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Issue Date: Vol. 41, No. 10 / August 25, 2001 - September 24, 2001, Posted On: 8/25/2001


Operators Report Growing Retailer Demand For Telecard Machines To Save Space And Labor, Solve Control Problems, Enhance Income


Emily Jed
Emily@vendingtimes.net

U.S.A. - Visit any hotel, convenience store, airport, truck stop or university just about anywhere in the U.S. and it's evident not only that the prepaid phone card has become a mainstream retail item, but also that vending is fast becoming the retail channel of choice.

In an uncertain economy, vending operators in search of new business to augment sales at existing locations and to expand their services into new markets may find telecards to be attractive volume-builders and door-openers.

Prepaid phone cards entered the U.S. market about a decade ago, and initially occupied a few narrow niches populated by consumers who knew what they were , principally foreign visitors, who had used them at home , and telecom-literate people with special needs, such as college students and truck drivers. The general public did not understand the prepaid concept, and initially was skeptical about its value.

That skepticism was not unwarranted. As with most startup industries, the infant prepaid phone card business attracted a good many dubious suppliers whose cards often were unreliable. Consumers didn't know how to tell the good from the bad. End users and retailers, through trial and error at their own expense, eventually pinpointed the most honest and reliable suppliers. And the responsible providers formed a trade organization, the International Telecard Association (now the International Prepaid Communications Association), to help educate the public, work for practical laws and regulations, and respond to unfavorable publicity.

The less reputable card suppliers, carriers and equipment manufacturers prevalent during the industry's formative years have gone out of business. The legitimate companies have survived, creating a more inviting climate for retailers , including vending operators looking for a new niche.

RETAIL MAINSTAY

Consumer familiarity with prepaid phone cards has grown immensely since the early days, as has consumer trust, and today phone cards have become a much sought-after staple, with a prominent home alongside batteries and film in convenience stores.

Just as customers no longer need to be sold on the cards, retail locations that have grappled with the logistics of selling them for more than a decade are more receptive than ever to the benefits of turning their prepaid phone card sales over to a trustworthy vending operator.

For location owners, vending presents a hands-off solution to the inventory control associated with over-the-counter prepaid card sales while producing a steady revenue stream through commissions paid by the vending operator. For the vending operator, prepaid phone cards are high in value, commanding more than most patrons are willing to pay for other items, perishability is a non-issue, and required storage space is minimal, both on the truck and in the warehouse.

Brett Christenson of CBS, llc (Canyon Lake, TX), situated midway between Austin and San Antonio, was in the payphone business for six years before prepaid phone cards hit the scene in his market. "Prepaid phone cards became popular and they hurt some of our payphone revenue," he told V/T. He took the "if you can't beat 'em, join 'em" approach.

"It was a new and coming business, but it caused a problem for store owners," said Christenson. "If you have one store and only you and your family work in it, keeping the cards and carrying the inventory is not a problem. But if you have five, 10, 20, 50 stores, now you're faced with keeping inventory at each location. You're looking at a theft rate of 7 to 15% because it's easy for an employee, or anyone else, to stick any number of cards in their pocket."

Retailers entering the fledgling Texas prepaid phone card market also got burned by stocking large numbers of cards, only to have their suppliers go out of business, rendering the cards worthless, recalled Christenson.

With an established base of payphone customers facing such issues, Christenson found prepaid phone card vending to be a logical extension of his business. "It made sense for us to go to our existing customer base with the idea of vending and offer commissions, which would be less than they'd make if they bought and sold the cards themselves, but now they have no inventory or theft to concern them; and if the cards go bad, it's our problem. It made sense to run phone card vending like our payphone business. We buy the machines, service them, and provide a service to our locations' customers. We take away the hassle and turn it into profit for us and for them."

CBS hit the ground running. The very first prepaid phone card vending contract the operation secured was for 40 stores, and it wasn't even an existing customer.

"We had to do a lot of research quickly, because Texas tends to lag behind and there wasn't a lot of phone card vending around to learn from," recalled the operator.

IT HAS TO WORK

Christenson's long experience in the payphone business taught him that with any equipment, the key was reliable operation with minimal malfunctions. Through careful study of his options, he concluded that Technik Manufacturing best met his criteria.

