END-OF-DEGREE PAPER

International Business Economics

THE FUTURE OF E-GROCERY.

A STUDY OF THE MICRO-FULFILLMENT MODEL

WITH A FOCUS ON THE SPANISH GROCERY MARKET

Adriana Cañas Verdugo, Carlota Martínez Aldeguer,

Alba Romero Martínez, Irene Vila Rodríguez

Tutored by Carolina Luis-Bassa

Code: GCI03
Academic Year: 2020-21
Degree: International Business
Economics

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ABSTRACT

E-commerce sales have been growing steadily for the past two decades. Remarkably, online purchases
across the grocery industry have been experiencing an enormous increase, with the coronavirus
pandemic boosting, even more, these growing orders. According to a report published earlier this year
by Nielsen, in May, 44% of global consumers were shopping online weekly, while only 9% were
regularly doing so before the pandemic. Although this fast growth has stabilized during the last
months, its impact on e-grocery commerce is unquestionable: covid-19 has contributed to the decrease
of in-store purchasing, accelerating e-grocery demand, and shortening the time-frame for disruptive
innovation in the supply chain.

This project aims to inquire into potential logistic solutions that can solve the new challenges of this
era. It will be shown that, after analyzing the different distribution strategies, the micro-fulfillment
model appears to have a great future projection. Combining the speed of local delivery with the
efficiencies of robotics, this feasible distribution strategy achieves to reduce the distance with
customers, increasing the speed of delivery and decreasing logistic costs. After the exploration of this
model's benefits and limitations, this paper presents the factors that have been found to be the drivers
of micro-fulfillment in the U.S., through a deep analysis of the trends in the North American
e-grocery market. Lastly, it focuses on seeking similar tendencies in the Spanish market with the goal
of analyzing if these are enough for the implementation of this distribution strategy.

Keywords: micro-fulfillment, distribution strategy, logistics, grocery, e-commerce, online shopping,

automation, Spain, covid-19.

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ACKNOWLEDGEMENTS

Firstly, we would like to thank our tutor, Carolina Luis-Bassa, for guiding us through the project and
providing us methodological support. We would also like to express our deep and sincere gratitude to
all the experts in the field that have backed up our analysis and, in some cases, even redirected the
course of our project. Despite having busy schedules, they managed to find time to help us, something
we are extremely thankful for. We had the pleasure of interviewing Marc Wulfraat, president and
founder of MWPVL International Inc., which provided us specific knowledge about the
micro-fulfillment model that was crucial for the development of the theoretical part of our study.
Rueben Scriven, the Senior Analyst at Interact Analysis, whose webinars have been one of the main
pillars of our research, took a keen interest in our project and was also committed to answering some
specific questions. Oriol Montanyà, Head of the Operations & Technology Area in the Barcelona
School of Management, and ex-Chief Operating Officer at Mercadona, not only gave us insights about
logistics, but also opened up our eyes at a time we were stuck on how to approach our analysis. Lastly,
Helena Ramalhinho, logistics professor at Universitat Pompeu Fabra, also shared with us her point of
view regarding the implementation of this distribution strategy in the Spanish market, allowing us to
consider aspects we were not previously contemplating. Without their assistance and contributions,
the success and outcome of this paper would have not been the same.

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TABLE OF CONTENTS

1. Theoretical and Methodological Framework ……………………………………………………. 5

2. Introduction. Digital Disruption at the Grocery Market ……………………………………… 6

3. E-grocery Distribution Strategies ………………………………………………………………… 7

3.1. Main Distribution Strategies …………………………………………………………………. 8
3.2. Selection of the Best Distribution Strategy ………………………………………………… 10

4. The Micro-Fulfillment E-Grocery Distribution Strategy ……………………………………… 11

4.1. What are Micro-Fulfilment Centers? Functioning and Characteristics …………………….. 11
4.2. Barriers of Micro-Fulfillment ………………………………………………………………. 12
4.3. Drivers of Micro-Fulfillment...………………….…………………………………………... 13
4.4. Summary of the Findings..………………………………………………………………….. 15
4.5. Main Internal Factors Influencing the Implementation of Micro-Fulfillment.……………... 15
4.6. Current Situation of Micro-Fulfillment.…………….……………………………………….. 17
4.6.1. Current Situation of Micro-Fulfillment Worldwide..…………………………………. 17
4.6.2. Current Situation of Micro-Fulfillment in Spain.……………..………………………. 19

5. The Spanish Grocery Market……………………………………………………………………. 20

5.1. Drivers of Micro-Fulfilment in Spain ………………………………………………………. 20
5.2. Barriers of Micro-Fulfillment in Spain...………………………………………………….… 23

6. Conclusions ……………………………………………………………………………………….. 25

7. Glossary…………………………………………………………………………………………… 26

8. References ………………………………………………………………………………………… 27

9. Appendices ……………………………………………………………………………………….. 32

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TABLE OF FIGURES

Figure 1. Characteristics of the Main E-Grocery Distribution Strategies ……………………………. 11

Figure 2. Speed Comparison of In-Store Fulfillment with Micro-Fulfillment.……………………… 12

Figure 3. Micro-Fulfillment Main Characteristics & Responses to Grocery Market Trends………... 16

Figure 4. Best Distribution Strategy depending on the Order Volume and Delivery Time………….. 18

Figure 5. Micro-Fulfillment Main Suppliers and Retail Partners……………………………………. 19

Figure 6. Evolution of E-Commerce Sales in Spain (in thousands of millions of €)...………………. 21

Figure 7. Spanish E-Commerce Revenues (in billions US$)..……………………………………….. 21

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1. Theoretical and Methodological Framework

This section aims to explain what research methodology has been followed throughout the report,
with a discussion of the three main sources that provide a basis for this project.

On the one hand, assisting in webinars, a place for professionals to exhibit their knowledge on topics,
has been useful to get first-hand information on micro-fulfillment as a new logistic trend.

On the other hand, information has been gathered from literature on the topic and bibliography from
expert authors in the field. Regarding the e-grocery market analysis, the Connected Commerce report
and the article COVID-19 has Flipped the Value Proposition of Omnichannel Shopping for
Constrained Consumers, both from Nielsen company, have been essential to consider key industry
trends that are shaping the transformation of the grocery industry towards e-commerce. Moreover,
articles such as E-grocery distribution: Micro vs Central Fulfillment - Which Strategy to Choose? and
Micro-Fulfillment y Dark Store: Las Armas Secretas de la Logística Urbana have been used to
categorize the different e-grocery distribution strategies retailers can choose from. In order to get the
insights of the micro-fulfillment logistics strategy, it was key to read the available information at
Mecalux’s website, a Spanish company specialized in intralogistics technology, as well as the article
The Next Shipping & Delivery Battleground: Why Amazon, Walmart, & Smaller Retailers Are Betting
On Micro-Fulfillment, published by CB Insights. In addition, for finding relevant specific drivers of
this model, the report Micro Fulfillment: Passing Fad or Permanent Market Shift? by Marc Wulfraat
has been essential.

Finally, some interviews have been carried out in order to contrast the findings with experts in the area
of interest. Precisely, four interviews have been conducted. The interviewees have been: Helena
Ramalhinho, Oriol Montanyà, Rueben Scriven and Marc Wulfraat. Please note that Appendix 1
provides a description of the interviewees.

