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Micromarket Know-How Rethinking The Operations Model Will Yield The Best Performance

The rapid growth in acceptance of self-checkout installations, the present scope of the market, recent developments and an overview of the micromarket's place in the full spectrum of convenience service operations were examined in detail in a pre-conference educational seminar held on the eve of the National Automatic Merchandising Association 's OneShow in Las Vegas. Titled "Mastering Micromarkets," the in-depth workshop was moderated by Dr. Michael Kasavana, NAMA Endowed Professor in the School of Hosp...

November 9, 2017

The rapid growth in acceptance of self-checkout installations, the present scope of the market, recent developments and an overview of the micromarket's place in the full spectrum of convenience service operations were examined in detail in a pre-conference educational seminar held on the eve of the National Automatic Merchandising Association's OneShow in Las Vegas. Titled "Mastering Micromarkets," the in-depth workshop was moderated by Dr. Michael Kasavana, NAMA Endowed Professor in the School of Hospitality Business at Michigan State University (East Lansing). It was structured in two parts, and VT will cover it in two installments.

In the leadoff session, Kasavana offered an overview of the rapid growth of the micromarket segment and its present scope. His presentation was followed by a detailed analysis of adding micromarkets to a vending operation presented by NAMA past chairman Jim Brinton of Avanti Markets and Evergreen Vending (Seattle). Brinton has been a vending operator for 45 years, serving the Pacific Northwest. Today, he also operates some 750 micromarkets.

The second part was a panel session moderated by Kasavana; the panelists were Jen Tonio, 365 Retail Markets; Aaron Speagle, Breakroom Provisions; Patrick McMullan, Three Square Market; and Michael Lawlor, USA Technologies Inc. They explored specific aspects of a micromarket operation in the context of developments in technology and consumer preferences.

Different From Vending

Dr. Kasavana

Kasavana, who coined the term "V-commerce" as a capsule description of vending machine retail activities, led off by pointing to a peculiarity of vending. Viewed as a method for making a purchase, it is "reverse retailing," in that customers pay before making their selections and completing the transaction. Micromarkets, on the other hand, offer the sequence of actions familiar from most other retail methods: "shop, scan, settle."

NAMA has been assembling information on the performance of vending, office refreshment services and micromarkets, the speaker reported. At show time, the data was complete through 2015, and the research has yielded some comparisons.

While the micromarket concept can be implemented with any available payment system, from cash to mobile, the classic medium is a "market card" funded by the cardholder through an online account. Such a market card does not incur the intercharge fees levied on credit and debit card transactions, and it generally doubles as a tool for conducting a loyalty program to encourage frequent use. Management systems for micromarkets often are Web-based, facilitating timely execution.
Unsurprisingly, micromarkets tend to be placed in locations with more than 150 employees, the moderator reported; only 7.2% are found in sites with fewer than 50. Variations on the original micromarket concept have been developed to broaden the applicability of the concept. For example, while a conventional micromarket may display between 175 and 270 SKUs, the new "nanomarket" designed for smaller locations might display 75 to 125, and nanomarkets may use an iPad or similar device as the user interface. A vending machine generally offers 50 or fewer SKUs.

Challenges confronting contemporary micromarket operators include maintaining the company website properly, coordinating warehouse prekitting with sales, analyzing sales data to obtain meaningful results (category sales by daypart, for example), and integrating micromarkets with vending machines. As with vending, managing stales requires close attention. And studies show that theft losses typically run in the 1% to 2% range, in line with but better than the average convenience store.

Regarding products, the speaker observed that the speed with which micromarket menus can be updated offers operators unprecedented flexibility in conforming to specific location tastes. The younger generation, for example, is inclined to favor "morning snacking," and study of consumer behavior in different dayparts -- early morning, morning and so forth -- can suggest profitable changes to the product mix.

To date, he continued, studies have shown that fresh food represents between 15% and 25% of micromarket sales, and some unexpected products have demonstrated great appeal (string cheese, for example, and hard-boiled eggs). Millennials favor fresh food and freshly baked goods. "And they like loyalty programs," he added. Moreover, since the micromarket enables patrons to pick up a packaged product and read its ingredient statement, regulations requiring separate content labeling do not apply.