"My head technician and I flew to the Technik facility and checked it out top to bottom before we bought the machines," recalled Christenson. "If you're buying 40 machines at $1,500 each, you better darn well know what you're getting before you put them out there in the field!"

CBS placed those first 40 units last October and they paid for themselves in six months. The company now has 200 machines in the field and continues to grow rapidly.

The vast majority of the Technik machines have four selections, stocked with a $5 and $10 domestic card and a $5 and $10 call-to-Mexico card.

The age-old formula for retail business success , location, location, location , has proven true for CBS. Approximately half of the company's 200 machines are situated in U.S. convenience stores along the Mexican border between Brownsville and Del Rio. According to Christenson, there are four million people along the U.S. border and 10 million on the Mexican side in this region.

"It costs $1 a minute to make a long distance call in Mexico, and gasoline is very expensive there," Christenson told V/T. "People drive across the border to fill up on gas, buy groceries and buy phone cards to call their relatives in Mexico from the gas station. Or they buy a domestic card and call their relatives in the U.S. from the payphone."

While CBS's primary market is convenience stores, the company also services some truck stops. And it operates machines in convenience stores on a college campus in San Marcos, TX, which is an altogether different market.

"In the dorms, it can be hard for students to get long distance service. Phone cards also allow parents to budget their kids' long distance use, versus turning them loose with a wide-open long distance bill. They can limit their kid to, say, $100 in cards a month," commented Christenson. He added that these phone card users are "more sophisticated" and that CBS adapts each machine to suit the needs of the customer base in a particular locale. The four machine selections satisfy the varied preferences within a given customer base.

To cater to its large concentration of Mexican patrons, CBS places bright red machines with a map of Mexico prominently displayed on the side. All signage is in both English and Spanish, including the phrase "this machine does not give change."

CBS machines accept $1, $5, $10 or $20 bills. Although they're not credit-card enabled, all of them are equipped with modems for remote polling. This allows CBS to check the status of any machine at any time. "In stores where we operate the payphones, we hook the modem to the line and poll it at 3AM, when it's unlikely someone is on the phone," Christenson told V/T.

Although the ability to poll machines and upload sales data provides good central control, each phone card vending machine is also equipped with a data port so route personnel can plug in a printer to generate on-the-spot sales reports. CBS's clients value the machine's perpetual count of vends as a measure for checking they are collecting commissions on all sales. CBS generates reports each month for its clients along with their commission checks.

INVENTORY CONTROLS

This sophisticated data collection and retrieval system requires additional equipment investment. "This is money well spent because the perpetual count, which can't be changed, eliminates fraud," said Christenson. "It's obvious if the driver's route sheet doesn't reflect how much money we know should be in the machine, the number of cards that should have sold and the number he should have replaced. You have to have a trust factor, but I check periodically to see that he really replaced the amount of cards he said he did. Also, if you watch your inventory, you can catch a dishonest person because if he only put in 10 cards and the machine sold out, and there should have been 20, you can put two and two together and figure out what's going on."

Christenson is a highly hands-on operator, which he views as paramount to his company's success and the satisfaction of his clients. "I installed every machine and I'm there for the first four or five collections if not for all for a while," he said. "I get a feel for each machine. Maybe a collector could fool me out of some money for a time or two, but not for long."

CBS has a route staff that services each machine weekly. Customers can call the company at a toll-free number posted on stickers on all machines and receive a prompt, courteous response. When store managers call to report a problem, the company sends a field technician out as quickly as possible.

Through trial and error, CBS selected one card supplier that it has found to be the most reliable and attractive to consumers, as well as three different carriers.

"For a while, people would only buy a large number of minutes, even if they didn't get them; that's what they wanted," explained Christenson. "But customers have become more savvy. They want a 'cleaner' card that does what it says; that kind of card is most popular. At first, we put a $5 card in that boasted 550 minutes with a 49-cent access fee. Unless you made just one call, you weren't going to get all your minutes. We also put in a card right beside it with 250 minutes and no hidden fees, which was a better deal, but people didn't buy it back then. People are beginning now to see which cards provide real value."

