Dark stores are basically supermarkets without customer walk-ins, serving online orders. These stores and their smaller, smarter automated versions, called microfulfilment centres (MFCs), are emerging not only as a crucial link in the last-mile delivery chain, but also as a disruptor in the realty space.
Last year, ZFW Dark Stores, a Delhi-based startup, set up its first dark store in Shahpur Jat. In less than a year, it has set up 15 dark stores and 145 MFCs across Delhi-NCR, riding the wave of the post-pandemic quick commerce. or q-commerce, boom. The company is now looking to enter Hyderabad, Chennai and Kolkata. The spaces set up by ZFW range from 50 sq ft to 2,000 sq ft and are housed in, say, a small mall in Delhi’s Rohini or in unobtrusive residential enclaves in Faridabad and Noida, in commercial complexes in Bengaluru and Pune, or in small shops in local markets across cities.
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“From finding the space, to hiring people and procuring inventory, we take a month to get an MFC running, and two months for a dark store. In NCR, for instance, there is enough distressed real estate and empty retail spaces to lease. We channelize local broker networks to find appropriate real estate in most cities, and open roughly 10-12 MFCs and dark stores a month," says Madhav Kasturia, founder of ZFW. The startup, which evolved from a cloud kitchen to a dark store platform, recently raised $1.2 million in its seed round.
Go urban
If the last few years have been all about big-box, million square feet-sized warehouses on city outskirts, the focus has now expanded and shifted to in-city logistics and micro warehouses. And dark stores, along with MFCs, sort centres, cloud kitchens and hybrid retail stores, are stirring up the so-far dormant urban logistics space.
While e-commerce, particularly its q-commerce or under 30-minute delivery segment, has redefined the last-mile delivery chain, urban logistics is seeing a revamp by repurposing existing realty spaces as in-city warehouses. Logistics firm ESR India recently announced its first in-city distribution centre in Delhi, to enable just-in-time delivery within 20 minutes. It is looking at multiple cities to set up similar centres.
The demand for in-city logistics, particularly dark stores, is estimated to be 7 million sq ft by 2022, according to property advisory JLL. The need is largely driven by e-commerce (grocery-led), retail and omnichannel players. And it is easy to see why: the JLL report also points to dark stores shaving off 10-30% in logistics costs. “Till 2021, everyone was talking of large warehouses, but there has been a shift. Companies realized if they didn’t look within cities to address customer demand more quickly, it would be tough. Urban logistics is seeing a revolution of sorts in our country," says Chandranath Dey, senior director and head, industrial operations, supply chain consulting industrial services, JLL India.
Ripple effect
Abandoned mall spaces, empty ground-floor retail stores, commercial complexes, underutilized parking facilities, housing societies, high streets, narrow bylanes or quiet neighbourhoods — dark stores and MFCs are being set up in all possible areas.
The e-commerce vertical of Mahindra Logistics Ltd (MLL), a third-party logistics (3PL) services provider, set up its first dark store in December 2020 in Bengaluru. Since then, it has set up multiple dark stores, where e-commerce companies have outsourced the dark store or last-mile delivery operations, or both, to MLL.
While it runs dark stores for e-commerce customers, both in grocery and non-grocery segments, it also caters to a ‘direct-to-kirana’ model, where the inventory is delivered to kirana stores. MLL works with FMCG brands on the latter, where kiranas usually opt for next-day delivery. Next on MLL’s to-do list is setting up more dark stores in tier-I and tier-II cities.
While the demand is high and spaces are available, finding the right one with suitable infrastructure is not easy. Ankur Singhai, vice-president, e-commerce, MLL, agrees. “We have a team that understands the requirements and possible challenges in a micro-market. Given that in-city logistics is here to stay, maybe it will be considered as part of urban planning in the future," he says.
Once MLL identifies a location, it works with the owner to explain the requirements. This involves a modified built-to-suit process, tweaked as per customer needs.
The demand for in-city logistics spaces is varied in size, location and format, leading to the need for a variety of commercial spaces. Ram Chandnani, MD, advisory and transactions services, CBRE India, says most dark stores or MFCs are of 1,500-3,000 sq ft, but some e-commerce firms are also setting up larger 20,000-30,000 sq ft mini distribution centres. “Companies are adopting different strategies and models to cater to customers. Large e-commerce firms, which have so far built big format warehouses, are revalidating their overall strategy, and focusing on in-city logistics spaces," he says. When an e-commerce company approaches a property advisory like CBRE to find spaces within cities, they do prior mapping to gauge demand.
“We follow a checklist for statutory compliances. In Bengaluru, for instance, Whitefield, Sarjapur, north Bengaluru, Malleshwaram and Jayanagar are places where there is good demand. But these stores can come up anywhere, as a result of which vacancy is disappearing," Chandnani adds.
Hyperlocal push
Four years after Join Ventures, which operates gifting portal IGP.com and premium flower service Interflora, decided to open dark stores for speedy delivery, founder and CEO Tarun Joshi believes that in the near term, the demand for such stores will outstrip supplies.