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2. Introduction. Digital Disruption at the Grocery Market

Since its inception, digitalization has disrupted various industries in the world, including grocery
commerce. As Internet connection and smartphones have become more accessible all around the
world, online shopping has developed to be an intrinsic part of our lives (Internet World Stats, 2020;
Newzoo, 2019). In the past two decades, e-commerce1 sales have experienced a striking steady growth
with further expectations of expansion in the next few years. In 2015, retail e-commerce sales
worldwide amounted to 1.54 trillion U.S. dollars. This amount has increased to 3.53 trillion U.S.
dollars in just 4 years (eMarketer, 2019). Besides, a study carried out by the research organization
IGD in 2018 revealed a combined forecast of 212% increase in online food and grocery retailing for
three critical markets: the United States, China, and the United Kingdom.

Moreover, a Nielsen report states that “the need for efficiency in consumers’ lives will be an essential
determinant in driving further growth in online purchasing”. According to their survey, consumable
categories such as packaged and fresh groceries had experienced one of the largest increases in online
shopping over 2018. Packaged grocery penetration increased by three percentage points and fresh
groceries (together with health care products, wine and alcoholic beverages, baby products, and pet
food) suffered an increase of 2% with respect to the previous year (Nielsen, 2018).

The 2018 Nielsen Connected Commerce Report also highlights the high growth potential and
opportunities for FMCG1 e-commerce from the past two years. It reported that 26% of global online
shoppers purchased this kind of goods in 2018, up to 2% more compared with the previous year. Even
fresh products (fish, meat, dairy, and vegetables among others), which have always been the category
with the lowest global online penetration indicators, experienced a two percentage point increase in
2018. The report also revealed that in 2018, one-third of consumers admitted purchasing online more
often than in-store. Also, around 30% of consumers that still had not made an online purchase for
groceries were willing to place an order in the near future.

These positive trends characterizing the past two years and favoring the expansion of e-grocery
commerce have only been accentuated with the covid-19 pandemic. The appearance of preventive
measures to slow down the spread of the virus back in March 2020 caused an enormous and sudden
increase in online grocery (Nielsen, 2020). As consumers settled into quarantine, online traffic to
grocery stores in April 2020 went up 161% since mid-February (Bellaiche, 2020).

Furthermore, as mobility restrictions forced consumers to stay at home, 27% of global consumers
started to shop online for the first time. In May 2020, 44% of global consumers admitted that they
were shopping online each week, compared to only 9% of global consumers that were regularly
shopping online before the covid-19 pandemic (Nielsen, 2020). Only in the U.S., roughly 35% of the

1
Term defined in the Glossary of this paper.

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households stated to have used online grocery shopping in the past 30 days, compared to 13% in
2019. It would have taken around three to five years to achieve such a level of penetration in normal
conditions (Wilson et al., 2020).

Grocery’s shopping habits are considered to be one of the most difficult to change, but it is obvious
that the covid-19 outbreak has forced a massive change in consumer behavior (Laseter, 2020).
However, the rise and extension of e-commerce has not only altered consumer attitudes and
behaviors. This digitalization in the grocery industry has also an impact on the entire supply chain:
this includes retailers and suppliers (Lacka et al., 2014). Because of the pandemic, retailers have been
forced to adapt their brick-and-mortar stores2 to expand back room to create more space for online
orders and face the rapid growth that e-grocery commerce was experiencing (Wilson et al., 2020).
With this premise, the evolution towards other logistic models that offer better fulfillment options for
online orders needs to be made. Consequently, this project aims to inquire into potential logistic
solutions that can solve for the new challenges of this era, focusing on a particular innovative
distribution strategy and its possible implementation in the Spanish e-grocery market.

3. E-grocery Distribution Strategies

Initially, grocery retailers offering online purchasing services could easily fulfill online demand with
simple methods such as workers pushing carts through the store and filling the orders by themselves.
Nevertheless, as more grocery shoppers are preferring to fill their carts virtually, in-store picking can
no longer be efficient, as it cannot bear the demand in either terms of space restrictions nor labor costs
and shortages (Spalding, 2019). Moreover, it is very sensitive to human errors that can lead to delays
and inefficiencies. In fact, according to Fabric, a company that offers micro-fulfillment solutions,
grocers incur a cost of $20 per each $110 order when using the hand-picking method, leading to an
unnecessary loss of more or less $5 to $15, something that is quite significant in an industry with
already tight margins (Longpoint, 2019).

To accommodate this demand, retailers have been forced to search for alternative methods, from
which they have a couple of fulfillment options. The majority are considering automatization as a
substitute or a supplement to their traditional fulfillment centers, where the main technology behind
these new solutions consists of reading the warehouse planogram to design the most efficient route to
fulfill orders (Carré, et al., 2020).

Currently, many retailers are still using human labor to operate online orders. Nonetheless, by 2030,
many operations could be automated, as AI assumes control over the repetitive logistic activities that
companies perform (McKinsey, 2020), something that motivates grocery businesses to adapt to the
growing e-commerce demand by taking advantage of robotics.

2
Term defined in the Glossary of this paper.

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3.1. Main Distribution Strategies

One of the very first solutions that some retailers are implementing to improve store-based picking is
incorporating robots in their stores to speed up e-commerce fulfillment. These robots collect and pack
orders automatically, transferring items from storage to store shoppers who consolidate the order,
optimizing employees’ work. The main benefit of this hybrid system is that the time walking through
the store picking products is saved, while it guarantees that customers will be getting the best
selection of fresh products, as the process is being monitored by an associated worker (Crowe, 2019).

Other retailers prefer to go for the automatization of traditional central fulfillment centers, which are
independent large format facilities serving retailers. Automatizing fulfillment centers to fill online
purchases have cleared the way for the creation of customer fulfillment centers (CFC), which are
highly automated distribution centers designed to serve a vast geographical region, typically requiring
a large footprint of 300,000 - 350,000 sq. ft. (27,871-32,516 m2). They can process substantially high
order volumes, usually delivered the next day. Some other specifications of CFCs include that they
usually require an investment of $100 to $200 million in equipment, which implies a need of $300 to
$500 million of sales volume to be viable (Wulfraat, 2020). Those centers maintain the characteristics
of large warehouses, typically located in suburban areas, keeping the advantages of traditional
distribution centers, such as low rent costs or strategic geographical connections, but adding robotics,
which help to optimize e-commerce demand. Nonetheless, this strategy also maintains a big
disadvantage: CFCs are far from the final consumer, which increments both delivery time and
transportation costs, one of the causes of concern given high last-mile delivery3 costs. In fact, these
additional costs usually correspond to 28-35% of total product costs (Pulido, 2020), which represents
a significantly high amount.

To solve the labor and transportation cost problem, dark stores and micro-fulfillment centers (MFC)
were born. Although those are two totally different logistic approaches, both omnichannel strategies3
were created to optimize logistic costs. The main purpose behind these new logistic strategies is to
locate fulfillment centers in populated areas to shorten delivery times, accommodating to the
increasing consumer expectations, while cutting costs. This reduction of last-mile costs is one of the
main advantages of these systems with respect to customer fulfillment centers and it is not only a
consequence of its location but also of the possibility of taking advantage of the BOPIS model3. The
click-and-collect or BOPIS is the alternative of the home delivery model, and it is also highly
preferred by retailers since it is 90% less expensive than delivery at home, according to Target Chief
Operating Officer. It saves on fuel, transportation time and vehicle maintenance, while offering
customers a wide range of pickup locations to make the experience as convenient as possible. This
system does not only benefit the retailer, but it also benefits the customer, since they no longer have to

3
Term defined in the Glossary of this paper.

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stay at home waiting for their order, allowing them to get purchases sooner and on their own schedule
(Salter, 2016). Therefore, it creates a win-win situation that can only be exploited by using dark stores
or micro-fulfillment centers.