As the market evolves, CBS keeps a close eye on what customers in its region want. "My partner and I are planning to do a market survey in locations where we don't have machines to see what people are buying," Christenson told V/T. "Our clients sign an exclusive three-year contract not to sell any cards over the counter, and not to buy them from anyone else. The more cards we sell, the more money they make. They trust us to keep the best cards in front of the customer; cards that work and that people will buy."

According to Christenson, having a "brand name" carrier is of minimal importance, as long as the carrier provides a 24-hour toll-free customer service number, with an English- and Spanish-speaking operator who can assist the caller.

REPEAT SALES

Ensuring that customers leave the machine with a trustworthy card the first time they patronize it is important, because vending operators won't get a second chance if the card does not perform as advertised. "By and large, people buy a card if it looks like it's reasonable," said Christenson. "If it works, they'll come back and buy again. If it doesn't work, they'll never come back."

CBS has a 30-day credit agreement with its card supplier, which allows the company to carry virtually no inventory. "The cards come in already active and go right out onto the street and into the machines," the operator told V/T. "We had problems in the beginning when we stocked inactive cards in the machines that should have been activated, so I like knowing they're active. We have such fast turnaround that they're not lying around being vulnerable; and because of the way we operate, if our card supplier went under, I wouldn't get hurt too badly. My ideal scenario is to service the machine once a week and have no cards left over. My cost of the cards is $19,000 to $20,000 a week; that's $35,000 to $40,000 retail! I'm lucky I don't need to buy $100,000 worth of cards and have them lying around in my warehouse."

One measure of customer satisfaction with the phone card venders and the tighter inventory control and protection from pilferage that they offer, according to Christenson, is that the majority of convenience stores in which he places the equipment report steady increases over the sales they had with their over-the-counter cards during the first 90 days.

"Everyone I talk to who has my machines thinks it's the best situation they ever had," he said. "The machines don't burn a lot of electricity or take up a lot of space. They're often next to an ATM that's lucky if it makes $100 or $150 a month, while my machine can make $200 to $500. Locations see the value."

He added that the prepaid phone card vending market in his region, although steady year-round, does have seasonal peaks. "There are huge spikes over the Thanksgiving and Christmas holidays, and in the summer there are lakes that are a tourist destination," the operator commented.

CBS, continuing its rapid growth pattern, recently secured a contract for a chain of 65 convenience stores that tried an over-the-counter point-of-sale activation system first. "Employees had to enter their three-digit code to activate the cards," Christenson told V/T. "There were so many employees that 50% of any three-digit codes entered worked. They got hammered. They tried that for four months, and now they're ready for our machines."

Christenson sees much untapped opportunity in his market and views phone card vending as a good add-on for already-established vending operators. However, he emphasized that telecard venders must be located in an inside area with an attendant; this is much more important with phone card machines than with snack and beverage venders. "The types of alcoves in hotels where you usually see vending machines wouldn't work," he stressed. "Laundromats can be great locations, but only if there's an attendant. At any time, there could be $700 to $800 in inventory and who knows how much cash; there could be $1,000 in the machine, and people know that."

His advice to those considering entering prepaid phone card vending is to talk to operators in the business and to study what cards sell well at different kinds of location in their market. Every operator must do his or her homework to find a dependable, reliable card with a rate structure that appeals to each specific clientele, Christenson emphasized.

Kevin O'Neal of Pinnacle (Fruitland, ID) is another payphone business veteran who found phone card vending to be a natural fit.

Beginning in the early 1990s, the company began placing telecard venders in its payphone accounts. The company has since placed some 300 machines, mainly at convenience stores, truck stops and grocery stores.

"People want vending machines for security against employee fraud," O'Neal commented. "Over-the-counter sales leave inventory unsecured, and there's no order or control."

EDUCATED CONSUMER

With phone cards so prominent in today's marketplace, most of the accounts that Pinnacle secures are well versed in the variety of cards and carriers available, and already have favorite cards that Pinnacle then stocks in its machines.

"Our customers, the store owners and managers, are very educated; there are lots of sales people out there explaining products to them," O'Neal told V/T. "The end users look for maximum minutes with both no-connect fee and connect fee cards. Truckers are more educated than a lot of other consumers; they want a flat rate, with no surcharge and the maximum number of minutes."

