Grab 'N' Go: Emerging Self-Checkout Micromarkets Find Favor As Vending Machines Alternatives, Route Complements

Posted On: 1/4/2012

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vending business, vending machine, self-service checkout, micromarket, micro market, vending route, vending machine operator, automated retailing, Atlantic Coast Exposition, ACE Planning Committee, Scott Halloran, Trolley House Refreshments, Kevin Bailey, Breakroom Provisions Co., Jim Brinton, Avanti Markets, Terri Bryant, Microtronic Markets, Joseph Hessling, 365 Retail Markets

Self-service micromarkets are taking hold in the vending space, as early adopters impressed with the results are deploying them in larger numbers and inspiring others to follow suit. The features and benefits of this new retailing concept were explored by a panel of experts at the recent Atlantic Coast Exposition in Myrtle Beach, SC. The session was moderated by 2012 ACE Planning Committee chairman Scott Halloran, Trolley House Refreshments (Richmond, VA). His panelists were Kevin Bailey, Breakroom Provisions Co.; Jim Brinton, Avanti Markets; Terri Bryant, Microtronic Markets; and Joseph Hessling, 365 Retail Markets.

ACE Micromarket Panelists

Avanti's Brinton, a veteran vending operator and a past chairman of the National Automatic Merchandising Association, runs 90 self-checkout installations in his own company, Evergreen Vending (Tukwila, WA). As a pioneer in deploying micromarkets over the past two years, he said he has witnessed at first hand how this emerging retail model can overcome many of the challenges today's operators confront, and substantially boost their bottom lines.

"Vending revenues are shrinking; sales are declining. It's hard to get manufacturers to want to give us new products. Meanwhile, clients and customers are seeking innovation," said Brinton. "And the number of large accounts that can support manual food operations is shrinking, but they don't want to step all the way down to a vending bank."

Micromarkets provide a solution to all of these challenges, Brinton emphasized. Also working in favor of the new workplace retail model is the public's increasing comfort with self-checkout technology in their everyday lives, at retailers like grocery stores and warehouse clubs. "There's a new comfort level with the technology, and the stars have aligned for micromarkets," Brinton stated.

The Avanti chief described a micromarket as a convenience store-style setup without a cashier behind the counter. "It's like an honor box on steroids," he observed. "Customers check themselves out, and have hundreds of product options to choose from."

Patrons select the items they want, from a variety of familiar racks and merchandisers, and bring them to a self-checkout touchscreen kiosk. This guides them through the checkout process; it recognizes each item, displays the prices and the total, and accepts payment. The kiosk is equipped with an optical or wireless scanner that reads UPC barcodes or RFID tags affixed to each product. Depending upon the system, patrons can pay with cash, a debit or credit card, or a prepaid stored-value card or keytag to which patrons can add value at a charging-station that accepts cash or a debit or credit card. Some systems also offer biometric technology as a payment option.

Brinton explained that the micromarket concept was developed seven years ago and launched as the Freedom Shopping system, which used RFID tags for pricing and security cameras to monitor the premises. This proved to be a workable approach, he said. The micromarket concept got a major boost from the introduction last year of systems that use the UPC barcodes on product packages, or printed by the operator and affixed to unpackaged items, with which consumers are familiar from supermarket checkout lines. The first self-checkout stores using barcode technology were deployed in 2010, at which time the new retailing method really took hold in the vending industry.

"Why is it successful? It's a closed environment with a known group of people, recorded by surveillance cameras," Brinton explained. "They don't want to tell their husband or wife that they lost their job because they stole a Snickers bar, especially at a time when jobs are hard to come by."

Among the many benefits of micromarkets is their ability to offer a dramatically increased selection of products -- as many as 200 packaged items, compared with the 45 or so product facings in a typical snack vender, Brinton pointed out.

Micromarkets allow operators to make nontraditional vending items available to their customers. "You can offer a 2-ft.-long beef stick -- the number one seller in c-stores -- that you can't sell in vending," Brinton instanced. "We operate 90 some stores and our top seller is string cheese, which we sell almost none of in vending."

Another advantage to the self-checkout stores is that customers can hold and examine a product, and read its nutritional information, before making their purchases. "Having products within reach has increased the freshness perception that we haven't been able to change in vending," Brinton added. "Patrons also benefit from one-stop checkout, instead of having to pay at several machines."

