How Dark Stores Are Changing the Grocery Industry

Feb 19, 2021
Sam Panzer
Sam Panzer
Customer Operations Lead
Min to read

In the early days of the pandemic, I returned home to the US and was struck by the sheer number of uniformed, on-the-clock workers roaming the grocery store aisles.

But it wasn’t the normal shop floor employees that caught my eye. Instead it was the green-clad army of Instacart shoppers, deftly wheeling carts from aisle-to-aisle, all while glued to their app.

2020 was a stellar year for grocery delivery apps. The segment rapidly moved from a luxury service, akin to pick-up dry cleaning or household cleaning services, to a bedrock food distribution channel.

Instacart achieved 3 years of projected growth in just 3 months, with 500% year-over-year growth.

At its heart, grocery delivery is still a luxury business, allowing customers to pay somebody else to shop for them. Professional shoppers do the exact same thing normal customers do, only faster and with more intent.

Grocery stores, however, aren’t designed for professional shoppers. Promotional displays reach out to the consumer with hot deals, seasonal produce and enticing new products. In a low-margin industry, this is just unnecessary waste and lost productivity for professional shoppers. 

We’re now entering an exciting new era for grocery delivery, and we’ll soon see the space reinvent itself after a surge of pandemic growth. So what will this optimization look like, and who will be putting it into practice?

Let’s have a quick look at three leading approaches.

‘Dark’ stores: Startups vs. Amazon

There is currently a flurry of funding for so-called ‘dark’ grocery startups, where goods are held at a ‘fulfillment center’ with no storefront or visibility to customers. 

These dark startups are having to work extra hard in the shadow of Amazon Whole Foods. The eCommerce giant has 500+ Whole Foods outlets, fulfilment centers, and now dedicated dark distribution hubs. These all power same-day grocery deliveries through Amazon Fresh on Amazon’s behemoth logistics infrastructure.

But, where Amazon moves with muscle, a new generation of venture-capital-infused startups is building hyperlocal delivery fleets and micro fulfilment centers. A few examples:

  • UK: $20M raised by Dija in November
  • Germany: $44 million Series A funding raised by Gorillas in November
  • US: $380 million raised by goPuff in October
  • Mexico: $12 million bridge round raised by Jüsto in July

Like restaurant delivery platforms before them, these dark store startups are launching in a handful of cities. Once they’ve proved their concept successful, they’ll look to raise additional funds and expand further.

Vegetables in a grocery store

Restaurant delivery platforms pivot

In competition with the new kids on the block are the big restaurant delivery platforms. They’re starting to use their existing courier networks and brand presence to offer groceries and other goods. This is a step beyond the ‘dark kitchen’ concept which has been around for a few years.

First you have Berlin-based Delivery Hero that’s acquiring grocery delivery players ($360M for the Middle East’s InstaShop). They’re also building their own grocery catalogues to list on the existing restaurant platforms.

Mjam, Delivery Hero’s Austria brand, recently rolled out “mjam market” in Vienna. It offers 1,000 grocery and pharmacy products, with plans to extend to 2,000-3,000 soon. 

Other platforms, like DoorDash, are simply extending the Instacart personal shopping model, sending a delivery courier through the store on the customer’s behalf. 

Grocery chains (in-house and platform partnerships)

The slowest-moving channel for grocery delivery has so far been the grocery brands themselves. Already barely squeezing a profit on sales (supermarkets average a 2.2% margin), supermarket chains usually charge significant fees for delivery compared to other services. 

Venture-backed startups can afford to operate at a major loss for years while building market share. But large public companies are geared to trim costs and pass value to shareholders. This makes innovation difficult, and has led to partnerships with platforms like Doordash or Instacart. 

Target, a major general merchandiser, has flipped their largest liability into a major asset. Nearly 2,000 stores, often connected to struggling shopping malls, have been converted into fulfilment centers for delivery.

With 75% of Americans within 10 miles of a Target, this is a cheap and highly effective way to effectively guarantee quick delivery on a range of household items.

In Germany, the large grocery operators surprisingly all offer delivery services (if only in larger markets). REWE Lieferservice (min €50) and Edeka’s Bringmeister (min €40) both offer grocery delivery at or near supermarket prices. Then there’s cash-rich startup Gorillas, boasting possible 10 minute deliveries at supermarket prices with a flat, sub-€2 delivery fee.

In conclusion

How we’ll shop in a few months is a multi-billion-dollar mystery, but we’ll surely see growth in the three models I've mentioned.

  • ‘Dark store’ brands with a delivery workforce
  • Restaurant delivery apps pivoting into grocery
  • Grocery stores piloting in-house services and partnerships with other platforms.

One thing is clear in all three of these booming markets - early market share is key. It can help fence out the competition and position the business for lucrative acquisitions further down the line. Early market share is earned through aggressive, nimble marketing to both acquire and retain customers.

Here at Talon.One, we’ve been addressing this challenge for over 5 years, under the leadership of a Lieferando founder. Today, we’re helping startups, enterprises, and everything in between fuel that growth through loyalty, coupon, and referral schemes with our powerful Promotion Engine.

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Jüsto Case Study: 30+ Coupon Campaigns Built in Just 1 Month
Get Your Free Case Study
Coupon Campaign Best Practice example
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Best Practices for loyalty programs
How to gain a competitive advantage
Your definitive guide to loyal customers