The number of micromarket locations in the United States rose 170% between 2011 and 2012, according to a study conducted by veteran vending market researcher Brad Bachtelle of Bachtelle & Associates (Tustin, CA). "What have we done? We've created a new channel," Bachtelle said. "It's driving more sales, pleasing customers and exciting our industry."
To gauge the success of the micromarket concept, Bachtelle & Associates worked with all the suppliers of self-checkout kiosks. They found that, in December 2012, there were 2,642 active micromarket locations with 2,724 active kiosks -- higher-volume micromarkets can have more than one checkout terminal. These installations represented sales volume of $90.74 million.
In 2011, Bachtelle reported, there had been 1,012 micromarkets. Thus, in one year, 1,768 locations were added and 56 lost. Average volume per location in 2012 was $48,000, said Bachtelle, who reviewed the growth of the micromarket segment and its potential for expanding the scope and capabilities of the vending industry during the National Automatic Merchandising Association's annual OneShow in Las Vegas.
"What's next? We predict that there will be 13,000 micromarkets on location by 2015, and 35,000 within a decade," Bachtelle continued. "If this takes place, and without taking inflation into account, micromarket volume will grow to $1.6 billion in 10 years."
The research also surveyed the use operators are making of micromarkets and the guidelines affecting installation. "We see a minimum of 150 employees as the threshold for a micromarket," Bachtelle explained. "On that basis, there are about 99,000 suitable locations in the country, but not all of them are available, so the market potential at present is in the range of 77,000 to 80,000 stops. We think 46% penetration is attainable. Today, we're at the tip of the iceberg."
Consumer insights from the study were sought over a four-week period in the fall of 2012, through consumer intercepts in 230 locations. Averaging subsidized and unsubsidized locations, the unit price was $1.37; 72% of purchases were made with the cashless "market cards" typically provided to micromarket customers. "A substantial number of customers use the card less than once a week," Bachtelle reported. "This is an opportunity for us."
In terms of sales dollar volume, 65.9% was contributed by market-card purchases and 34.1% by open-system media, principally credit cards.
On average, one in seven items purchased is "food," but food generates one out of every four sales dollars -- "and we can look at breakfast sales for the first time," the pioneer researcher reported.
Not unexpectedly, the researchers found that the top 5% of customers drive 25% of the business. The research also found that a micromarket tends to attract 18% more visits in a day than a vending area, and averages 1.2 sales per day per visit, compared with 0.7 sales in a vending area.
"Consumers like micromarkets," Bachtelle emphasized. "Replies we got to the unprompted question 'what is it that you like?' included 'variety,' 'the payment systems,' 'ease of use,' 'fresh food' and 'product access.' Asked what they dislike, customers said 'higher prices' and 'can't use cash.'"
At present, the researcher observed, vending operators fall into two broad classes in their response to micromarkets: those who see the opportunities and are reacting as though a "land rush" is under way, and those who recognize the need to "protect my business," and so are willing to install a micromarket when necessary to retain an account (or, perhaps, to win one).
LEARN BY DOING
And the business is so new that no hard-and-fast operating principles have emerged. "The focus today is on keeping them running and learning how they work," Bachtelle reported. "This is so new that we haven't yet done it right. But we know they can drive incremental revenue.
"The micromarket is not an extension of vending: it's new and different," the longtime industry observer pointed out. "It's kind of like managed foodservice, kind of like vending and kind of like a convenience store. The Food & Drug Administration's food code covers every type of foodservice, but the micromarket doesn't fit in any of them: it's not 'vending' and it's not 'foodservice.'"
Bachtelle observed that clues about "doing it right" can be found in patrons' expressed preferences for access to the products, variety and perceived freshness. These qualities, he said, contribute to an upscale environment and position the micromarket as an employee benefit.