From an operational standpoint, the self-serve mini c-store model eliminates the issue of "hung" or undelivered products, as well as service calls for out-of-order machines. "Out-of-products decrease because the operator has real-time knowledge of what products have sold and refunds are no longer are a problem," said Brinton. "And it's also not as big a deal if a certain product is out, because there are so many more to choose from and the customer isn't looking at an empty machine."

He emphasized that another major benefit to the client is that it keeps employees on site for meals, boosting productivity. The Avanti Market chief cited a survey of current micromarket client contacts who said they like vending overall, but ranked micromarkets "excellent" across the board: for selection, ease of use, reliability, employee response and overall satisfaction.

Brinton went on to describe the benefits of self-checkout micromarkets to the operator, which he said have helped drive sales increases of 60% to 250%, and in some cases as high as 600%, in test markets where Avanti systems replaced vending machines.

A major plus for the micromarket operator, the speaker emphasized, is the ability to collect sales taxes and bottle deposits. "I add 9.5% to the bottom line, and customers don't mind," he reported. "They pay it at c-stores and grocery stores, and have no complaints. Self-checkout stores also allow the option of nontraditional pricing; you can charge 99¢ or $1.09 and follow retail psychology."

A major benefit of micromarkets is that they allow the operator to give customers the products they want without being constrained by whether or not they will fit in a vending machine, Brinton reiterated. In addition to oversized meat snacks and string cheese, he amplified, loaves of bread, frozen pizzas and gallon containers of milk are offered, by his company and other operations. Customers buy these items at work to take home, extending sales beyond traditional dayparts.

"There are a lot of pluses to self-checkout markets," Brinton stated. "But in a lot of locations, vending works great and a self-checkout system isn't the answer. I operate 5,000 vending machines, and by no means do I plan to pull the plug. The micromarket is just another way."

The ideal micromarket client base is very extensive, according to Brinton, who said the self-serve stores perform equally well with blue- and white-collar customers, and can be easily tailored to the demographic in sites ranging from call centers and professional offices to medical facilities and factories. Critical to the success of the unattended stores is that they be placed only in sites with a "closed" population and limited public access, Brinton emphasized. He has found that the systems typically perform best at locations with 150 or more employees, but certain sites with as few as 100 can support them.

He said one of the biggest surprises micromarket pioneers have encountered is that total monthly sales revenues have doubled on average -- and in some cases tripled -- at accounts converted from vending to the self-checkout stores. At call centers generating less than $2,000 in monthly revenue from vending, for example, sales have climbed to nearly $6,000 when a micromarket was installed. Corporate sites that generated less than $1,500 in sales from vending are yielding close to $3,500 after converting to a micromarket, the panelist reported.

Another unexpected business boost that has accompanied implementation of the self-checkout model is that food sales have increased from 7% of the vending mix to 25% of micromarket sales. "I don't hate being in food any more, when I get $5 and $6 for a sandwich," said Brinton. "And snacks, drinks and desserts all go up when food goes up." Additionally, ice cream and milk, which typically represent only 1.1% of sales in vending, climb to 4.3% of sales in micromarkets. Likewise, hot beverages account for only 1.4% of vending sales, but 2.4% of micromarket sales.

And the financials speak for themselves, according to Brinton, who said the average profit in the traditional vending model is 1.15%, compared with 17% with a micromarket. "It's time for us to make the revenues we've been paying to our customers," said Brinton. "I pay commissions at zero of my 90-some markets; it's a solution they need."

Brinton cited increases of 50% to 100% more in sales, 5% to 15% higher prices, the ability to collect sales tax and reduced service frequency and equipment maintenance among the factors for micromarkets' higher margins when compared with vending (see financial table below).

Self-serve stores also have an energy-saving edge over vending machines. The annual cost of power for a 14-machine vending location is $3,330, compared with $1,630 for a micromarket serving the same size account, according to Brinton.

Brinton estimated that there are at present some 700 self-checkout micromarkets installed across the U.S., and projects a total installed base of 7,000 systems by the second half of 2014. He foresees a nationwide market for 50,000 self-checkout stores, assuring operators that they haven't missed the boat.