“Currently, the demand is probably 10 times that of 2018 and only some bit of supply has caught up. Consumers are getting more demanding in terms of product quality, delivery speed and the way in which it is delivered," he says. The company runs 40 dark stores in 25 cities, with plans to open five each a month in 2022-23, and enter more cities. It has bumped up the size of its dark stores, from 1,000 sq ft to 2,500 sq ft. Its three large mother warehouses now support and feed the dark stores. “Dark stores are equally capable of handling non-perishable goods because of faster delivery. Post pandemic, we realized that a dark store is a far more scalable model especially for fulfilment because you can stock more variety compared to a regular store-front," says Joshi.
Tier II cities like Jaipur, Lucknow, Kochi, Surat, Vizag, Vijayawada, Nagpur and Guwahati, too, are seeing a dark store spurt. Ecom Express Ltd, a logistics partner with e-commerce firms, recently launched a 2 lakh sq ft fulfillment centre in Hoskote, Bengaluru, to support a leading e-grocery company’s 100 hyperlocal or dark stores in the city. It is setting up similar centres in Hyderabad, Surat, Jaipur, Mumbai and NCR.
“We are seeing a demand for fulfillment centres, especially in tier-II and tier-III cities, where consumer spending has jumped due to increased internet penetration," says Lakshmanan S, COO, fulfillment services, Ecom Express.
The omnichannel push by companies, in general, has created new demand for commercial spaces across cities. Online edtech platform Byju’s, which earlier this year announced opening 500 coaching centres, has already set up over 100 of them (1,500-2,000 sq ft) in mainly tier-II and tier-III cities. Now, it is looking to open bigger 3,000 sq ft centres in larger cities, said a person familiar with the development.
Location is key
The sweeping expansion of in-city logistics spaces is new to India. So, as they get closer to our homes, there are obvious concerns. What are the operating hours? What kind of parking infrastructure is available? How wide is the road? Is there a hospital or school nearby?
Earlier this year, DunzoDaily, the q-commerce grocery arm of Dunzo, opened a dark store on the extended premises of a school in Malleshpalya, in suburban Bengaluru. Overnight, a parking shed was built for the two-wheelers of delivery boys. Soon enough, residents of nearby housing societies and the parents of school students protested against the sudden increase in traffic in the area and the general disquiet it created. The store shut in just a few months.
Right location is key, says Prodipto Roy, co-founder of Quickshift. The 3PL player, which works with over 100 brands, is setting up multiple, small-sized in-transit hubs in Mumbai and Delhi-NCR. Trucks bring in inventory from warehouses, before bikers take them for same-day delivery. Roy says real-estate cost, flooding issues, approach roads, parking bay and local city regulations pertaining to the movement of trucks are considered before setting up a hub.
Zepto, which rose to fame with its 10-minute grocery delivery promise, has seen 98% success rate with its store locations. “The core determining factor is whether a dark store is able to scale up quickly or not. Before we open a facility, a rigorous network design process goes into it. Everything from population density, road dynamics to traffic data is considered," says co-founder and CEO Aadit Palicha.
Zepto, for instance, exited a location that relied on orders from a corporate park. With offices resuming in a staggering manner, it decided to relocate the store.
In terms of operating metrics, a store in Dwarka against one in Bandra largely equates to the same last-mile delivery cost. Palicha says Zepto is still launching stores because the cash burn is significantly less than most of its peers.
“We can use the money saved from the maturity of our network to invest in new stores. Are we launching stores as aggressively as, let’s say, December 2021 or January 2022? No. But we are launching more stores, in general," he says.
Seeing a churn
Dark stores are here to stay, reiterates Abhishek Gupta, engagement manager, Redseer Strategy Consultants, especially in food and grocery where people expect shorter delivery timelines. “But if we apply the same metric to, say, beauty and personal care where people are willing to wait longer to get the product and where companies focus on sustainable growth and not just customer acquisition and top-line growth, we could see some rationalization," Gupta adds.
Property agent Ganesh Pawar in suburban Mumbai’s busy Chandivali-Saki Naka-Andheri area is seeing a churn too. He ventured beyond residential leasing last year as the demand for unused industrial and retail spaces went up driven by e-grocery. Of late though, Pawar has seen some dark stores shut within months of opening, only to be replaced by newer ones. “The demand is such that ground-floor spaces get filled up easily even if one store shuts down," he says.
Managing costs is key, says Joshi of Join Ventures. Given that warehouses are mostly located in the outskirts, land acquisition and rentals are cheaper. “Cost of people is at least 25% more (in a dark store) compared to a warehouse, while rentals per square foot are at least four times more," he says. It’s a sentiment shared by Harminder Sahni, MD, Wazir Advisors. “Unit economics of dark stores will determine the pace of expansion and investor interest. Right now, it’s a work in progress. Different formats and strategies will emerge. BigBasket is already opening kiosks in parking lots. South-east Asian cities like Taipei have similar unmanned kiosks," says Sahni.
The road ahead looks bright enough for India’s dark stores so long as the convenience of same-day delivery is here to stay. And more critically, as Joshi says, if they get the right size, people and location too.
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