Dark stores are traditional retail stores converted to fulfillment centers no longer opened to the public.
They can be purpose-built or normal stores turned into dark stores, but their own purpose is to fulfill
online orders. They operate as miniature warehouses located in urban areas, where online orders are
prepared for pickup or delivery, reducing last-mile delivery costs. However, getting closer to the final
consumer is not enough, optimizing and automating the process to fulfill orders is a need when online
orders are that significant (Morgan, 2020). The key to this logistic strategy would be robotics. Some
of the retailers betting on dark stores are already partner shipping with start-ups such as Fabric and
Alert Innovation to integrate robotics (Berg, 2020) and generate orders electronically, being then
processed based on the store’s blueprint for picking's route optimization.

On the other hand, micro-fulfillment centers (MFCs) represent a balance between the previously
presented models, combining the “speed of local delivery associated with in-store picking, with the
efficiencies of robotics fulfillment from large automated facilities” (Volovich, 2020). These automated
MFCs are usually co-located within one retail store, but can also be placed as a small warehouse site
in an urban area. To reduce the space limitation problem, these centers are usually installed in an
approximately 10,000-20,000 sq. ft. (929-1,858 m2) space (Wulfraat, 2020). The investment in
equipment is also significantly lower than the one required for customer fulfillment centers, being
approximately 4-5 million dollars. Not only investment, but also the cost of wages is reduced, since it
requires a small amount of human labor, making labor costs low.

But what is special about micro-fulfillment centers that make experts claim that it will be one of the
dominating logistic strategies in the near future? Not only the space reduction, accomplished by
designing every single element to optimize the space efficiently, but also the usage of hundreds of
robots traveling in all directions. This automatization enables retail companies to fulfill a typical full
grocery basket in less than five minutes from the moment the consumer places a standard order online
to the moment this order is ready for delivery. This allows consumers to get their groceries in an hour
on their doorstep, or even less if they prefer to pick them up at the store, something that could not be
imagined a few years ago (Fabric, 2020).

Figure 1 summarizes the main characteristics of the four main distribution strategies mentioned in this
section, for an easier comparative.

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Figure 1. Characteristics of the Main E-Grocery Distribution Strategies. Source: Own elaboration.

3.2. Selection of the Best Distribution Strategy

Now, the main question is: which of all these different kinds of e-commerce distribution strategies is
the most efficient? Unfortunately, there is not a unique correct answer to this question, as this is a
decision that each grocery store should make based on the factor conditions affecting them directly,
including service performance, geographical footprint, shopper buying patterns, budget or size
(Spalding, 2019). Nevertheless, there is a clear winner trend among retailers: micro-fulfillment.

Giants like Walmart, FreshDirect or Ahold Delhaize are some of the retailers that have welcomed the
use of micro-fulfillment solutions, as it will be seen later in this paper. This solution seems to be
greatly growing in popularity among grocery chains for automating online grocery to meet demand
(Ladd, 2020a), as these small facilities can be deployed quickly, enabling many markets to be
covered. Moreover, it also seems to be a solution for the low-margin challenge that retailers face,
especially with online sales: net margins per order fulfilled in-store or in dark stores are 9%, $9.03 per
order, but micro-fulfillment centers have managed to increase this net margin up to 12.4%, $12.38 per
order (Wulfraat, 2020).

Although it might look too expensive for small players to adopt, these might also be tempted to end
up implementing it in the near future in order not to fall behind in an industry where consumer
expectations keep increasing (CB Insights, 2020). Therefore, it seems like micro-fulfillment is the
future of e-grocery fulfillment.

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4. The Micro-Fulfillment E-Grocery Distribution Strategy

From now on, this study will be focused on this recently implemented approach intended to make the
fulfillment process more efficient: micro-fulfilment.

4.1. What are Micro-Fulfilment Centers? Functioning and Characteristics

Micro-Fulfilment Centres (MFCs) employ automation and robotics to fulfill online grocery orders
or assemble Click and Collect orders for pickup at the store (BOPIS). It is a flexible model in which
the shopper journey can be initiated in one process and finished in another. Therefore, since it
provides cross-channel services, it is an omnichannel strategy that offers flexibility and choice to
consumers, allowing them to tailor their shopping experience in a way that best suits them.

MFCs have two main components: a software management system that processes online orders and an
automated storage facility, characterized by several features. Firstly, they are smaller than traditional
fulfillment centers, which can be as large as 300,000 square feet (27,871 m2) of space, while MFCs
range from 10,000 to 20,000 square feet (929-1,858 m2), with some being as small as 5,000 sq. ft.
(464m2) (L.E.K Consulting, 2020). Combining the best of robotics, these high-density storage
structures reduce space by up to 85% (Honeywell Intelligrated, 2020). Consequently, unlike
traditional warehouses, they do not have to be located in the outskirts of cities and can be located near
the final customer in urban locations, where a large segment of the population lives, either inside an
existing store or in a smaller warehouse space, which brings down the cost and time of delivering
orders. Therefore, by using MFCs, the distribution process is sped up in two ways. On the one hand,
thanks to the automation of the warehouse, which fastens the processing of the order compared to
regular in-store fulfillment, as figure 2 below shows. On the other hand, since the distance between
the customer and the warehouse is reduced, the order delivery time further decreases. Not only is the
distance decreased because warehouses are located in urban areas or leveraged in the existing store
networks, but also because retailers can have more than one compact logistics center in urban areas to
build a dense network of warehouses.

Figure 2. Speed Comparison of In-Store Fulfillment with Micro-Fulfillment. Source: Own elaboration based on “Micro
Fulfillment: Passing Fad or Permanent Market Shift?” by Marc Wulfraat 2020.

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Furthermore, with a highly compact design that decreases real-estate space, retailers’ leasing and
operating costs are reduced, as more product volume per-square-foot can be held compared to
traditional warehouses. Also, thanks to automation, labor costs are diminished, as the costs associated
with employee overtime, temporary staffing, insurances, and training, are reduced (Futch, 2019).

4.2. Barriers of Micro-Fulfillment

Despite being in the perfect scenario for micro-fulfillment to display its full potential in the future of
online groceries, as with anything, this logistics solution presents some drawbacks.

(A) Large Initial Disbursement and Volume Requirements

Backfitting a store’s back room to make it functional for the installation of a MFC is most of the times
the largest expense. The costs of building a MFC taking up to 5,000 weekly orders can go from $8
million up to $10 million after expenses for site preparation, construction, equipment
software-integration and other expenses are taken into account (Silverstein, 2020). According to a
study conducted by Marc Wulfraat, which took as an assumption averages in the U.S. industry,
introducing automation with less than an estimate of 5,000 weekly orders, would not be profitable.