How Vending Machines and Self-Checkout Micromarkets Stack Up
a profit comparison
Self-Checkout Vending Notes
Projected sales $45,000 100% $30,000 100% Kiosk sales figured 50% higher, but could be 100% higher
Product cost $20,700 46% $14,700 49% Kiosk prices are about 5%-15% higher plus sales tax
Shrinkage/refunds $675 1.5% $300 1% Kiosk product theft/vending refunds
Depreciation $2,023.57 4.5% $2,385.71 7.95% 7 years depreiation used on both
Labor $3,600 8% $3,000 10% Kiosk 6%/2%; vending 8%/2% (route/warehouse)
Account commissions/utility $675 1.5% $2280 7.6% Utility expense allotment kiosk/avg. commission vending
Vehicle expense $1,125 2.5% $900 3% Less vehicle expense kiosk due to less service frequency
Maintenance labor cost $450 1% $900 3% Labor for repairs
Parts expense $450 1% $690 2.3% Equipment repair parts
Royalty fee $2,925 6.5% - 0% Average royalty fee used
Credit card $1,237.50 2.75% $300 1% More credit cards used in kiosk
Sales taxes - 0% $2,100 7% Kiosk - sales collected/vending operator pays (avg.)
Overhead allocation $4,050 9% $2,700 9% Same corporate contribution used in both
Annual profit/loss $7,763.93 17.25% $344.29 1.15% -
$2,730.00 9.1% Used equipment and repair expenses not in both

A question-and-answer session followed, initiated by an audience member asking how much space is needed for a self-checkout store.

Panelist Kevin Bailey of Breakroom Provisions replied that a micromarket can run the gamut from small to very large, adding that it's often possible to fit one into the vending space that it replaces.

"You inherit the space, and have the flexibility to make it work," concurred 365 Retail Markets' Hessling.

Another question was whether the client helps pay the upfront acquisition cost. Brinton said that his locations typically do not absorb any of the cost. He also noted that, since installations require Internet connectivity and surveillance cameras, it's no longer the receptionist making the decision. "It typically goes up one or two levels above the usual decision-maker," he explained.

Another concern among operators attending the session was whether the client helps offset shrinkage. "Most times I say I'll accept responsibility, but I would like the company to back me up," Brinton replied. "Most clients start off lukewarm about being involved, but within a month they say they will flush out the bad apples. Some support me from day one; they figure if somebody will steal a Snickers bar from me, that individual is likely to steal a laptop from them."

"They become a hero to their employees, and you become a hero to them," 365 Retail Markets's Hessling added. "It's something they don't want to give up."

Another operator expressed concern that c-stores will move into the micromarket space, and start to chase potential business that vending operators now are pursuing.

"C-stores have siphoned business from vending over the years; they used to just be gas stations," Brinton remarked. "Now we've turned the tables. I see an opportunity for smaller independents to pursue the micromarket opportunity by prekitting from their inventory and servicing four to five locations. Each self-checkout store averages $40,000; they can pick up $200,000 to the top line with very little investment. I do think you will see some of them come into the space."

Hessling assured participants that the competitive threat is minimal, since vending operators are far ahead of the curve. "You have inventory, you know who to talk to and you have contacts in HR. You have the infrastructure," he stressed. "It would take a lot of learning for c-stores to get to where you are."

"We are experts at distribution," moderator Halloran emphasized. "C-stores get tractor-trailers in the parking lot and dump it into the facility. I'm not saying it won't happen, but I think it will take time."

Another operator asked whether college dormitories are a good fit for micromarkets. Brinton said that some Avanti customers are successfully operating them in that environment, but have to put certain extra limitations in place to minimize shrinkage.

"Multi-tenant buildings are a fantastic place for them," he added. "Building owners are much more receptive to having a micromarket than a traditional vending installation because of variety. Having a deli or c-store on premises helps them attract tenants."

Shrinkage rates were another topic of concern for the audience. Hessling said 365 Market operators report shrinkage in the 1% to 2% range, and Brinton said he estimates the Avanti system's shrinkage at 1.5%. "It's not only unscanned items, but also has to do with how it's pulled from the warehouse, too," he noted. "You have to be very careful and accurate with your processes, and not automatically blame the customer."

"Some of our customers will open a market at a blue-collar account like a textile mill and see a 3.7% shrinkage rate," Bailey of Breakroom Provisions added. "As an operator, you still have to look at the overall number. You're collecting sales tax, you have no out-of-pocket expense and your sales increase."

Hessling pointed out that telemetry allows the operator to tighten controls. "You should know what you put in and what sold," he said. "If you have a good process, it's a good way to control shrinkage."

In cases where shrinkage seems to be high, reviewing security camera video footage can often help identify the culprit. "The camera only records when customers are in the market, and it has a grid that lets you look at a specific area -- like just the Snickers bars -- and also to just watch a specific five-minute interval," said Brinton. "You can talk to the client, if you have a good agreement. In one case, we worked together and discovered it was the cleaning crew."