Efficient customer service and fast, clear connections are the keys to success for any phone card, added O'Neal.

The majority of Pinnacle's vending patrons are domestic travelers and those who don't have long-distance service at home. "We have a huge Hispanic market and we sell a lot of minutes to Mexico, especially in the summer harvest months when a lot of immigrants work in the U.S. and call home," said O'Neal.

According to O'Neal, phone cards are an impulse sale and vending is an ideal medium to securely display them in front of consumers. "People don't go out to find a card; they buy it because they see it," he said. "We place our machines in high-visibility spots at the front of the store. If they insist on our putting it in a low-visibility spot, we'll place it for three months, then show the store the revenue and ask them to let us move the machine. We show them the numbers again in three months." Since more sales generate more commission, store managers always can be convinced to move machines to more visible areas of the store.

According to O'Neal, high-visibility placement is far more important than gimmicks on venders. "We don't have any 'talking' machines with all the bells and whistles. Our venders just display the cards and light up where the card comes out. Our customers don't like big, flashy machines in their stores," said O'Neal. "In locales with large Hispanic populations, we use graphics with symbols of their home countries, which promotes sales."

The majority of Pinnacle's machines offer three selections , $5, $10 and $20 cards , and a mix of cards with connection fees and flat rates. Pinnacle's machines only accept cash. According to O'Neal, the majority of patrons do not have established credit, which is why they are using the phone cards to begin with; most don't carry credit cards.

Pinnacle's route drivers collect and service both the pay phones and phone card vending machines at each stop, generally on a bimonthly basis.

By purchasing deactivated cards and activating them in batches when they are loaded into the machines, O'Neal maintains high internal security.

Like Christenson, O'Neal believes that the prepaid phone card vending market offers a lot of promise for existing vending operators who are looking for an add-on product to supplement business at the locations they already serve, especially in today's weaker economy.

FULL-LINE OPPORTUNITY

Pinnacle uses Vendtek, Technik and Opal equipment, and selected the machines for their reliability and visibility.

"It's important to someone starting out in this business also to look into the manufacturer's customer service and tech support. Will they walk you through it in the field as your technician fixes the machine?" he noted. "That's the kind of service we found from the companies we use."

Art Pfizenmayer of Phonechip, Inc. is another operator situated in a prime phone card vending market , the resort corridor centered on Las Vegas.

Pfizenmayer founded Phonechip in 1998, following a career with the FBI and a few years as a gaming industry consultant in the Southwest. The company is named for a proprietary telecard that Pfizenmayer developed through his relationship with Paulson Gaming Supplies. This product, which resembles a gaming chip, comes in a clamshell package for retail; it is not vended. Phone Chip's primary business, however, is the placement of phone card vending machines.

Pfizenmayer's experience in the gaming industry familiarized him with telecard vending. "I saw the potential and decided to strike out in that direction," he recalled.

From day one, Pfizenmayer has limited his machine placements to casinos and hotels. Resorts augment the revenues they earn from the telecommunications services they provide at their properties with the commissions on phone card sales, and consider vending machines a necessary component of their guest services.

"We did an analysis with major properties showing that, while there was some erosion of other telecom revenue after phone card machines were installed, it was more than offset by the added revenue generated by the machines. We have an agreement with the resorts to give them a percentage of the gross revenue," shared Pfizenmayer. "If you pick up a phone at a resort, they get revenue. If you dial an 800 number and use a debit phone card, versus letting the meter run on the hotel phone, it becomes a value because your rates are much lower."

REMOTE DATA COLLECTION

Phone Chip produces custom vendible telecards for most of its clients. Personal identification number (PIN) series provide for 15, 20, 25, 30, 40 and 60 minutes of calling time. The company has the cards imprinted with custom graphics selected by each property.

Phone Chip exclusively uses Opal's "Tri-D" three-select card vender because, unlike smaller locations with limited space, casinos like the very visible machine with its high-impact backlit graphics.

"Opal also does custom colors to match the casino d©cor, and we do custom installations, where we recess the machines into the lobby wall," noted Pfizenmayer.

Pfizenmayer also selected Opal equipment for its reliability. "It is really maintenance-free. I've never had a malfunction," noted the operator. The anti-theft device must be reset if it is triggered and protects the machine against assault, and this valuable feature is the principal field service requirement. "The equipment is nearly 100% maintenance-free, other than that," he reported.