(B) Automation System’s Low Flexibility and Capacity Limitation

Another important aspect to note is the fact that MFCs technology is evolving swiftly, making the
design, equipment and automation systems installed today, obsolete in a matter of months. To this
problem, it must be added the fact that increasing or diminishing the capacity of an automation system
is a difficult task once it is already installed (Silverstein, 2020). With an unexpected large increase in
demand, it will not be as easy to make up for the lack of capacity of the automation system as
adjusting the number of workers. Hence, it is crucial to forecast the expected demand, as MFCs do not
offer this flexibility regarding the number of products that will be part of the automated system.

(C) Product Selection Restrictions

Furthermore, MFCs cannot handle all kinds of products that a typical grocery store offers. For
example, frozen food, direct-stream digital products, items that need to be weighted, fragile
commodities, oversized and bulky objects, and food items or household chemicals that might leak
might require workers to manually retrieve these products when customers order them. Marc
Wulfraat, makes the following observation on the current situation:

“In a lot of cases where MFCs are active, the retailer is trying to get 50% of the order line activity
from the automation system, and the other 50% has to come out of the more manual approach either
from the store or from manual operation adjacent to the automation system.” (Silverstein, 2020)

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Moreover, as there is a SKU4 limitation in the automation system, some products are also prefered to
be excluded. Fast-velocity items are usually avoided given their high rotation, as well as low-velocity
items, which would remain in the system longer. Thus, mainly medium-velocity items will be
automated, while the rest will be manually-fulfilled (Wulfraat, 2020).

Taking into account the above-mentioned limitations, as a general warning, retailers should be
cautious about the assessment of whether they need or not to invest in such a facility. As it has been
shown, this decision will mainly be based on the current and future order volume. A business might
not yet need a standalone MFC, but they can explore other options such as adding them to their
current stores, either by assembling it in back rooms or building a separate facility. This is a less risky
investment for businesses with not an extremely large number of weekly orders but that will still
provide a solution to fulfill the proliferation of e-commerce activities in retailers operations.

4.3. Drivers of Micro-Fulfillment

In spite of the challenges that MFCs might come with, grocers should not underestimate the
cost-savings they can potentially realize from installing a MFC both in space utilization and in the
number of workers they need to serve the customers (Silverstein, 2020). Indeed, there are many
indicators in the e-grocery market that call for a solution like micro-fulfillment to arise. After having
mentioned its characteristics, it is relevant to reflect the specific drivers of this distribution strategy:

(A) Urbanization Growth

There is an increasing urbanization trend (see Appendix 2). In fact, it is expected that by 2050, more
than two thirds of the population will live in urban areas (see Appendix 3), 54% more than in 2016
(United Nations, 2018). In countries such as the United States or Spain, this rate will be even higher,
surpassing 80%. Considering two of the main characteristics of micro-fulfillment, it is clear that using
this distribution strategy is a suitable choice to respond to this trend. Firstly, given its small size, since
a mass-urbanization will lead to less space for warehousing. Secondly, due to its location, because the
fact that these centers are situated in increasingly populated urban areas allows retailers to easily serve
a large segment of population.

(B) Warehouse Vacancy Rates5 Approaching Record Lows

In hand with the above-mentioned trends, demand for logistics space is increasing. However,
urbanization growth implies less space available in urban areas and, on the other hand, given the
exponential growth in e-commerce sales (explained in section 2), more and more companies are
shifting towards demanding warehouse space over retail space. Consequently, vacancy rates keep on

4
Term defined in the Glossary of this paper.
5
Vacancy rates reflect the amount of space unoccupied against the total space available.

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decreasing. Appendix 4 reflects the exponential decrease in the U.S.' vacancy rate, reaching a 4.3% in
2018. In the case of Europe, in the second quarter of 2020 the weighted average vacancy rate was only
3.7% (Harrington, et al., 2020). Therefore, nowadays, finding a suitable logistic space to respond to
the increasing e-commerce demand becomes very challenging since opportunities to expand and build
new facilities are limited, especially in densely populated urban areas. This challenge favors
automated fulfillment solutions that provide space optimization, as they can be deployed in smaller
facilities or even leveraged in existing retailers’ facilities.

(C) Shortage of Skilled Labor

It is estimated that the skills gap will leave 2.4 million positions in the U.S. manufacturing industry
unfilled between 2018 and 2028, which represents more than half of U.S. manufacturing jobs,
(Deloitte, 2018). The same trend is followed in other developed countries. According to the logistics
consultant Marc Wulfraat, by 2030, the industrialized labor pool will decrease by 5.4% in 10 major
developed countries. Several factors contribute to the warehouse labour shortage, such as the lack of
desire among younger workers to do physically demanding blue-collar jobs, or an aging retiring
workforce (see Appendix 5). The rise in e-commerce sales intensifies the labor drought problem, since
it is causing a massive increase in demand for warehouse workers (Futch, 2019). Indeed, according to
the U.S. Bureau of Labor Statistics, logistic jobs will grow by 4% from 2019 to 2029. As a
consequence of the shortage of skilled labor, the industry growth could slow down (see Appendix 6).
One way to cope with this is through robotics and automation. MFCs provide a solution that
minimizes the reliance on a diminishing labor pool.

(D) E-Commerce Growth

As explained in section 2, the e-grocery market is booming. Consequently, grocery retailers must
adapt an online channel to respond. However, home delivery orders are less profitable than in-store
sales (Wulfraat, 2020). This is due to, among other reasons, the rise in last-mile delivery costs, which
eat up retailers’ profit margins. As a matter of fact, according to the Capgemini Research Institute,
U.S. retailers incurring last-mile delivery costs will suffer a potential decline in net profit of 26% in 3
years, unless last-mile delivery capabilities are bolstered. Thus, to seize the e-commerce growth
opportunity, retailers should not just add an online channel, but accompany it with a structural change,
because if not, in the long term, retailer’s competitiveness could decrease.

(E) High Consumer Expectations

As online sales have surged, shipping times have gone down, reaching a new normal for the delivery
speeds of online orders (McKinsey, 2020). The American leading retailer Amazon has disrupted the
market by offering same-day delivery coupled with low prices and free returns since 2009, threatening

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retailers and creating a new need for consumers (see Appendix 7). Currently, shopping decisions
increasingly depend on shipping time, and knowing that a delivery will be timely before the purchase
can be a reason to change to another retailer. Indeed, a recent study reveals that 55% of consumers
would switch to a competitor if it offers a faster service (McKinsey, 2020). Therefore, those retailers
who provide a superior last-mile service will gain a competitive edge over their peers and those who
do not could risk more than half of their customers. To meet these expectations, retailers must reset
their delivery process, considering those fulfillment strategies that focus on speed delivery. In fact,
same-day delivery integrates the convenience of online retail with the immediacy of brick-and-mortar
stores, which is what the omnichannel strategy of micro-fulfillment is able to offer.

4.4. Summary of the Findings

Having analysed MFCs characteristics’, as well as the trends that positively affect its use, Figure 3
provides a summary of the findings. On the left side, grocery market trends are depicted, and in order
to understand why each one is a driver of micro-fulfillment, the middle column shows this model
characteristics, which imply specific benefits (shown in column 3) that satisfy each trend.

Figure 3. Micro-Fulfillment Main Characteristics & Responses to Grocery Market Trends. Source: Own elaboration.

4.5. Main Internal Factors Influencing the Implementation of Micro-Fulfillment

Although analysing the macroeconomic environment is important to understand whether

micro-fulfillment responds to the needs of the market, its adoption is in the hands of retailers, who
must decide if the benefits of this distribution strategy go along with their overall strategy. Indeed,
even when the market trends are favoring the implementation of micro-fulfillment, this model may
not be the best choice for every single retailer.

