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Lee Hnetinka’s Darkstore changing the delivery services for online retail businesses

Lee Hnetinka is a name gaining much attention in the business sphere of delivery services. Businesses use delivery services to build relationships with their customers. However, a delivery service is just more than delivering the products to the customers. They must make use of resources and applications to ensure the system runs smoothly. Today, businesses offer delivery services as a standalone business. For example, a pizza restaurant will link up with a local delivery service company that will provide the deliveries.

moneyDarkstore, same-day delivery service founded by Lee Hnetinka seems to be changing the way delivery services are traditionally done. Hnetinka has been in the business of delivery services for some time having been the founder of Wun-Wun, a New York-based company that delivered small products in an hour after a purchase.

Hnetinka’s Wun-Wun was an on-demand delivery service that was directly competing with Postmates. He sold the assets of the company to Alfred, a TechCrunch Disrupt SF 2014 winner. Hnetinka then teamed up with the founder of JustVacay, Wilson Lee and launched Darkstore.

Today, Darkstore is offering one-of-its-kind delivery fulfillment platform serving e-commerce brands. Darkstore has partnered with Tuft & Needle that sells mattresses online. After viewing the products at Tuft & Needle’s San Francisco showroom, customers can have the mattresses delivered same day if they order it before 4 p.m

The same-day delivery service is what many online retail businesses are missing. Previously, a delivery like this would take about one to three days, but now it is happening same day of ordering. Darkstore is targeting e-commerce brands that sell their products online, and which don’t have a local brick and mortar store. The delivery service seeks to ensure that products for these online retail brands are shipped fast while reducing the cost of doing that

Darkstore has identified partners that have excess storage capacity in form of malls, warehouses, or bodegas and empowers them to be fulfillment centers by using an app.

Business owners want to establish a relationship of reliability and trust with their clients. To ensure this, businesses offer discounts and rebates and hire proficient customer care representatives. The same businesses produce quality products. But is that all? Probably not!

There is the aspect of delivery services. Customers want to get their orders soonest possible and that’s why many people are looking for businesses that give priorities to their delivery systems. The idea of delivery services has been practiced by many businesses and for a long time. You can get your pizza delivered to your home or office fast. You can also have the grocery brought to your doorstep. And, those are good examples of delivery services and they do work amazingly for the customers and the businesses. But what about the high-volume order businesses that need to get their products delivered to consumers? What about the online retail businesses that don’t have physical stores and warehouses to stock their inventory?

Having a delivery service for high volume orders can be a complex thing for small retail businesses. They need to lease the space for storage of their inventory and probably purchase vans and hire staff to operate those facilities. But today, we are talking about specializing in a certain field of business and doing your best so that you can produce the quality of services that customers want. If you make T-shirts, for example, running a warehouse or a fleet of vehicles may be something different for you. You may not have the business knowledge for such operations. While you can hire staff to manage those operations, you will be working on different areas that require a lot of input and tools to work through.

What if you had a delivery service that integrates a delivery model to ensure as an online retail business, you don’t have to own or lease a warehouse and you don’t have to own a fleet of vehicles for transporting products.

The delivery service model works with existing warehouses and companies that have fleets of vehicles, and which offer shipping and delivery services. This means, you as the owner of an online brand you reduce the cost and headaches of having to manage the warehouses and the vehicle fleets.

Darkstore’s idea came from Gary Fritz, the Expedia.com President who said that signing a lease wouldn’t work well for the business plan. This eliminated the risk of having to own a warehouse by brands such as Expedia.com, and Hnetinka has sort to revolutionize this idea and make it work for a broad range of online retail businesses.

In their first deal, Darkstore liaised with StorageSF, which is based in San Francisco offering a handsome $7.70 per square foot for a space that would earn them $2.00. The partnership has been achieved through a profit share agreement of 70/30. For a Tuft & Needle mattress that is retailing at $750, it would mean that Darkstore takes $20 and then splits that with the San Francisco storage partner.

Many online retail businesses face challenges in offering delivery services. They would want to do it so that they build a relationship with their customers. However, setting up warehouses, employing staff to man those spaces, and taking care of the inventory would require quite a large amount of money. Again, the same brands would want to purchase vans to handle the fleet operations, which again is a costly undertaking. If it’s an online brand, it may find it quite cumbersome and too involving to manage their own delivery service. But Hnetinka has a different way of doing it.