PHOTO: A secure, prestige location, like this artist’s concept Hawaiian resort hotel above, is an ideal place to combine all elements of digital malls: vending machines, micromarkets and next-generation virtual stores. At right, virtual stores will enable shoppers to “virturally” try on and select merchandise for later home delivery. They could even provide immersive augmented-reality games and entertainment.
In particular, the variety and freshness attributes require close attention to the whole warehouse refrigerated and frozen storage process, and make it impossible to service micromarkets from the same kind of traditional "route truck store" as a vending machine, the speaker noted; "You need a different kind of employee." Moreover, financial visibility is essential: "You must do account P&Ls, independently and separately." Variables that lend complexity to micromarket operation include the great pricing flexibility, including the ability to price in one-cent increments ("you can sell anything"), credit-card fees and add-on taxes, e.g. the ability to collect sales tax on item purchases, as cannot be done with vending machines.
A DIFFERENT ANIMAL
"Vending is a 'buy' system, while a micromarket operation is a 'sell' system," Bachtelle observed. "It invites, and requires, merchandising. The complete flexibility a micromarket gives you is fun -- and it's very challenging. It calls for consumer merchandising programs of a kind foreign to vending. At present, we don't know what we don't know; but we will figure it out. And we are a retail channel."
For this reason alone, micromarkets should accelerate operators' establishing closer and more cordial partnerships with brands, the speaker suggested. "And we have to change the focus from operations to consumers."
These considerations point to the need for separating the micromarket and the vending operations -- putting micromarkets on their own dedicated route, for example, and adding a job title for merchandising and promotion on the micromarket side. Whereas a typical vending operation will have a table of organization in which administration and accounting occupy an echelon above warehouse, route and field service, a micromarket operation should have a marketing title up there too, or perhaps one level higher.
In a sense, micromarkets make mandatory the conceptual improvements that have been recommended in vending for decades -- true category management and planogramming, close attention to maintaining variety, introducing new products and analyzing performance, bringing seasonality into the menu-planning process -- all with the object of improving location granularity. "Frequent consumer promotions are essential, too. There's so much here that we don't know, because we've never done it.
"Micromarkets are here to stay," Bachtelle continued. "They're new and they're cool. But beware, and take care of your vending business; it's what pays the bills," he warned.
These are interesting times, and there is a real opportunity for those who are willing to keep their minds open and to learn new approaches. "A rising tide lifts all boats," Bachtelle said. "And both vending and micromarkets fit into the broader retail picture."
Joanne Bethlahmy, director of Cisco Consulting Services' Internet Business Solutions Group (retail and consumer packaged goods) said that, in the course of doing "thought research" into retailers and retail suppliers, the IBSG concluded that all the pieces are in place for the development of what she called a "digital mall." This might combine information and other service kiosks with micromarket and vending systems in a compact, integrated retail environment.
The marketplace is changing, Bethlahmy observed, affected by urbanization -- substantial movement out of the suburbs (with their spacious malls) and back to the city -- along with economic uncertainty. Retailers must deal with the growth of e-commerce, the shopping expectations of the "millennials" and the prevalent practice of "showrooming," in which shoppers visit a store to look at a desired item close up, get information about it and perhaps try it out -- and then use their smartphones to look online for the lowest price at which they can buy it.
Other challenges for retailers include the need to counteract the slowing rate of return on investment, enhance consumer experiences, reduce labor and construction costs and maximize brand differentiation. These requirements are leading retailers to experiment with smaller store formats and to invest in equipment innovation.
Bethlahmy believes that vending technology has lent itself to bringing many innovations together in recent years, in concepts ranging from low-tech "Artomats" (classic cigarette machines selling small artworks created locally), to large machines selling groceries and sundry items, to Procter & Gamble's high-tech "P&G Beauty Bar" machine (which vends cosmetics and allows customers to speak with an expert in a central call center by means of a built-in video terminal).
ASK AN EXPERT
The Beauty Bar incorporates what Cisco calls "remote expertise." Another implementation is the PharmaTrust kiosk, which enables a customer to get a prescription filled after speaking with a remote pharmacist. This technology holds great promise for supporting a brand at an unattended point of purchase, Bethlahmy said.
