BM Trends: Dark Stores

Dark Stores are warehouses that have become prominent in the era of food delivery and eGrocery as a more efficient type of ‘on-demand warehouse’ in a centrally located area of a city.

They facilitate timely delivery of fresh food and other related items so that on-demand players can compete with more traditional, in-store purchasing. Can the Business Model Trend continue or will it fall flat in the future?

  • Companies like Instacart (on-demand grocery delivery) rose to prominence in the pandemic, followed by a huge wave of VC funding; today, that wave of enthusiasm has diminished
  • Despite the high-tech approach and endeavor to optimize operations for efficient delivery, eGrocery and its adjacents (ie. Quick Commerce) are very low-margin business models
  • Dark Stores require a large investment of capital into both space and technology; yet, strategically, the goal is to minimize labor and inventory costs in the long-term
Grocery Delivery - Business Modelling
Business Model Innovation – eGrocery
  • Dark Stores can be ‘pureplay’ where there is no physical store (ie. solely eCommerce storefront) or they can be hybridized with bricks and mortar stores in certain locales
  • Kiranas (localized convenience stores in India) provide a reference business model; the pace of innovation in the market is rapid, and both sides are trying to adapt in real-time
  • The Future Trend is localization. Regional bifurcation (one region versus another) will mean that what works in one area will not work in another and the choices of suppliers/producers will likely dictate who will win in the mid/long-term

But more important is the fact that a Dark Store, Quick Commerce business model will target a 2-3% Net Margin, vs. a 5-6% Net Margin for more traditional retailers

Dark Store Business Model: Bullet Points

Dark Store Value Proposition Canvas

Value Proposition Canvas - Dark Stores
Value Proposition Canvas
  • Value Proposition is localized, on-demand fulfillment of fresh grocery products and other dry goods
  • Generate Revenue through online eCommerce storefronts; typical grocery model, although we see other categories of goods bundled into the model (alcohol, amenities, etc.)
  • Customer Segments are typically urban consumers who prefer the convenience of having groceries delivered – Busy Professionals, Working Parents, Suburban Families
  • Key Resources are the brand and fulfillment platform; consumers must trust the source of their food
  • Cost Structure is driven by investment into the physical ‘micro-warehouse‘ space, which often-times is located in dense urban environments + Technology, Ops Staff, Delivery Drivers

Dark Store Business Model Canvas (Mockup)

Business Model Canvas - Dark Stores
View Full PDF

Example ‘Dark Store’ Companies:

  • Gorillas – “Groceries at your door in minutes”
  • GoPuff – “Alcohol, Food, Drinks, and More Delivered to You”

Reference Business Model: Kiranas

Sometimes we have to think a little outside the box to find comparisons for certain business models. As much as some food delivery and eGrocery companies think they are revolutionizing the industry, localized food distribution has been happening at convenience stores for decades. While not glamorous, these ‘kiranas’ (as they are called in India) work because they build trust with their neighbors and within their communities.

A kirana isn’t any old convenience store … They are tightly integrated into their local communities, normally serving at most a few hundred families. “Many of us have grown up with the kiranas. It is just an extension of our kitchen,” he says. “The shopkeeper knows us by name, he knows us by family. He is not only a person who serves us, but tomorrow, if there is a need, he actually helps you out. Kiranas have become an integral part of the society.”

Technology Review

What if the average Kirana was technlogy enabled?

In India, there are 12 million family-run kiranas. Kiranas account for more than 95% of India’s grocery market.

Inspired by the rapid growth of Instacart, GoPuff, and Gorillas in North America, India’s delivery apps decided to take a run at the grocery market, which is estimated to be $620 Billion in size in India.

What differentiates the kiranas in India from convenience stores in North America is that the kiranas will typically provide local customers credit, opting to settle debts on a weekly or monthly basis.

Local companies like Zepto, Olá, and Blinkit aim to “disrupt” the Kirana space by promising hyper-rapid delivery in 10 minutes using the Dark Store model, with each one operating hundreds of Dark Stores across the country. The amount of investment required in both space and technology is in and of itself one major obstacle the ambition to ‘replace the fridge.’

But more important is the fact that a Dark Store, Quick Commerce business model will target a 2-3% Net Margin, vs. a 5-6% Net Margin for more traditional retailers. The additional logistical cost is what affects the margins.

In other words, while the new-age QCommerce, eGrocery stores are investing $Billions into Dark Stores and sensors to detect whether fruit is ripe, the kiranas – who no doubt face a threat to their future existence – have the chance to respond with some tech of their own.

Why, if India already has a hyperlocal retail network perfectly tuned to the needs of every community, should anyone spend money building a new one? A host of “kirana tech” startups have decided there’s no need. Instead, they’re building tools to help the shops compete with the behemoths of modern retail.

Technology Review

Future Trend: Localization

Future Trends - Localization
KaboomPics

Trying to predict any Future Trend requires reading the tea leaves about a series of trends in confluence and make a big bet in one direction or another.

The question in the case of Dark Stores and QCommerce, is where are you going to order your tea? From the online store or the local kirana?

Suppliers & Distributors Will Likely Determine the Future

The answer to this question – in the future – will likely come down to who supplied the tea and how local that supplier is. Producers/suppliers will likely determine the outcome of this market, whether that is for fresh produce, dry goods, booze, snacks, or tea.

Those stores – whether physical or online – who have the best aggregate supply will win the market, not the one who can deliver the bag of potato chips (or whatever the equivalent in India is) the quickest.

Big Food brands and other global CPGs (consumer packaged goods) will love the development of QCommerce because it is easy for them to influence and coordinate their own supply chains to suit the trend. But smaller, more local producers may not favour them in the same way unless it offers them some kind of distinct advantage in both distribution and customer acquisition.

Momentum is moving towards organics, natural products, local producers, and sustainable supply chains. The Future Trend of Localization will likely determine the fate of this market in the mid-term.

Top 3 – Learn More

Business Model Toolkit

Business Model Innovation – eGrocery

Strategy & Grocery – Thrive Market + Memberships