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Therefore, the main factors that determine a retailer’s strategy and competitive advantage and that
have an influence on the adoption of micro-fulfillment must be analysed, in order to describe the
profile of the supermarkets that would be interested in investing in this innovative solution.

(1) SKU Selection

One factor that retailers should take into account is the fact that their online offerings should not differ
from those offered online if they want to promise an e-grocery experience similar to the one in-store.
Thus, given the SKU limitation mentioned in section 4.2, micro-fulfillment would be more suitable
for retailers that have a narrow assortment of products. In the case of supermarkets with a wide
offering of SKUs, a larger fraction of products would be excluded from automation and would need to
be manually picked.

(2) Level of Convenience

Retailers whose business competitive strategy is to provide consumers high levels of convenience will
find in MFCs a huge opportunity to reduce costs while guaranteeing short delivery times. Retailers
playing a non-convenience strategy, whose delivery times tend to be at least next-day deliveries, will
not be as interested in investing in this strategy.

(3) E-Grocery Order Volume

Given that building a MFC implies a high initial investment, the volume of e-grocery orders must
exceed a particular level in order to be profitable to install an automation system. According to Jordan
Berke, a former Walmart executive and e-commerce expert, volume is the key aspect grocers should
take into account before making this hefty disbursement: it would not be logical for a business to
assume the upfront costs if it only gets a few orders a day. According to the study carried out in the
U.S. by Marc Wulfraat, automation is something that retailers should consider when their weekly
online orders exceed 5,000. Thus, in order to determine whether micro-fulfillment is a feasible
solution for a specific retailer, they should not only consider data about the current level of orders but
also make relevant future predictions that allow them to make sure that the infrastructure they are
investing in now, will also be useful in the future.

Figure 4 depicts the best distribution strategies a retailer should implement considering these last two
factors: volume and convenience.

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Figure 4. Best Distribution Strategy depending on the Order Volume and Delivery Time. Source: Own elaboration based on
information provided by Interact Analysis.

4.6. Current Situation of Micro-Fulfillment.

As technology improves, many multi-channel retailers have opted for reinventing their logistic
strategies to solve economics of last-mile delivery through the use of micro-fulfillment. Leaving aside
a wide range of applications of this model in different industries, some grocery retailers have already
partnered with technology start-ups to explore the solutions that micro-fulfillment provides. Doing so,
these grocery leaders are not only ensuring their survival in this hypercompetitive marketplace, but
they are also gaining a first-mover advantage (Honeywell Intelligrated, 2020).

In fact, many e-grocery players were already focused on increasing profitability by cutting supply
chain costs associated with fulfillment and rapid delivery. Various fulfillment strategies have been
previously tested and deployed, including traditional regional omni-channel fulfillment centers,
ship-from-store and crowdsourced delivery models. However, these solutions are stop-gap at best and,
as witnessed in the months of covid-19, they do not scale with a sharp increase in demand. Thus, the
true winners have been those that have embraced the disruptive technology of robotics paired with
advanced Artificial Intelligence fulfillment software (Grey Orange, 2020).

In this section, the main suppliers of this technology and grocery retailers benefiting from it will be
reviewed to have a global view of the current situation of micro-fulfillment in this industry both
worldwide and particularly in Spain, a country in which this study will be later focused on.

4.6.1. Current Situation of Micro-Fulfillment Worldwide

The main advances in this topic have taken place in the United States, where multiple grocers have
invested in micro-fulfillment centers, largely via partnerships with MFC providers (L.E.K.
Consulting, 2020). Figure 5 summarizes the top alliances.

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Figure 5. Micro-Fulfillment Main Suppliers and Retail Partners. Source: Own elaboration based on “Tracking
Micro-fulfillment in the Grocery Industry” by GroceryDive 2020.

Although this chart does not include other independent grocers joining this trend, it can be seen how
most American grocers are opting for dealing with the most well-known micro-fulfillment providers.
Alert Innovation, a U.S. company, currently operates two MFCs for Walmart using their Alphabot,
which is able to manage online orders inside a 20,000 sq. ft. (1,858 m2) warehouse, shipping with
99.9% order accuracy and offering click and collect service at 2,100 locations in the U.S. (Wulfraat,
2020). Dematic, also an American supply-chain technology firm, dedicates now between 10,000 and
20,000 sq. ft. (929-1,858 m2) interior spaces of selected Meijer stores for e-commerce pick-up and
delivery, transforming only a small part of the chain’s supermarkets into logistics nodes that combine
retail centers and fulfillment centers (Longpoint, 2019). Fabric, a U.S.-Israeli start-up formerly known
as CommonSense Robotics, which operates various MFCs in Tel Aviv and has more than fourteen
grocery sites under contract, has recently partnered with FreshDirect to meet the surge in demand in
Washington, D.C., metro area (Berthiaume, D., 2020). Takeoff Technologies, another North American
start-up, has more than five grocery MFCs operating in the U.S. with partners like Ahold Delhaize,
Albertsons, Loblaw, and Sedano’s, which have leveraged the power of existing stores to expand its
reach into click-and collect and delivery services within hours (Dudlicek, 2020). Takeoff has even
partnered with Woolworths in Australia, using a 25,000 sq. ft. (2,322m2) space of a Melbourne store
(Woolworths Group, 2020). Swisslog, a Swiss company, is supplying H-E-B with its AutoStore
micro-fulfillment platform that will be placed in or near its supermarkets (Berthiaume, D., 2020a). On
the other hand, Kroger, a U.S. grocer, as well as Ocado, a UK supermarket chain, built large
automated fulfillment centers in 2019, something that was seen as controversial, since
micro-fulfillment was already considered a superior strategy by some analysts (GroceryDive, 2019).
For that reason, Kroger is now planning to enter into a micro-fulfillment agreement with a yet
unknown partner (Warehouse Automation, 2020). Other relevant players in the micro-fulfillment
world are Pulse Integration, Tompkins Robotics, Ocado and Witron.

According to some consulting firms, there is a wide disparity in terms of capabilities between the
different MFCs offered in the market. While this is, to some extent, a subjective matter, it is true that

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firms in the field can be differentiated between start-up companies with limited capabilities, providing
new and barely tested solutions, although having high potential, and more advanced companies in
terms of maturity and software capabilities (Ladd, 2020). Nonetheless, the risk of relying on these
start-ups will have to be taken by grocery retailers if they want to gain this first-mover advantage.

4.6.2. Current Situation of Micro-Fulfillment in Spain

In the Spanish grocery market, however, this topic has not yet gained as much importance as in the
United States. In fact, there are no micro-fulfillment centers built for serving grocery retailers, nor
known partnerships with providers of this technology. Nonetheless, it must be mentioned that the
country already has operating technological firms supplying the micro-fulfillment model, being the
most important ones Dematic Spain, already mentioned in the section above, and Mecalux, a Spanish
company specialized in intralogistics technology (Mecalux, 2020).