Kasavana noted that the rise of micromarkets has aroused a good deal of interest, and has prompted food safety professionals to study best sanitation practices for operating them. The well-respected Conference for Food Protection, a non-profit organization founded in 1971, issued its Guidance Document for Unattended Food Establishments last year. It was prepared by the CFP's Unattended Food Establishment Committee and accepted by its council of delegates. Larry M. Eils, who retired from NAMA after a quarter-century's service as public health and safety director and the chairman of its Technical Standards Committee, is a voting member for Industry of CFP, and serves on its 2016-2018 executive board.

Other resources are becoming available too. NAMA has prepared a micromarket operational guidelines manual titled "Mastering Micro Markets"; it's available for purchase by association members for $195, and to nonmembers at $295. And seminar registrants received a six-page summary of Micro-Market Best Practice Pointers, compiled by Kasavana on the basis of extensive discussions with operators.

NAMA also has introduced a professional certification program for micromarket operators. It validates the certificate-holder's knowledge of merchandising, inventory management, payment technologies, customer engagement and best practices. The first certification exam was given after the "Mastering Micromarkets" seminar at the OneShow. It also is available online. Certification requires candidates to answer 50 questions based on the material in the manual. Details are online at namanow.org/micro-markets.

Dr. Kasavana reported that NAMA's Vending Data Interchange taskforce continues to make progress in allowing operators to unify data processing for vending machines and micromarkets. The first VDI Vending-to-Micromarket Integration Standard, published last year, provides a solid base for development. He then introduced Jim Brinton.

Growth Opportunity

Jim Brinton

"In 2008 and 2009, we brainstormed the micromarket concept," Brinton recalled. "I was the NAMA chairman then -- and it was not a fun time in vending. So we looked outside the box."

A contemporary survey of 750 chief executive officers was conducted by Ernst & Young to determine what they considered their greatest challenge. "Keeping up with technology" was cited by 24% of the respondents, and "time to market" by 31%. "Finding good people" was singled out by 38% -- but "customer satisfaction" was chosen by 71%.

Brinton said that this sounded about right to him. "I tell my employees that I'm just the facilitator of getting our customers' money to you," he quipped. "Why do customers leave? Why would a client ditch vending altogether? It has to be caused by our not treating them right."

This has always been true, the industry veteran emphasized; "It's why commissions became so important. We really didn't have a lot else to offer."

The new micromarket concept seemed to combine the convenience of vending with the flexibility and agility of a manual foodservice operation, and Brinton conducted experiments accordingly. He was very pleased by the results, and launched Avanti Markets to pursue the opportunity, and to make it available to others. Along the way, he learned how a vending operator can avoid some apparently reasonable but damaging false starts.

For one thing, he reported, a micromarket route is different from a vending route, and it requires different skills. "Your route driver is the face of your business; you want someone who sees the position as an opportunity, someone who's dedicated to the job. Look for candidates with those qualities, then train them," Brinton advised. He cited marketing consultant Simon O. Sinek's bestselling book, Start With Why: How Great Leaders Inspire Everyone to Take Action (2009), which recommends hiring for attitude: candidates with the right attitude can be taught the skills they'll need.

Testing The Waters

A vending operation that adds micromarkets will, in many cases, start small, placing a few on location to get a feel for running them. With fewer than five micromarkets out, they can be serviced as part of a vending route. "But the two are different," Brinton emphasized. "There's a retailing dimension to micromarkets that's not the same as vending machine service." With 10 or more on location, it's beneficial to start separating the two operations.

"It's fine to buy a couple of micromarkets to test," the speaker observed. "But if they work for you, move fast, and segment your vending and micromarket services."

A major difference between the vending and the micromarket segments is that, in vending, "it's all about turns," the industry veteran pointed out, "and the fewer services, the better. Micromarkets are more flexible in accommodating the odd high-value item for which demand is real but unpredictable -- like smartphone chargers. "We sell a lot of those," Brinton reported.

Based on his own experience, he continued, the typical driver can service 10 to 12 micromarkets a day. In his view, a location whose volume does not support at least two visits a week doesn't have enough traffic to justify the cost of a micromarket. A high-volume location may require daily (or even more frequent) service; the Avanti founder can envision circumstances in which an attendant might be desirable at peak periods -- "not to sell, but to restock," he ventured. This would be similar to the employment of attendants in large food vending locations.

