Market Area Analysis for In-Store Online Fulfillment of Small and Medium-Sized Supermarkets in Under-Served Areas of Online Grocery Delivery*,**

Purpose: The demand for online grocery shopping has increased substantially over the past years due to changes in market environment such as the expansion of the non face-to-face consumption and the increase in the proportion of single-person households. However, online grocery delivery services in Korea are limited to major metropolitan areas. There are still many under-served areas in small cities and rural areas where same-day and early morning grocery delivery services are not available. This study aims to provide a in-store online grocery fulfillment strategies utilizing small and medium-sized supermarkets in the under-served areas. Based on the order data of the supermarkets and online grocery order data in Pohang, this study proposed a systematic method to locate in-store fulfillment stores and determine their delivery service areas. Research design, data, and methodology: The data used in this study are divided into two parts. The first dataset consists of supermarket order records from the Pohang Small and Medium Distribution Joint Wholesale Logistics Center provided by the Korea Electronics Association (KEA) from January 2021 to December 2023. Because the store location was only identified by its postal code, we used the five-digit postal code district as the unit of analysis for store location. Additionally, to assess the potential online food demand among consumers in the region, we obtained food category order data (January–December 2013) from the online shopping mall operated by domestic offline-based retailer Company A. Due to Company A’s difficulty of disclosing recent order data, the 2013 data was provided on the condition that it be used solely for academic research purposes. We performed the RFM (Recency, Frequency, Monetary) analysis using the supermarket order data to identify the supermarket locations in five-digit postal code district suitable for online fulfillment. RFM scores were calculated by postal code and categorized into five classes based on quantile classification, assigning scores from 1 to 5 points. Stores with recent order activity and high Recency scores were considered to have strong online sales capabilities. Additionally, stores with high Monetary sales volume and high Frequency were deemed to have high inventory turnover, indicating strong sales capabilities not only offline but also online. Then we identified the top 40% high demand areas of online grocery orders. Using the GIS spatial overlay method, we identified the in-store fulfillment store locations (postal code districts) that meet the above two conditions and that are at least 1 km away from the competing large hypermarket stores. Finally the same-day delivery service areas were determined by identifying the 2 km delivery areas along the streets from each in-store fulfillment locations. Results: This study identified 11 postal code districts suitable for in-store fulfillment locations in Pohang and 57 km2 of same-day delivery service area around those locations. This study identified four geographical areas for small and medium-sized supermarket online delivery services. The first region includes the old downtown area around Yongheung-dong, including Jukdo Market in Pohang City; the bustling commercial district stretching from Pohang City Hall to the intersection; the entertainment district around Sangdae-dong Administrative Welfare Center, known as “Ssangyong Intersection,” extending to Se-myung High School; the Sangdae-dong area, which serves as the main gateway to Pohang with the Pohang Terminal located there; and the existing commercial district including Hyoja-dong, where POSTECH is located. The second zone is the new downtown area in Jangseong-dong, North District, Pohang City, where large-scale apartment complexes have been developed, and it is also adjacent to tourist attractions near Yeongildae Beach. The third zone is the residential-focused commercial area in Mundeok-ri, Ocheon-eup, South District, Pohang City, which was formed with the establishment of POSCO’s steel facilities. The fourth zone is the Yeongil Bay area, including Donghae-myeon, Yakhyeon-ri, in Pohang City’s Nam-gu district, which is a tourist commercial district with many tourist attractions such as Dugu Beach, Ilwolji, and Ilwolsa Temple. Discussions and implications: This study determined the location of in-store fulfillment locations and same-day delivery areas based solely on offline order data from local small and medium-sized supermarkets and Company A’s online food order data. However, to actually implement and operate a in-store fulfillment system, practical constraints of individual stores—such as the store owner’s willingness, workforce availability, and the existence of spare store space—must also be considered. In particular, selling store products online requires significant additional tasks, including registering product and pricing information on online platforms, real-time tracking of store inventory, and handling online order receipt, picking, and packing. Above all, it is crucial that store owners possess the willingness and capability to manage and handle these responsibilities. Additionally, establishing and executing a systematic store-based fulfillment process is crucial, which can be elaborated as follows. When a customer accesses the online shopping app, it provides a list of stores capable of delivering to the customer’s address, allowing the customer to select an online purchase store from this list. Subsequently, the store selected by the customer displays products available for online order on the screen, organized by product category. Once the customer selects items, completes the order, and makes payment, an order fulfillment instruction is issued to the store. After the store completes picking and packing the ordered items, a delivery request is made and a delivery personnel is assigned. The fulfillment process concludes when the delivery personnel visits the store, picks up the customer’s order, and delivers it. In the early stages when online orders are low, it would be preferable from a profitability perspective to focus in-store fulfillment services on locations with high potential online demand. As online orders increase, same-day delivery areas can be expanded by adding fulfillment stores. When online order volume exceeds individual store processing capacity, the existing wholesale logistics center can be expanded to increase online order processing capacity or new micro-fulfillment centers (MFCs) can be established to handle online orders exclusively. Conclusions: In order to strengthen the online fulfillment capabilities of small and medium-sized supermarkets, this study suggested suitable locations of supermarkets that can serve as e-fulfillment stores with their corresponding same-day delivery service areas. This study holds significant value in that it proposes a solution to improve delivery accessibility in areas underserved by online food delivery services by enhancing the online fulfillment capabilities of local small and medium-sized supermarkets. The limitations and the future directions of this research are as follows. First, this study considered areas with relatively high online food order volumes in 2013 to be core market areas with high potential demand for online food, but this may not accurately reflect consumers’ preferences for online food purchases at the current point in time. Future studies should collect and analyze data on the online and offline food consumption patterns and retail preferences of consumers in these areas at a more recent point in time through surveys. Second, sales performance may vary by product depending on the online and offline sales channels. It is necessary to identify product categories with high online sales potential based on the characteristics of the commercial district where the store is located and establish customized online product assortment strategies for each store. Third, this study assumed that stores with higher Recency, Frequency, and Monetary value in their recent offline supermarket orders would also have higher online sales capabilities. However, to sell offline store products online, it is necessary to register store-specific product and price information on online platforms to expose them to consumers, monitor store inventory in real time, and prepare for delivery by picking online order products. The construction and dissemination of digital platforms for this purpose will require financial support from the government and local authorities. In the practical implementation stage, factors such as the store owner’s willingness to undertake such tasks, the availability of personnel, and the presence of spare space within the store must also be considered. Detailed profitability analysis, including the online sales volume required to offset the costs associated with store delivery, will also be necessary.