The Spanish boom in online sales during covid-19 stressed logistics and last-mile delivery and made
obvious the lack of preparedness of the sector for reacting to the acceleration of these already-existing
trends (Antelo, A., 2020). However, it is true that during the first lockdown, Spanish grocers adapted
their infrastructures, accelerated their logistic projects, and extended their agreements with various
applications to meet the increase in online orders and respond to last-mile problems (Alimarket,
2020). For instance, the Spanish retailer Dia transformed 10 supermarkets into dark-stores in Madrid
and Barcelona, incorporating more than 1,000 workers to fulfill online orders, and reached an
agreement with Glovo and Prime Now from Amazon to cover delivery services in the most important
cities (Álamo, C., 2020). On the other hand, Carrefour accelerated the development of its new hybrid
model of e-commerce combining the preparation of online orders in open stores with order fulfillment
in exclusive stores for e-commerce (Álamo, C., 2020). Moreover, El Corte Inglés, increased 30% of
its delivery and “click&car” services, and Mercadona introduced its first “hive”, a logistic block
dedicated exclusively to online sales (Alimarket, 2020). Finally, while some other retailers like the
regional supermarkets Dinosol and Condis opened stores exclusively for online order fulfillment,
others like Auchan and Sanchez Romero opted for extending the agreements with delivery companies
like Deliveroo and Glovo (Álamo, C., 2020).

Although none of these improvements include micro-fulfillment, following the trend, more funding
and trial opportunities for firms providing this kind of technology are expected for the upcoming years
(Volovich, V., 2020). Moreover, the fact that Spanish grocery retailers have reacted relatively fast to
the challenges from the pandemic, already positions them a step closer to micro-fulfillment. Indeed,
according to Deloitte research paper Logística de Última Milla: Retos y soluciones en España, the
employment of urban hubs, particularly micro-hubs6, should be the first priority to be considered by

6
Term defined in the Glossary of this paper.

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Spanish retailers, given its potential impact in solving last-mile logistics and the low complexity of its
implementation, compared to other solutions, which allows for its application in a short time horizon.
On the other hand, the study also highlights the positive impact of robotization, although this should
not be considered as immediate as the installation of micro-hubs. Thus, taking into account that
micro-fulfillment centers are in essence a combination between micro-hubs and robotics, it seems like
its implementation in the Spanish market would be the perfect solution for last-mile logistics.
However, despite its potential, especially in the grocery market, where the benefits of fast fulfillment
have become a must, there is still a long way to go for Spanish retailers to advance in this field.

5. The Spanish Grocery Market

Having shown, on the one hand, that Spanish retailers’ are facing a need to readapt their supply chain
to properly satisfy the increasing e-commerce demand, and on the other hand, that micro-fulfillment is
a feasible distribution strategy to respond to nowadays’ global trends, this section aims to analyse if it
is a viable solution for the Spanish grocery market, where it is not yet present. To do so, an analysis of
the Spanish trends will be conducted, in order to see if the above-mentioned micro-fulfillment drivers
are also present in the Spanish grocery market. Subsequently, the specific barriers of the Spanish
market will be highlighted, considering the main cultural differences with the U.S..

5.1. Drivers of Micro-Fulfilment in Spain

Firstly, e-commerce growth is a worldwide trend that also exists in the Spanish market. In 2019, Spain
ranked the 13th largest market for e-commerce worldwide, contributing 16% to the worldwide
e-commerce growth rate (EcommerceDB, 2019). As seen in Figure 6, in Spain, e-commerce sales
have been increasing year by year, and are expected to keep on increasing, as depicted in Figure 7.

Figure 6. Evolution of E-Commerce Sales in Spain (in Figure 7. Spanish E-Commerce Revenues in billions US$.
thousands of millions of €). Source: “Logística de Última Source: “Spanish eCommerce revenues”, by Statista 2020.
Milla”, by Deloitte 2020.

This goes in line with e-grocery sales, that also keep increasing year by year; in 2019 the share of
consumers who bought food and perishable goods online was around 25%, 10% more than in 2015
(Statista, 2019). Thus, Spanish supermarkets’ sales increasingly depend on the online channel.

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Indeed, it must be considered that these values do not reflect the impact of the coronavirus crisis,
which accentuated the growth. According to a post-lockdown study from Kantar, e-commerce grew
115% in terms of value and 105% in terms of volume, increasing also 15.5% in terms of new online
buyers. In fact, as a result of covid-19, the online channel had a value evolution of 210% between
people older than 65 years, with a penetration of 9.3% (García, 2020). Covid-19 has also had an
impact on the categories purchased online, and e-grocery has become the top 3 most purchased
category, with 62% of Spanish declaring to shop groceries online (IAB Spain, 2020). In fact, during
the lockdown, 61% of the Spanish population shopped fast consumer goods online, and only 17.5% of
those plans to stop doing so once the virus is over (Aecoc, 2020).

Looking at these sharp increases in online sales, it is clear that there is a need to readapt supermarkets
logistics. Firstly, because, as explained in section 4.6.2., Spanish retailers are not fully prepared to
satisfy such increasing demand. In fact, according to Lantern, in its report La Innovación en el
Contexto Covid, 86% of the retailers will invest and work on its online platforms. Concretely, 57% of
them think that this growth will impact on the company’s decision to invest in improving their
logistics platform as well as in implementing new e-commerce systems. This opens a wide range of
opportunities for micro-fulfillment to get a place in the Spanish market. Secondly, given that
e-grocery sales are less profitable than in-store sales for the majority of retailers
(Distribución/Actualidad Retail, 2020). For instance, the president of Mercadona7, claimed that his
supermarkets lose money with online sales. According to Ignacio Otero, Bain & Company Associate,
while the growth in online orders is positive in terms of volume and market share, in the current
model, this is bad for profitability. Thus, moving forward with digitalization is a must for Spanish
companies in the sector if they want to avoid losing competitiveness in the long term. According to
André Carvalho, Spanish retailers must either develop a profitable online channel, but with an
attractive value proposition for final consumers, or they will lose market share and further worsen
their profitability, since they need to cover their fixed cost structure. This further strengthens a
possible micro-fulfillment implementation.

Besides, Spanish consumers have become more strict in terms of requirements, especially regarding
those activities related to last-mile delivery. They demand more flexibility and a reduction in waiting
time, while they expect to pay little or nothing to enjoy these services. According to the Spanish
report of 2019 of EcommerceDB, the main reasons for shopping online in Spain are home delivery
and round-the-clock availability, where 68% and 67% of the shoppers agree. Throughout Metapack’s
global e-commerce consumer report, the Spanish came out to be one of the most exigent European
online shoppers in terms of delivery options and post-purchase experience. According to the IAB
Spain 2020 e-commerce study, 27% of the respondents that were not satisfied with online purchases

7
Mercadona is one of the leading physical supermarket and online shopping companies in Spain.

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claimed that long delivery times were the reason, while 24% blamed the prices, and 23% mentioned
poor return policies. Research has also shown that Spain has the highest global result for shoppers
expecting not to pay for standard deliveries, with a percentage of 55% of shoppers expecting not to
pay, which is 10% higher than the global average (Metapack, 2019). Regarding e-grocery sales in
particular, consumers’ biggest concerns are related to the time that elapses between the order and
delivery, and the range of available delivery times (Aecoc Shopperview, 2020).

