unique merits and considerations, yet at times can support a still nascent hub & spoke automated fulfillment approach. AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 03 Macro-Fulfillment One method that grocery retailers have adopted is the Centralized Fulfillment Center (CFC), which leverages online order fulfillment through a warehouse-type facility separate from the store. One of the strengths of this model is the breadth of stock keeping units (SKUs) offered given the facility size. Ocado Group, a U.K. based provider of automation solutions has an average facility size in the 300k – 400k SF range, with an average SKU count of approximately 55k3. This compares to a traditional supermarket, which has roughly 15k – 60k SKUs depending on its square footage4. In addition to offering a wider breadth of inventory, CFCs also have the added benefit of reducing labor costs and improving order accuracy via process automation particularly when compared to fulfillment executed inside the conventional brick and mortar supermarket. Typically, an online order is directed to a CFC where it is assembled by robots, helping to eliminate process inefficiencies (e.g. finding the most economical routes across the fulfillment grids). Subsequent to the picking process, individual employees will place items into totes, with the assistance of the CFC’s technology offerings. Lastly, the retailer will distribute the order either by delivering the order directly to the customer or through a hub and spoke model, which depends upon the orders being taken to a facility specializing in last-mile delivery or pickup3. PHOTO: OCADO GROUP PLC, ORIGINALLY POSTED BY BLOOMBERG BLOOMBERG POSTED BY ORIGINALLY PLC, OCADO GROUP PHOTO: IN MACRO FULFILLMENT, ORDERS ARE DIRECTED TO A CENTRALIZED FACILITY, WHERE ROBOTS PROCURE GOODS ABOVE A THREE-DIMENSIONAL GRID1 AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 04 Kroger & Ocado In May 2018, Kroger announced a partnership with Ocado Group to construct up to approximately 20 CFCs in the US during the first three years of the agreement; in turn Kroger agreed to pay fees related to exclusivity and consultancy, as well as a services agreement5. Kroger’s Ocado facility in Groveland, Florida measures 336k square feet and is equipped with 1,000 robots. It will employ roughly 400 employees by 2023. The facility reportedly cost approximately $55 million to construct1. While this facility has an estimated potential to fulfill $400 - $500 million in annual sales1 (handling the equivalent of roughly 20 stores6), the economics of achieving profitability are dependent on the e-commerce adoption from each respective regional market3. Kroger expects its CFCs to realize “site breakeven” profitability by the end of year three and achieve similar operating margins relative ORDERS ARE EITHER DIRECTLY DELIVERED TO A CUSTOMER to a store by year four. Over time, CFCs are expected to have similar OR SENT TO A LAST-MILE DROP-OFF FACILITY3 if not higher operating margins relative to a store primarily through more favorably for 2-day delivery as opposed to same-day delivery. automation, optimized routing, and other avenues7. Of significant Notably, Kroger’s CFCs are estimated to service an approximate importance is the reduced reliance on physical labor which we will 90-mile radius, which may ultimately make it challenging to justify discuss momentarily. KROGER PHOTO: the cost associated with same-day delivery due in part to the While Ocado’s facilities offer incredible efficiencies from an time needed to deliver orders1. This dynamic may have influenced operations perspective, limitations from a transportation Kroger’s recent decision to hit the pause button on commencing standpoint may ultimately best position the Kroger/Ocado CFC additional unannounced CFCs; Kroger recently reduced its AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 05 commitment to construct 11 of the targeted 20 total facilities thus far7. Despite the apparent change in tone from management KROGER TARGETS DIGITAL in regards to the total CFC expansion in the near-term, Kroger REVENUE TO DOUBLE continues to target digital revenue (approximately 7.5% of total TO APPROXIMATELY net sales) to double to approximately $20B by the end of FY23 in addition to improvements in their respective profitability7. $20 Of significant importance, and divergent from Walmart, the country’s largest grocer, Kroger has a unionized workforce. To date, BILLION there has not been meaningful pushback from the major grocery BY THE END OF 2023. unions (i.e. The United Food and Commercial Workers International Union and the United Auto Workers). Likely, this is attributable to the low automation penetration currently achieved in the industry. Currently less than 1% of grocery stores are automated, while KROGER EMPLOYEES ORGANIZE ORDERS WITH THE ASSISTANCE OF OCADO TECHNOLOGY. approximately 10% of the North American grocery supply chain (e.g. distribution centers and warehouses) have incorporated some form of automation8. While part of the long-term value proposition PHOTO: WSJ PHOTO: of a CFC is predicated on automation, elimination of waste, etc. concerns from a labor union perspective could intensify in the years ahead if the adoption of CFCs and automation continue to increase. AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 06 Micro-Fulfillment Another approach to solving for improved e-commerce profitability In addition to MFCs’ ability to expedite the time between customer is through the adoption of the micro-fulfillment center (MFC). order and fulfillment, they are also estimated to eliminate An MFC is typically either a compact warehouse, a dedicated approximately 75% of the costs related to the manual picking section of the store, or a store add-on that functions as an on-site sorting and fulfillment center. Standard MFC formats can vary in size from approximately 5k to 20k SF3. One of the principal tangible benefits of MFCs are that they leverage existing assets/supply chain infrastructure, while their smaller size enables operations in proximate distances to population densities. MFCs tend to be a comparatively less capital- intensive means of serving customers considering the minimal upfront investment needed. A typical MFC costs a few million dollars and has a payback period of approximately 2 years.9 PHOTO: DEMATIC, ORIGINALLY POSTED BY SUPPLY CHAIN DIVE SUPPLY BY POSTED DEMATIC, ORIGINALLY PHOTO: From a profitability perspective, the utilization of ORDERS ARE DIRECTED TO THE RETAILER, WHERE THEY ARE PICKED BY ROBOTS IN THE MFC MFCs can improve home delivery margins to roughly -2% vs. -15% using manual picking (ex. fees) and can yield click- process3. MFC technology providers such as Fabric indicate that and-collect order margins of +2% vs. -5% for manual picking9. their solutions are 4x faster than the manual picking process and Over time, the inclusion of fees charged to customers could boost have order accuracy exceeding 90%9. click-and-collect order margins to approximately the +5% range vs. +2% currently achieved via MFCs9. AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 07 ORDERS ARE EITHER PICKED UP FROM THE STORE OR ARE DELIVERED TO THE CUSTOMER Walmart Leans into Micro-Fulfillment With 5,342 stores throughout the U.S.10, one of Walmart’s comparative advantages relative to peers is the proximity of its store base to the SOURCE: MCDONALD’S vast majority of the US population, which makes the incorporation of MFCs a logical way to expedite orders and reduce costs. Walmart has worked with multiple technology partners, including Alert Innovation, Dematic and Fabric, which allow the company to create organic tests among MFC offerings in varying environments11. This includes both the addition of MFCs inside the store or supplemental to the existing structure. The benefit to the former being that MFC configurations can fit into spaces as small as Fabric’s 5k SF micro-centers12, as well as Dematic’s 10k SF configuration13. Recently, Walmart has indicated that it will begin to add “automated pickup points” to stores, which will enable customers and delivery providers a quick point of access to pick up their order. Given that Walmart offers pickup from ~3,500 stores and same-day delivery from ~2,700 PHOTO: AP PHOTO/SUE OGROCKI; ORIGINALLY POSTED ON 6ABC POSTED OGROCKI; ORIGINALLY AP PHOTO/SUE PHOTO: stores, the addition of MFCs will likely be synergistic to the Company’s existing model due to the improvements in process efficiencies12. AGREE KNOWLEDGE
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