The rise of ‘dark stores’—and how they could save struggling retail

Whole Foods “opened” a new “store” that you can’t walk into or shop at.

Located in Brooklyn and slightly smaller than a typical Whole Foods, the store is dedicated solely to fulfilling online orders. It’s the company’s first purpose-built online-only store. With longer aisles, no salad bar, and missing those checkout candy displays, the store will be used to pack up online orders, which have skyrocketed during the pandemic. Amazon, which owns Whole Foods, says its grocery sales tripled, year over year, for the second quarter of 2020.

But this is not just a pandemic-related reaction. Though six of its stores were temporarily converted to handle only online orders, this new dedicated online-only store had been in the works for more than a year, according to company officials. And it’s not alone. More retailers are accommodating the shift of shopping from in-store to online by turning their physical locations into so-called “dark stores”—miniature warehouse-like spaces where online orders can be packed for pickup or delivery. Retail experts say this is just the start of a major trend.

“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,” says Ken Morris, managing partner at Cambridge Retail Advisors.

Unlike the new Whole Foods store, not all of these facilities need to be purpose-built. Grocery chains such as Stop & Shop and Hy-Vee, based in Iowa, are already experimenting with turning stores dark. Other retailers are converting stores into micro fulfillment centers, Morris says. Walmart has one in New Hampshire. Bed, Bath & Beyond plans to convert a quarter of its locations into dark stores. Some shopping malls are also being converted into fulfillment centers.

This approach could represent a lifeline for struggling stores. One of Morris’s clients, which he couldn’t name, was considering closing a few of its underperforming grocery stores but is now planning to convert them into micro fulfillment centers.

Though nongrocery retailers are turning stores dark as more shopping happens online, Morris expects grocery stores and their perishable products will still draw at least some of the in-person market. He says grocery chains will eventually move to a “semidark” or hybrid approach, in which shoppers can submit most of their order online for pickup but still roam the aisles to select items such as produce or deli meats.

Key to this change is robotics, Morris says. Even without the social distancing rules of the pandemic, the typical grocery store can handle only so many customers. Warehouse technology startups such as Fabric and Alert Innovation are already beginning to work with retailers and grocers on integrating robotics and adding more product into smaller, robot-only spaces. “These things are very quick. They can pick 15,000 orders a day, and they do it in a small footprint,” Morris says.

There’s even the potential of making the robots part of the theater of the shopping experience, Morris says. “Some grocery chains and drug stores are considering putting these things center, glassed-in, in the middle of the building so people can actually see it happening,” he says.

For now, the transition will be more gradual. Morris says the drop-off in physical shopping during the pandemic led many chain retailers to temporarily turn stores dark. But as the pandemic drags on and online grocery shopping becomes more common, he expects other grocery chains will begin to analyze their online orders and the population density near their stores and decide that some locations may be better used as dark stores.

“Every metro area will have some of these,” he says. “In the next five years, this will explode.”