All of the machines have modem access, enabling Pfizenmayer to monitor his machines remotely from the office. "That diminishes fraud potential as far as service in concerned and helps eliminate customer service issues. Casinos and their guests have high expectations when it comes to customer service; it's the name of the game," he told V/T.

The company has three levels of customer service: the Qwest customer service toll-free number on the cards; its own "800" number on its machines, providing access to assistance 24 hours, seven days a week; and a technical staff on standby around the clock to respond to service calls immediately, if possible, or by the next business day at the latest.

In addition to the staff that regularly services the machines, Pfizenmayer is in the field daily to inspect machines, and services them himself periodically to maintain a feel for the volume of each machine.

CLIENT RELATIONS PLUS

Phone Chip uses Qwest almost exclusively as its service provider. "It helps when dealing with the corporate contact; they want to know we have a top-tier provider," Pfizenmayer explained. "The end purchaser is not concerned with the carrier, but with value. Patrons want to know that the product will work, and that someone stands behind it." For this reason, Phone Chip does not see any value in co-branding with its carriers on the cards.

In addition to reliability and value, there's a certain souvenir value for custom cards at large resorts such as Bally's and Treasure Island. The three-bin machines generally feature a custom $10 and $20 card specific to the venue, and a more general scenic Las Vegas card.

Phone Chip's machines do not accept credit cards because Pfizenmayer believes there's too much potential for fraud in the Las Vegas casino environment. "With swipe-type activation, people can steal other people's cards, and there's no control," he told V/T.

To control the valuable merchandise in-house, Phone Chip orders its phone cards in bulk, then batch-activates them as route drivers fill machines.

"We have an on-board management information system that's fairly elaborate. It tracks the number of times the machine is opened and closed, and inventory, and we can remotely turn it on or off," Pfizenmayer told V/T. "Before our guy goes to make a collection, we know the amount that should be in the machine. I also carry a laptop computer, so I can access any of my equipment from anywhere, anytime."

While Pfizenmayer is thriving in the lucrative resort and casino niche, his advice to other vending operators considering launching a prepaid phone card vending venture is to examine their markets very carefully.

"We selected the resort market because it's very compatible with phone card usage. Margins in convenience stores and truck stops are much different from those in a resort corridor," he cautioned. "Tourists on vacation are a whole different market from transient and immigrant populations. Your convenience store market is looking for 240 minutes for $5 with front-loaded charges and connection fees, and those margins are very thin; that's why we're not in that market."

He added that, with smaller margins, the cost of equipment becomes an issue. "If you're retiring your capital investment from income on such narrow margins, one misstep and you have no profit," commented Pfizenmayer. "Right now we're not inclined to go into that market, but that could always change in the future."

None of Phone Chip's cards, either domestic and international, impose connection fees, because the company's customers don't want them, he told V/T. The only surcharge is the payphone "dial-around" charge common to all prepaid phone cards, which the service provider collects to compensate the payphone owner for the toll-free use of the instrument.

CUSTOMERS IN THE KNOW

"Europeans are especially debit card savvy, and a lot of our customers are international," said Pfizenmayer. "With our cards, if you use a minute, you're only charged for a minute. Other cards charge for four, five, six or even 10 minutes with some of the real aggressive cards. You get an honest minute with our cards. The surcharged cards appear to have a greater value, but in the long run, the quality of the product pales in comparison to what we offer."

As Pfizenmayer sees it, the use of prepaid phone cards has steadily grown over the years, and two trends are clear. "The first is that people are looking for real value in their minutes. They're more inclined to look harder to find better actual value , an honest minute , and that's what we believe in," he told V/T. "The second thing is that I get an overal'l sense that there is a little 'plateauing. There was a lot of shakeout with unscrupulous companies in the beginning, and a lot of larger suppliers disappeared from the scene.

"It's a shakeout of quality versus quantity, and that's a good thing," Pfizenmayer summe up. "There's is plenty of growth ahead. It's a matter of whether you choose to sell as much as you can with smaller margins, or less with higher margins. Either way, it's a great opportunity."


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