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Dark Stores: Stores that Enhance Efficiency
and Boost Sales

The distribution industry is implementing various measures to respond to the exponential growth in demand for contact-free and online shopping.
"Dark stores," one of the phenomena witnessed as a result, are offline stores used by distributors as hubs to deliver goods faster to online customers,
as well as to save inventory storage costs. While the growth of these so-called "dark stores" is mostly led by large supermarkets,
their expansion takes various forms. Let’s take a closer look at them.
Article: Editor’s Office

The reason why "dark stores" became a trend so quickly

You may not be familiar with the name “dark store,” but it’s quickly becoming a new paradigm in the distribution market. Dark stores, which refer to logistics hubs that allow customers to speedily receive the items they ordered online, are basically stores operated for delivery.

The growth of "dark stores" first accelerated mainly through the spread of the coronavirus pandemic, and then became exponential with online shopping. With more customers choosing to shop online than ever, and with the pandemic still showing no signs of abating, the distribution industry had no other option but to drastically reduce the number of offline stores. This is because the companies found it more and more difficult to handle delivery based solely on their logistics centers as the once crowded stores grew quiet over time and an increasing number of customers preferred to shop online. As the online shopping trend grew stronger, the need for more logistics centers to respond to the online order volume increased, while large offline stores that needed huge operating expenses fell into tremendous debt.

Against this backdrop, distributors chose to significantly downsize the number of their large offline stores and use those spaces instead for regional warehouses to ship goods to online consumers. Simply put, "dark stores" are part of the distributors’ future strategy to use the advantage of offline stores, which are located near consumers, as delivery hubs. As a result, distributors were able to save the cost of having to build additional logistics centers, reduce delivery time since the stores have better accessibility to consumers, and better respond to the explosive growth in online demand.

Each of the "dark stores" in Korea’s differentiation strategy

The "dark stores" in Korea have their roots in the distributors including countries like United States, the United Kingdom, and Japan. When introduced in Korea, the concept was customized or partially tailored to fit domestic tends. One thing that large distributors in Korea have in common is that they mainly utilize stores in areas with a lot of online orders as "dark stores." Meanwhile, they also differentiate their strategies to take the leading position in the new trend. Some representative examples would be SSG.com’s PP centers, Lotte Mart’s semi-dark stores, and Homeplus’s fulfillment centers.

To start with, as part of its dual-track strategy, SSG.com operates both PP Centers for Pick and Pack and also online-only logistics centers. The reason why the company is implementing this dual-track approach is because although it does have three NEOs, an online-only distribution centers, this is not enough to respond to the significant growth in online orders. SSG.com is opening more and more PP Centers in E-mart stores around the country in order to increase its SSG delivery, a same-day delivery service offered by the company. Its plan is to use NEOs for dawn delivery and PP Centers for same-day delivery. Since their opening, PP Centers have attracted more and more customers, and now they comprise a whopping 50% of SSG.com’s overall revenue. Accordingly, SSG.com announced that its plan is to increase the number of PP centers from the current five to as many as 70 by year 2025 to build on the momentum of online sales growth.

Lotte Mart introduced a system called “semi-dark store” to its offline stores. Along with the need to optimize logistics for online delivery, Lotte converted part of its retail space, or the entire floor area of its stores, into "semi-dark" stores with automated facilities for picking and packing. Lotte is continuously transforming its existing offline stores into logistics hubs and implementing various measures such as launching Lotte ON, an online shopping mall containing all of the company’s retail brands, and moving Lotte Mart and Lotte Fresh, its supermarket chain’s offline-centered logistics structure to the online space.

Homeplus is responding to the changes by establishing a distribution model called “all-line” which is a combination of offline and online distribution. As a company that has already transformed the warehouses and exits for logistics vehicles of its offline stores into online logistics centers, Homeplus began to operate "dark stores," named “Fulfillment Centers,” starting with the Gyesan branch in Incheon in 2018. Based on its know-how and infrastructure, Homeplus also began to offer same-day delivery services that allow customers who order before 2 p.m. receive their products on the same day. It took a step further and started to operate “Seven Order” services that deliver products to customers by midnight if orders are placed by 7 p.m..

Various types of "dark stores" that changed the paradigm of delivery services

There are also other types of "dark stores" that may seem different from the ones above, but still enable new services and boost sales as a result. Department stores, which are traditionally offline retailers, are one example. With its “To Home” service, Hyundai Department Store delivers ready-to-cook meals to customers within an hour after order. The reason why such fast delivery is possible is because of its “mobile micro-fulfillment centers”, or urban warehouses, which are EV trucks with a cold chain system.

One noticeable trend is that the e-Commerce industry is also introducing "dark stores." Oasis Market, a start-up that started its business delivering fresh produce by dawn, is one of the few in its field that continues to operate profitably. Unlike the established distributors mentioned above, these start-ups utilize offline stores to sell the volume remaining after online dawn delivery instead of warehouses and reduce disposal by having discount promotions and only selling what is on the shelves.

Baedal Minjok and Yogiyo, the two largest online delivery platforms both have "dark stores" called “B Mart” and “Yo Mart,” respectively, in urban areas. The growth that these stores are showing is rapid enough to pose a threat to large supermarkets, as well as convenience stores in neighborhoods. These companies are strengthening their leadership position in the quick commerce industry (quick + e-commerce) with the competitive edge that they have already gained in the delivery app market based on fast delivery.

Some are skeptical of the future of "dark stores," whose growth so far has been rapid. These skeptics say that no matter how advanced online shopping becomes, there is no way that the experience customers get from online stores will become identical to that gained from offline stores. According to these people, customers are likely to return to offline shopping once the pandemic is finally brought to an end, and they can begin to go out to shop.

However, more people believe that "dark stores" are not just a temporary phenomenon, or a mere passing fad. This is because although their share may decrease over time, they have already proven that they can function as an alternative that can flexibly respond to changing market circumstances and consumption patterns. Therefore, it is expected that "dark stores," will solidify their position whenever market uncertainty intensifies due to various factors, with Covid-19 being just one example.

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