These e-commerce consumer’s needs exert great pressure on retailers, who want to remain
competitive (Deloitte, 2020). Therefore, it is crucial for Spanish supermarkets to have a logistics
strategy that allows them to process time at the minimum cost, if they want to meet consumer
expectations of getting orders faster at cheaper prices. Keeping in mind that last-mile costs are the
ones jacking up the price, micro-fulfilment centers seem to be a feasible solution to this problem.
Indeed, the fast delivery in urban areas that the use of MFCs can provide would only be used by 55%
of global consumers, a value that rises to an astonishing 77% in the case of Spanish consumers
(Adigital, 2019), something that just favors the possible implementation of the micro-fulfillment
model in Spain. And, if this innovative technology achieves a positive delivery experience for Spanish
consumers, it is likely that 89% will shop again (Adigital, 2019), making micro-fulfillment not only
able to meet customers expectations, but also able to maintain their loyalty.

Another indicator favoring micro-fulfillment is urbanization growth. The degree of urbanization in

Spain is of 81%, which means that only 19% of the Spanish population lives outside urban areas
(World Bank, 2020). Although it does not look like the case at first glance, studying the areas where
people actually live, Spain is one of the countries in Europe with the most density of population (Rae,
A., 2020). The cities of Madrid and Barcelona are the most populated, with 3.3M and 1.6M
inhabitants respectively (Instituto Nacional de Estadística, 2020). However, the most inhabited
densely areas are Hospitalet de Llobregat and Badalona, being the first and the third with the highest
density in Europe (Ramón, E., 2020). Thus, those four cities should be the first to be considered for
MFCs to be installed. Nonetheless, as Madrid and Barcelona lead e-commerce growth in the country
(Gispert, B., 2020), they are probably the best candidates to implement this distribution strategy.

These two cities are not only the most important ones in terms of commerce (Cámara Oficial de
Comercio, 2020) and population (Instituto Nacional de Estadistica, 2020), but are also the ones where
industrial space is more expensive (see Appendix 8), as well as scarce. Thus, they should be also
studied in terms of warehouse vacancy rates. Starting with Barcelona and its metropolitan area, it is
well known the low availability of logistic stock, whose prime area vacancy rate is 1.8%. The second
ring of logistics operations gets the majority of vacant space, but it is only a 5.7% vacancy rate
(Cushman & Wakefield, 2020). The real estate consultant Cushman & Wakefield highlights the need
for new logistics spaces in the Catalan capital, where the main problem is the lack of land in which to

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carry out these investments. Moreover, the continuous e-commerce growth will keep rising the
demand for logistic ground. The price picture is not good either; this increase in the demand for
storage space in urban cities has increased prices and, additionally, the bad quality of premises in
Barcelona has driven an increase of 40% of prime rents the past five years (Cushman & Wakefield,
2020). Appendix 9 depicts how while available space for warehousing decreases in Barcelona, prime
rent increases year by year.

The situation in Madrid is similar, where quality of available stock is also low, making rental costs
expensive. Those prime rental values have increased by 35% since 2014 (Deloitte, 2019). It should
also be mentioned that although in Madrid there is a positive trend towards the reduction of vacant
space too, vacancy rates are not as low as in Barcelona, with a rate of 9.1% (Deloitte, 2019).

Urban micro-hubs, such as micro-fulfillment centers, are the answer to this problem of lack of space
in these cities with the most potential, as it has been previously shown. In fact, micro-fulfillment
centers would not only solve this, but they could also be the new solution for congestion and air
quality, as they are placed closer to the final consumer, avoiding the presence of too many
transportation vans overcrowding urban areas (Financial Food, 2020).

Moving to a different issue, it must be said that the logistics sector still requires a high level of labor
(Mountpark, 2018). This situation is chiefly worrying for companies that need large warehouses and
logistics facilities, which usually require a significant number of employees. While, according to the
Ministry of Development, the logistics sector is booming in Spain, the feeling of having a shortage of
qualified labor is growing among companies, which even believe that the labor gap will worsen in the
following years (López, 2018), as only considering the aging of population, industrialized labor pool
in Spain will shrink by 4.4% by 2030 (Wulfraat, 2020). According to the second edition of a study
carried out by Mountpark, there is already an alarming lack of truck drivers and warehouse workers.
This deficit is also clearly perceived in Spain (Revista Logística del Paraguay, 2020). Hence, by
introducing MFCs in Spain, which make use of robotics and, thus, require less blue-collar jobs, there
would be less reliance on this diminishing labor pool.

All in all, having analyzed the Spanish grocery market trends, it has been shown that Spain has those
trends that are drivers of the micro-fulfillment logistics strategy (e-commerce growth, high consumer
expectations, urbanization growth, low vacancy rates and a shortage of skilled labor).

5.2. Barriers of Micro-Fulfillment in Spain

Although this strategy that was born in North America could be also appropriate in the Spanish
grocery market, the fact that the above-described indicators move in the same direction in both
countries does not imply that this logistic solution can be applied to the same extent than in the U.S..
Indeed, there are cultural differences between the Spanish and North Americans that translate into

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limitations for the implementation of micro-fulfillment in the Spanish grocery market, which will be
highlighted in this section.

The first concern is that, although the e-grocery market has experienced a tremendous growth in the
last few years, Spanish online grocery demand volume might not exceed the minimum that makes an
automated center profitable.

Moreover it must be taken into account that the space limitation in Spain is not the same as it is in the
U.S., and neither are the preferences of retailers over this space. According to Helena Ramalhinho, an
expert interviewed, supermarkets have the tendency to transform facilities into commercial space in
Spain, avoiding warehouses, as retailers prefer to offer the maximum products and services in the
available store space. Also, Marc Wulfraat pointed out that facilities tend to be smaller given the
higher space restrictions, so Spanish retailers have less space to take away from the store to install
MFCs. For this reason, an average-sized micro-fulfillment center could not be that attractive for
Spanish retailers. This implies that the average size of a Spanish MFCs should be smaller than the
MFCs average size8, something that intensifies the stock limitation drawback, since a smaller center
implies that less products can be fulfilled automatically. This problem leaves retailers with two
options: they either decrease the amount of stock of each product or they are forced to narrow the
range of products offered online. The first scenario can be dangerous, given that stock outs when
shopping online can make consumers stop trusting the online channel, making them perceive the
e-grocery experience is worse than in-store shopping, or the brand, increasing their probability of
switching to different retailers. Thus, grocers are left with the alternative of offering a narrower SKU
selection in their online channel, something that might not be aligned with their online strategy.
Nonetheless, this problem would not be as dramatic if implemented in a Spanish grocery chain such
as Dia and Mercadona, which typically work with less references of each product categories,
compared to other players in the market, something that generally reduces its probability of running
out of stock (Mercadona, 2019; Dia 2019).

On the other hand, consumer shopping habits are quite different as well. While in the United States
grocery carts are mainly composed of canned and prepared food, the mediterranean diet makes
Spanish buyers consume higher volumes of fresh products, such as fruit, vegetables, fish and meat
(see Appendix 10). Indeed, the results of the Statista Global Consumer Survey conducted in the U.S.
in 2020 depict American’s consumption habits, since only 13% of American consumers who ordered
online in the past 12 months bought fresh fruit and vegetables. Such differences in eating habits are
relevant for the conclusions of this paper since, as mentioned in section 4.2., human labor is required
to fulfill fresh product orders, which implies that those cannot be prepared in a fully-robotized MFC.
This limitation becomes more relevant in a context in which fresh products suppose a high portion of

8
Based on American space standards.

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a typical shopping cart, which is the case of Spain. Thus, retailers will have to manually pick those
items if they want to offer them in their online catalogue. Nonetheless, this leaves more space for a
wider range of packaged products to be offered online, which can be automatically prepared in the
MFC, something that decreases the magnitude of the above-mentioned SKU selection drawback.