Jim Brinton: "There are a lot of pluses to self-checkout markets. But in a lot of locations, vending works great and a self-checkout system isn't the answer. I operate 5,000 vending machines and by no means do I plan to pull the plug. The micromarket is just another way."

"Half of your clients believe that if people are stealing from you, they'll steal from them. The other half don't want to be involved, but they usually do become involved," Bailey added. "Route operators are very familiar with how their markets look. If you keep finding two Cokes missing, you can put up a sign with a picture of a Coke, saying: 'Please shop responsibly to keep prices reasonable.'"

Hessling added that he encourages operators to keep a video monitor pointing toward customers to let them know they're being watched.

An audience member asked the panelists what kind of equipment mix operators typically use for a micromarket. Bailey said 50% of Breakroom Provisions customers use Coke and Pepsi-branded coolers, supplied by their bottlers. The others purchase their own beverage coolers, because they want the flexibility to stock the drinks they choose or desire a more cohesive-looking market -- just as in vending.

"You can put out a bunch of mismatched equipment, but the opportunity lies in the products and presentation," Hessling agreed. "You can really retail and sell, and that's what's driving growth. It's familiar because it's so similar to the retail atmosphere that your customers know and like outside work."

Avanti Markets

Asked about the labor efficiency of the micromarket model, Brinton observed that the typical vending operator would like to merchandise two to three rows of Snickers in a vending machine, but doesn't have enough space. In a self-checkout market, the operator can stock a whole a box of Snickers as one of 300 SKUs. "And when one item runs out, it's not nearly as noticeable as in vending," he remarked. "We've also seen a drastic increase in alternative beverage sales, because we're not as focused on filling one item."

"It's full pre-picking, and service cycles are less frequent than vending," noted Breakroom Provisions' Bailey. "You have lots of efficiencies."

Halloran pointed out that operators can increase prices remotely from their computers. "You don't have to put a price tag on anything," he said. "If they want to know what it costs, they scan it. It's not in their face, every day, that it's 65¢. When it goes to 69¢ overnight, they don't even notice."

"They're not choosing an item; they're shopping," agreed 365 Retail Markets' Hessling. "They have so many options available, and they don't have 85¢ hitting them in the eye every day, like in a vending machine, so they don't focus on price as much."

Bailey observed that micromarket customers are conditioned by the way they shop at c-stores. "If you stand outside and poll c-store customers, a majority will not know what they paid," he said. "It's about the merchandise, how it looks and feels and that they can pick it up. It's not about the system to the customer."

"Every store must be eye-appealing to everyone," agreed Microtronic Market's Bryant. "It's very important to focus on merchandising to recreate the look and feel of a mini convenience store."

A seminar participant worried about managing the large number of SKUs required for self-checkout stores.

"Your customers want those extra SKUs, and you have to have to flip your thinking to 'look what I can sell,'" replied Bailey. "It seems like a lot of SKUs, but look at it as just a case of each chip or candy bar."

"You're servicing a store rather than filling a vending machine, and you should expand your SKUs to make more money," added Hessling.

"You have to take your vending machine hat off and think like a retailer, or the customer won't see the benefit they were expecting," advised Halloran.

Another question that arose was how micromarket operators deal with date codes when customers pick the freshest product from the back. "You have to be very creative and clever," Brinton replied. "I never have two roast beef sandwiches with different dates, or two of the same flavor yogurts with different dates. You have to set it up on cycles and constantly rotate."

Bailey emphasized that self-checkout market operators have a bigger opportunity than ever before to profit from selling food. "You have to realize that people will buy a $5 and $6 sandwich, and when that goes up, everything else will go up with it," he advised. "Don't be afraid to price food for what it's worth at a deli; they'll be happy to buy it."

"It's really at-work retailing," Hessling emphasized. "I've seen operators buy earbuds for $1 and sell them for $5. You own this industry. Those are your contacts. Adapt and make money."

Brinton wrapped up the session by emphasizing that installing a self-checkout store goes a long way toward locking in a client's business. "You want to secure your sites," he urged. "If you lose a vending site to a proactive operator who installs a micromarket, it takes a lot longer to get that piece of the business back."

The full-line vending industry has been in the forefront of retail automation for more than half a century, and has familiarized the public with self-service equipment that accepts money and delivers product. Vendors also have developed and refined warehousing and route delivery systems that put in-date products in front of patrons, when and where they're needed. According to the ACE technology panelists, those skills now are paying additional dividends when they're applied to installing and servicing high-profit micromarkets.


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