While these new applications of vending technology have been rolling out, micromarkets have arrived on the scene. The Cisco executive described the micromarket as an unattended, technology-dependent convenience store; at present, most of them sell food and beverages in workplaces. While they sell branded merchandise, the stores themselves are "unbranded."
The third emerging technology bearing on the present retail need is the "virtual store," the speaker noted. "This is a physical manifestation of e-commerce," she explained -- a terminal at which customers can find information on, view and order merchandise for later delivery. It permits establishing additional retail locations without additional inventory.
Tesco, the United Kingdom's largest grocery store chain and the world's third-largest retailer, tested a "virtual store" in Seoul, Korea, three years ago. This offers delivery of an order within two hours, and was promising enough to spur many follow-up pilot programs. To date, "virtual stores" have been designed to permit consumers to view color photos of products imprinted with quick response codes that can be scanned with a smartphone to retrieve additional information or to place an order.
All these approaches to combining retail automation with consumer engagement seem well suited to the semi-permanent (or even mobile) "pop-up" stores with which major retailers also are experimenting, Bethlahmy reported.
THE NEXT STEP
"Up to this point, these projects have been conducted by single retailers," the Cisco expert said. "And we don't think any of them is enough to solve the overall problem. In fact, there's a risk that they may fragment the retail sector." The challenge for retailing as a whole is to attain the scale at which it becomes cost-effective to substitute technology for traditional labor in conventional brick-and-mortar stores.
"Our vision is of an exciting, low-cost, low-labor, digitally enabled immersive 'mall' in high-traffic venues," Bethlahmy said. "It would be a branded, highly interactive environment, and could be designed for indoor or outdoor installation."
She described an artist's conception of such an automated "mall" in a resort hotel (see page 32). Customers entering at the left would encounter a "digital concierge" kiosk offering "remote expert" interaction. To the right is a wide recessed bay with vending machines (and perhaps games) on two walls, and "virtual stores" across the back. On the right end of the installation is a micromarket configured as an unattended food court.
All these elements could be adapted to the needs of different locations, and arranged to conform to the space available. "This goes beyond a workplace break area and lunchroom," she pointed out. It could provide a very wide range of services, and new ones could be added easily: banking, dry cleaning, the automated "remote expert" pharmacy, personal electronic items and accessories, and so on and on. Engineering advances now under way will add to the "virtuality" of the shopping experience, Bethlahmy predicted, and these include holograms and other three-dimensional graphics.
Micromarket technology also is advancing, she added. "Watch for self-locking display cases and coolers, and shelves that report removals from inventory." New concepts might usefully be plotted on coordinate systems with "traffic" -- or "prestige" -- on one axis, and "security" on the other.
In summary, integrating appropriate micromarket, vending and "virtual store" systems into a satisfying and engaging experience offers benefits to everyone, the Cisco executive said. "Consumers get convenience, a wider range of options, entertainment, answers to their questions about products, and other benefits they want. Operators get new locations and an extended spectrum of more profitable merchandise," she instanced. "And both operators and suppliers get useful data besides.
"We think this could be a $7 billion opportunity in the United States," she predicted. Things to keep in mind when evaluating a specific implementation will include its ability to deliver an immersive experience, secure connectivity for payment processing, appropriate back-end systems and support, and the opportunity for deriving business intelligence from the operation.
What's needed to realize the "virtual mall" concept is a consolidator or "orchestrator," viable pilot installations to validate the approach and a scalable business model, Bethlahmy concluded.
According to Bachtelle, the independent evaluation from Cisco, which is not in the vending industry, validates his findings. "There's a huge opportunity here," he said. "Micromarkets are taking us to tomorrow."
Cisco's digital mall -- the next generation of self-service shopping -- is detailed at cisco.com/web/about/ac79/docs/retail/Digital-Mall_Deck.pdf