Brands don’t have to lease storage spaces and they don’t even have to own fleets of vehicles. Darkstore brings in an app that takes care of all that and this is what Hnetinka had to say, “That’s our business model. We partner with dark stores that have excess capacity and we share the revenue 70/30 with them. We don’t take on any real estate leases, and we don’t operate the dark stores ourselves. The storage facility accepts the incoming freight and they process all of the orders all using the Darkstore app.”

Neither Darkstore nor the online retail brands need to sign a lease or employ staff to offer the delivery services. Darkstore uses their iPhone app and they show it to the operators doing the delivery services. What happens is that an order comes in, the staff of the storage facility scans the SKU and they enter the item’s number. The retailer can also access the inventory from their back office without having to visit the storage facility. They check the inventory that is available in the respective stores that are being operated with help of the Darkstore’s technology application. As customers order the items, Darkstore API updates and reflect that.

Hnetinka thinks that Darkstore is like the Amazon Web Services that have changed the way online businesses are able to get their server space and ensure they launch it at a reduced cost.

Hnetinka sees a big opportunity in this business, “On average, warehousing and fulfillment are 3 percent of sales. So, for a brand, 3-5 percent of sales is what you pay for warehousing and fulfillment. There are 4 billion e-commerce orders done annually in the United States, 2 billion Amazon and 2 billion non-Amazon and we think we can get 15 percent of that market. So, that’s 270 million in orders. Our average revenue order, we believe is going to be $9. That’s $2.4 billion and that’s our 5-year projection.”

But Hnetinka’s Darkstore doesn’t work with just any other online brand. They select the brands to ensure that they have a high demand for their products in the specific locations where they have partnered with storage facility operators. It wouldn’t make sense to have an inventory that is going to sit in the storage space. Darkstore wants to deal with brands that have fast-moving products or high-volume orders so that they are able to offer deliveries fast without having to hold the inventory in the stores for so long. It would be expensive if a product does not sell and it just sits in the warehouse. That’s not how Darkstore business model is designed.

In an interview with PSFK, Hnetinka pointed out, “We look at Darkstore very much like Amazon Web Services, but for real space.” He further said, “Before Amazon Web Services (AWS), you had to get your own server, set it up and it was just that one server for one company. With Amazon Web Services, you have one server and many companies share this one server, and in doing that you have much larger cost savings and efficiencies, enabling startups to start at a way lower cost. We view the same cost savings with Darkstore, brands are now able to have a same-day delivery fulfillment center without the high cost.”

Darkstore’s concept has been applied by other businesses such as Uber, which is touted the largest transportation company that owns no car and others like Airbnb, which is considered the largest hospitality businesses with no hotel facility. In explaining how similar, but unique his Darkstore model works, Hnetinka said, “We’re not going to take on real estate leases and we’re not going to run these warehouses ourselves, so we want to be the largest fulfillment company that doesn’t own a fulfillment center.”

Darkstore has partnered with AxleHire, a Berkeley, California-based company to offer deliveries. AxleHire charges $5 for every delivery of small items and for something like a mattress, it charges $10 per delivery. Every brand pays the delivery fee, so in essence, Darkstore earnings are shared between the storage facility operators and Darkstore itself and not the company offering the transport services. When you look at it, Darkstore is just a platform that helps facilitate same-day deliveries and e-commerce brands are seeing this as a great chance for them to be able to ship and deliver their products pretty fast.

Darkstore idea has probably been borrowed from other places like Taiwan and London. In these locations, dark stores have been used to offer fast delivery to customers. The dark store concept may not have been brought to the United States until now, and Hnetinka feels that he can make the model work well for the online brands that have been facing challenges in running their own delivery systems or using platforms like those provided by Amazon.

Hnetinka said, “In Taiwan, the way it operates is, under bodegas, there’s extra space, so virtual retailers store their stuff there,” further adding, “That’s where we got the idea to exploit excess capacity and not build the dark stores themselves.”

Initially, when Hnetinka founded Wun-Wun, the mission was to make use of stores as warehouses and that to Hnetinka was a stop-gap. When running Wun-Wun, Hnetinka and his team kept tied to that mission. But the market landscapes can change and so can the missions change. Other big players have come in like Postmates and UberRUSH, but Darkstore seems to be the solutions online brands want when it comes to same-day delivery services.

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