[Post-Covid-19 New Normal] Dark stores are all the rage as e-commerce takes over

A remodeled Emart branch in Jung-gu, central Seoul, can process more online orders. [JEON TAE-GYU]

Retailers in Korea are facing a new challenge amid the rising demand for online shopping.

With the growing use of dark stores — spaces that look like supermarkets but only cater to orders for delivery or collection — the competition to deliver packages faster through last-mile delivery services has suddenly become one of the most important factors in attracting customers.

Last-mile delivery refers to the rapid movement of goods from a transportation hub to the final delivery destination. It is the key to the operation of dark stores.

Food delivery platform Baedal Minjok, or Baemin, launched its B Mart dark stores in November last year, using its delivery infrastructure and network. Its rival Yogiyo plans to roll out dark stores in the second half of this year.

Delivery company Barogo jumped into the retail market in June through a partnership with convenience store start-up Now Pick, which only accepts online orders.

Barogo rents out its unused space in Dogok-dong in Gangnam District, southern Seoul, to Now Pick.

Barogo’s 144-square-meter (1,550-square-foot) space is stocked with products sold by Now Pick, which includes handbags and cosmetics.

Barogo handles deliveries from the hub, as well as from five other Now Pick stores across Seoul. Delivery from Now Pick is said to be possible within 30 minutes.

Instead of rent, Now Pick pays Barogo a certain percentage of the profit incurred from sales at the hub.

“As the demand for last-mile delivery grows stronger, more players are trying to be part of the service,” said Kim Ga-hyun, a spokesperson for Barogo. “Barogo has 800 hubs in populated areas, and we’re indeed willing to rent out more of that space [to be used as dark stores].”

With the online shopping boom, companies are lining up to enter the e-commerce space, either from a customer-facing perspective or, like Barogo, on the logistics side. According to Statistics Korea, online shopping in July was worth 12.96 trillion won ($10.89 billion), up 15.8 percent on year. It was the highest monthly figure since Statistics Korea started collecting data in 2001.

“The new [dark store] business could be a good opportunity for Yogiyo to evolve into a retail platform beyond just a food delivery platform amid the changing market that focuses on non-face-to-face services,” said Kim So-jung, head of the new business division at Delivery Hero Korea, the Korean unit of the Berlin-based food delivery company that operates Yogiyo.

Delivery Hero Korea believes Yogiyo Express, an artificial intelligence-based delivery dispatching system, will help the company operate dark stores efficiently.

Amid the continuous entrance of new players, traditional discount marts are trying to stay afloat by transforming their existing physical stores to handle online orders.

Starting in April, Lotte Mart installed dark stores and smart stores at two of its branches in Nowon District in northern Seoul and Gwanggyo in Suwon, Gyeonggi.

Its dark store adapts a closed section of the store into an automated packing facility, similar to a purpose-built dark store. Its smart store is a hybrid concept, where everything from picking and packing is visible in the store in the same aisles where people shop.

In these branches, pickers — employees who shop for online customers — collect items from the shelves in the public area and then carry them into a packing facility.

Lotte Mart said it plans to expand the number of dark stores to 29 by 2021, while also opening 12 more smart stores by 2021.

Emart opened a similar store in its branch in Jung-gu, central Seoul, in January.

The branch, jointly operated by Emart and its e-commerce operator SSG.com, is a smaller version of SSG.com’s NEO distribution centers in Gimpo and Yonggin, Gyeonggi.

An entire floor of the Emart store has been redesigned to facilitate picking and packing with conveyor belts and wider aisles for pickers to move around more easily, although the remodeled space may have made the shopping experience less optimal for offline customers, since there are employees constantly moving with around boxes of products.

Regardless, the result has been quite successful. Since the remodeling, the number of packages the branch can handle has increased fivefold from 1,000 per day to 5,000. The number of orders has also shot up more than fourfold, from 950 per day to 4,500.

“Including Emart, offline stores are transforming into spaces that can handle more online orders,” said Kim Ha-eun, a spokesperson for SSG.com. “Our primary focus at the moment is building a distribution center, but we’re keeping an eye on how the [remodeled] branch performs throughout the year, and we’re open to the idea of remodeling other stores.”

Homeplus plans to add facilities to all of its offline stores by 2021, from three currently, to improve last-mile delivery. The discount chain will increase its number of pickers from 1,400 to 4,000.

“Before Covid-19, customers only used last-mile services when they needed something urgently,” said a spokesperson for BGF Retail, which also offers last-mile delivery through its CU convenience stores. “Now, people actually shop through last-mile services.”

In August last year, snacks and beverages were the two most popular product categories ordered online at CU. This year during the same month, beverages topped the chart, followed by home meal replacement kits. Food ingredients were also in the top five.

“We’ve entered the last-mile delivery war,” said Prof. Seon Yong-gu, who teaches business at Sookmyung Women’s University. “In the past, having a big space and facilities like a parking lot were important factors for retailers. In the IT era, having a verified fast delivery service has become the key to success.”

An important factor to win that war includes saving delivery costs. For retailers, last-mile is seen as the most inefficient delivery service, accounting for 53 percent of logistics costs, according to analyst Kim Jae-hoon from Mirae Asset Daewoo.

Unmanned robot delivery is rising as a solution to reducing cost for last-mile delivery, according to analyst Park Moo-hyun from Hana Financial Investment.

“Each unmanned delivery robot could replace at least five peoples' work," said Park. "Once they’re fully tested, companies are expected to adopt them quickly. In Korea, robot delivery is still in its early stage, but elsewhere like the United States, it’s all happening. Amazon Prime, for instance, recently got clearance for drone delivery.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]