Brinton reported that micromarkets offer several important benefits to operators, when compared with vending machines. "We can collect sales taxes at our micromarkets, just like any retailer can," he said. "We can adjust prices easily. And we can eliminate commissions." While it may be necessary to pay commission for statutory reasons, customers don't expect it, as they usually do with vending. The micromarket is presented as an amenity that keeps employees happy, not a revenue source.

Micromarket route drivers probably will work the same eight-hour days as vending drivers, but dollar sales will be higher, the industry veteran predicted. He also noted that some changes to the warehouse probably will be required, including an expansion of the space devoted to storing snacks and packaged beverages, the refrigerated storage available for fresh food and the frozen storage space. While many vendors would prefer not to sell food, he added, it's one of the keys to a micromarket's success.

Prepackaging route orders by location -- "prekitting" -- has improved drivers' efficiency in vending by reducing the time needed to restock machines. Brinton pointed out that the concept is even more valuable in a micromarket operation, because the variety of merchandise is much greater.

"Your warehouse isn't in your truck any more," the speaker emphasized. "With more than 200 SKUs for a micromarket, trucks should carry only what's needed for the day's service." And assembling route orders in advance enables a driver simply to load the full bins onto the truck, rather than picking stock from refrigerated and frozen storage facilities, he added. "Drivers don't like to work in freezers -- it's cold in there."

Summarizing the process of budgeting for micromarket operations, Brinton noted that waste and pilferage are two areas that can cause costs to balloon if they're not carefully controlled. He reported that his company has a loss-prevention management specialist on staff, and this post has more than paid for itself.

"To control shrinkage, and to maintain safety, you need someone to look at your surveillance videos," the speaker noted. "You have to take action to control theft; 7-Eleven does it, and you need to do it, too."

On average, micromarkets are more profitable than vending machines, the industry pioneer said. An ongoing question is whether their appeal to patrons can be transferred to an installation for smaller locations, selling a more limited menu. His experiments with such installations ("nanomarkets") have shown that they can be -- but success requires close attention to maintaining an attractive selection of long shelf-life items that are guaranteed to sell. It isn't always easy to predict what those items will be (string cheese, for example, has proven to be a surprise favorite), so it's important to try new things and keep track of patron preferences.

Moreover, small micromarket locations disproportionately favor a cash payment option, Brinton reported; at present, some 30% of sales in nanomarkets are made with cash. "You have to accept what your patrons want to pay with," he emphasized.

Whatever the size of the account, some micromarkets don't perform up to expectations. "What do you do if it isn't working? You could try to negotiate a subsidy, or propose that the location subsidize 'healthier' items under a wellness program," he proposed. "You could suggest adding a payroll deduction payment option. You could look for higher profits from ancillary items like coffee."

In conclusion, Brinton offered several "takeaways" based on his experience. For one thing, he said, "raising and lowering prices at a micromarket does not work to correct problems. For another, shifting patron payment preference away from credit cards adds 5% to your profit. And finally "try to keep the account!"

Sharing Experiences

Brinton then opened the floor to discussion. One operator said that, in his experience, the often-praised "buy one, get one free" promotion tends to confuse micromarket patrons; they are inclined to ask, "Do I scan both items, or what?" He has found that a better solution is to offer a free item after a specified number of purchases ("Buy four, get the fifth for free"), with the kiosk screen alerting patrons of eligibility for the free item. "Loyalty programs work" he added. "People like swag! Ours is points-based. You can offer gift cards as well. These programs create 'stickiness.'"

Brinton agreed. "And it's harder for the account to throw out a micromarket operator, in view of all the cash on patrons' market cards, and all their loyalty points."

Another audience member observed that "micromarkets start to 'look old' faster than vending machines do. How do we maintain their freshness?"

"We have a person who visits our micromarkets regularly, to maintain them and to move things around," Brinton replied. "And we didn't install area treatment at first, but we can add it when overall refreshment is needed: implement branding changes, use different colors and so forth. You need to look at micromarkets continually, clean them well and keep them fresh."

Area treatment, which proved to be an important merchandising tool in full-line vending installations, always is worth keeping in mind. "We're going to get involved in the interior design of lunchrooms, too," he said.