6. Conclusions

After a thorough study of the current situation in the e-grocery market, this paper has explored the
characteristics of the main distribution strategies that solve the new challenges of this era. The first
conclusion that can be extracted from it is that micro-fulfillment is an efficient solution that appears to
have a great future projection. Not only that, after focusing on the analysis of its main features, it can
also be concluded that the benefits they bring respond to the needs of the market, as figure 3
illustrates. These general trends have thus been described as the drivers of micro-fulfillment, which
are: (a) an increase in the urbanization growth rate; (b) low warehouse vacancy rates; (c) a shortage of
skilled labor; (d) the growth in e-commerce; and lastly, (e) high consumers expectations.

Moreover, this paper points out how the main factors that determine a retailer’s strategy should be
taken into account by grocers’ at the time of investing in this solution. Retailers that experience
significant online order volumes, offering a low SKU selection and high levels of convenience to
consumers will be more favored by the implementation of this logistic model.

For the assessment of whether micro-fulfillment is well suited for the Spanish market, the same
specific trends have been analysed in the country’s context. It has been found that the drivers of this
model are also present in Spain, favoring its possible implementation in those cases in which the
retailer’s strategy is aligned. Nonetheless, the fact that these previously-mentioned indicators move in
the same direction in both countries does not imply that this logistic solution can be applied to the
same extent than in the U.S.. Indeed, there are cultural differences between the Spanish and North
Americans that translate into limitations for the adoption of micro-fulfillment in the Spanish grocery
market. This leaves the door open for further research to focus on how this model can be adapted to
the Spanish grocery market necessities.

Furthermore, after reading this paper, grocery retailers can review their strategy priorities and
necessities to evaluate whether micro-fulfillment is an interesting solution for them to implement. A
deeper understanding of the feasibility of this model for specific retailers can be achieved through a
rigorous evaluation of the costs and potential benefits of adopting it. Moreover, although this study
identifies micro-fulfillment as the distribution strategy with the most future projection, further
research needs to be done in the logistics field in order to analyse the rest of the distribution strategies
presented, as they can be as efficient and an alternative for those players whose strategies are not
aligned with micro-fulfillment features.

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7. Glossary
The main technical terms used in this analysis have been described in this glossary.

1. BOPIS: “Buy online, pick up in store” is a service where consumers start their shopping
journey online and finish it by collecting their purchases from a physical store. This service is
also commonly referred to “Click and Collect”.
2. Brick-and-mortar store: in-store, and offline retail relate to physical retail stores.
3. E-commerce: or online retail, refers to selling products to customers through the internet.
4. FMCG: “fast-moving consumer goods” are those consumer goods of high rotation.
5. Last-mile delivery: the journey of an order from a warehouse to a customers’ address. It
implies an increase in the final costs of the product, including labor and fuel costs, reverse
logistics and refund costs, maintenance costs, and environmental and congestion costs.
6. Last-mile delivery costs: It includes labor and fuel costs, reverse logistics and refund costs,
maintenance costs, and environmental and congestion costs.
7. Micro-hubs: small logistics facilities where goods are bundled inside the urban area
boundaries, serving a limited spatial range.
8. Omnichannel strategy: approach which involves operating stores and e-commerce sites and
provides cross-channel services such as BOPIS.
9. SKU: acronym that stands for Stock Keeping Unit. It is a unique identifying number for each
product the store carries.

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Cámara Oficial de Comercio. (2020). Principales Ciudades. Retrieved November 19, 2020, from
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Carré, F., Tilly, C., Benner, C. & Mason, S. (September, 2020). Change and uncertainty, not
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9. Appendices

Appendix 1. Description of the interviewees.

Helena Ramalhinho is currently a full professor at the Economics and Business Department at
Universitat Pompeu Fabra (UPF). She has been involved in different research projects and consulting
for business firms in the area of Operations Research and Logistics, and it is currently the director of
the Business Analytics Research Group at the UPF.

Oriol Montanyà is a professor at UPF, as well as a researcher & supply advisor. He is the current
director of the supply chain and TI Academic Department at the UPF.

Rueben Scriven is a research analyst for Interact Analysis (an international provider of market
research for the Intelligent Automation sector), responsible for developing global forecast models for
high growth technology markets including electric commercial vehicles and logistics automation.

Marc Wulfraat is the president and founder of MWPVL International Inc., a leading supply chain and
logistics consulting firm, who has published several reports about the MFCs Logistics strategy.

Appendix 2. Share of the population living in urban areas, 1500 to 2050.

This chart provides the estimates of urban shares across the world through 2050.

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Source: United Nations. (May, 2018), 68% of the world population projected to live in urban areas by
2050, says UN. New York. Retrieved November 1, 2020, from https://www.un.org

Appendix 3. The definition of Urban Area.

There is no universal definition of what constitutes an “urban area”, it varies between countries. The
below chart reflects the minimum threshold level of the number of inhabitants in a settlement needed
for it to be classified as an ‘urban area’.

Source: United Nations. (May, 2018), 68% of the world population projected to live in urban areas by
2050, says UN. New York. Retrieved November 1, 2020, from https://www.un.org

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Appendix 4. Warehouse vacancy rates in U.S.

The above figure reflects the evolution of vacancy rates in the U.S. from 2014 until 2018.

Source: CBRE. (2018), Real Estate Market Outlook. Retrieved November 04, 2020, from
https://www.cbre-ea.com/

Appendix 5. Aging population.

As stated in the European Commission's 2018 Ageing Report, Europe’s population is getting older.
Indeed, the total population in the EU is projected to increase from 511 million in 2016 to 520 million
in 2070. However, the working-age population (15- 64 years old) will decrease significantly from 333
million in 2016 to 292 million in 2070. With regard to the US, it is stated that by 2035 older people
are projected to outnumber children for the first time in U.S. history (Wulfraat M., 2019).

Appendix 6. Skills shortage poses a risk to the economy.

The 2018 Deloitte and The Manufacturing Institute Skills gap and future of work study reveals a
potential risk of 454 billion dollars in additional manufacturing value added in 2028, if the industry is
unable to fill the anticipated open jobs. As depicted in the below figure:

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Appendix 7. Amazon and the top e-commerce companies have nudged consumer expectations
towards same-day delivery.

Source: McKinsey & Company, (January, 2020). Future of retail operations: Winning in a digital era.

Appendix 8. Annual primary rent costs per square meter for warehouses in Spain as of the 4th
quarter 2019, by city (in euros).

Source: Statista. (July, 2019). E-commerce in Spain. Retrieved November 13, 2020, from
https://www.statista.com/outlook/243/153/ecommerce/spain#market-users

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Appendix 9. Overall vacancy (yellow line) and prime rent (blue bars) in Barcelona 2012-2020.

Source: Cushman & Wakefield. (Industrial Q1, 2020). EU MarketBeat Industrial Barcelona.
Retrieved on November 18, 2020, from https://www.cushmanwakefield.com

Appendix 10. Volume in the American / Spanish Food Market (in million kilograms).

Source: Statista. (July, 2019). E-commerce in Spain. Retrieved November 13, 2020, from
https://www.statista.com/outlook/243/153/ecommerce/spain#market-users

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