The Hidden Cost Of Micro Markets

March 15, 2016
Industry operators examine unanticipated costs and challenges of entering the micro market segment — and why they are still worth the investment.

Business diversification can be intimidating. There are unknown risks in investing and expanding into any new segment: there is no guarantee that the return on investment will be quick, or even happen at all; there are education gaps with learning a new process; and there is no promise of success.

For many vending and OCS operators who entered into the micro market segment, there were anticipated costs such as the price of a kiosk, shelving and credit card processing fees to name a few. But when it came to the actual implementation of micro markets and day-to-day operations, there were several hidden costs in terms of time and money that became more discernible.

Unexpected cost of theft

Although many operators knew early on that theft in micro markets would be a point of concern, few anticipated just how big of a cost burden it would be. For Rod Nester, president of Clarinda, IA-based Smith Vending, theft has been an expensive and time consuming part of entering the micro market segment.

When Nester first installed his micro market, he transitioned a vending route supervisor to spend about 60 percent of the time working on promotions and marketing for the company’s nine micro markets. In reality, however, the employee ends up spending a lot of that time watching video footage to try and control theft, instead of focusing on improving the customer experience at the market. “We can burn two or three days trying to go through footage and working with clients to resolve theft issues,” said Nester. “Pretty soon I’m spending $400 to $600 in lost time to catch someone who stole a $1.50 bag of chips. It’s expensive, but I have to do that or else it will drive me out of business.”

Theft has been more than 5 percent at many locations for Nester, forcing him to commit resources in order to resolve the issue. Not only is Nester losing money in shrinkage, but when his employees have to take on loss prevention responsibilities, they are losing time working on micro market promotions and loyalty features — a main reason for entering the segment in the first place.

“This is an issue that has been building for us and we’re now starting to take action on it and we’ve spent a lot of resource dollars,” said Nester. In order to control micro market shrinkage he invested in biometrics for each market, put in digital billboards on every kiosk and removed and replaced cameras for better visuals. In total Nester says he has spent about $1,000 per market fighting theft. Now he wonders how long he will have control over it. He worries that even with the new measures he has put in place, it still might not be enough to deter would-be thieves long term. “I’m not sure if my investments to discourage theft will last three months or three years,” he said. 

Despite the issues that arise from theft, Nester has a positive view of micro markets as a whole. Micro market sales for Smith Vending showed a steady increase for the past two years, increasing from around $125,000 in 2013 to nearly $450,000 in 2015.

Chattanooga, TN-based Five Star Food Service which operates 500 micro markets realized early when transitioning to micro markets that they had to invest in an infrastructure that would support rapid growth. Today the company has 105 dedicated micro market employees, four of whom work full-time on loss prevention. “The employees investigate markets where the shrinkage is more than 2 percent,” said Mark Stephanos, vice president of micro markets for the company. Five Star Food Service even hired a retired law enforcement officer to work on video surveillance.

Endless inventory

In vending, an operation has around 40 stockkeeping units (SKUs); in micro markets, that number can be from 150 to 1,500. While many see this as an opportunity, others have found that increased inventory can cost time and money not accounted for when first getting into markets. “Entering new products, deleting items out, keeping on top of pricing; that is a task in itself,” said Pete Johnson, food & beverage manager of Quail Mountain Vending in Klamath Falls, OR. “The sheer labor cost of changing inventories and backend work to make sure every product goes into your store and comes out of your store will be surprising when you first get into micro markets.” Increasing SKUs also increases driver time and the amount of time spent at a location, Johnson warned.

Smith Vending’s Nester cautions operators to take into account the time it will take to monitor the movement of items and track inventory in order to reduce stales. “For the first two years [I was in micro markets] there were so many hidden costs that I didn’t know what the ROI was,” he said. “We weren’t tracking labor or inventorying markets on a regular basis. It wasn’t until we had six markets that we had to start being proactive and finding where the costs were adding up.”

For Raleigh, NC-based OCS and pantry service provider Capitol Coffee Systems, the increase in inventory meant that the company needed to invest in vehicles, too. “We came from OCS into micro markets and so we weren’t like the vending guys who already might have vehicles to handle frozen product,” said Charles Brunson, chief bean counter. The company started with a standard truck for $45,000 and then needed to add freezers and coolers, which added an additional $10,000 that it did not take into consideration when getting into the segment.

The type of inventory offered can have an effect on product management as well, says Tim Taylor, president of Menomonee Falls, WI-based Davians. The company makes its own micro market fresh food in a commissary and has been challenged with managing waste. “Waste is always important in our industry,” said Taylor, “however, in our micro markets one will find fresh products ranging from $4 - $7 which has significant impact on our cost of goods if not managed.” For Taylor, the ‘more SKUs the better’ mentality is dangerous and he recommends operators have specific micro market planograms and define SKUs in order to keep a handle on inventory management.

Cost of data

Big data means that operators can find out exactly what is selling, where it’s selling, when it’s selling and in some cases, who is buying it. While some operators enjoy all that big data offers, others don’t see the need. Johnson of Quail Mountain, who operates 10 markets through three micro market providers, was surprised by how much he had to pay for what he calls ‘extra’ data with one provider. “I can see where some operators with dozens of accounts could benefit from the extra data, but for a small to mid-size operation like mine, it isn’t necessary,” he said.

Kim Curtis, president of Good Stuff Vending in Sacramento, CA, agrees. When she looked into adding micro markets four years ago she was surprised by the cost of the provider fees. Although the cost to enter has come down since then, it was cost-prohibitive for her in the beginning, which is why she ultimately ended up hiring a developer to create her own micro market software. “We don’t have 50 or 100 markets — we have three — and the monthly fees I would have had to pay were too high for the number of markets I operate and the revenues they bring in,” she said. Recently Curtis transitioned her markets to run on deORO software for a base monthly fee. Despite the cost, Curtis is excited about micro markets and said the investment helped the company grow one former vending account from $400 per month in revenues to $1,500.

The amount of data provided was one catalyst for why Will Steppe, president of Platinum Food Service in Alexander, NC, decided to reinvest in micro markets a second time. Steppe originally began with one provider who had a robust backend that was built for operators with a lot of accounts, he said. The amount of data was overwhelming for Steppe and he didn’t want to pay for the data he wasn’t using. “It was hard to switch because I was familiar with my original system and I had purchased the kiosks and displays but the cost to switch was worth it for me in the long term,” he said.

It wasn’t just the data that turned out to be a challenge for operators; it was other technology, too. When Steppe began with his first micro market provider he had to purchase a physical server with a static IP, which lifted the market $6,000 over the original price. “I could only put so many micro markets on the server, too, so if I were to have grown bigger with the company I would have been faced with purchasing more servers.” It was a cost Steppe did not anticipate, which made his switch easier. With his provider now the information is in the cloud and isn’t limited by how many markets Steppe installs.

Internet integration at locations is an issue that every operator will most likely face, too, said Five Star’s Stephanos. Most times, locations don’t want to give operators access to their network. “We have a detailed checklist every time we get ready to install and we always have a problem getting the Internet connection,” said Stephanos. “It is extra time spent discussing with the location about the safety of the connection. And we usually have to find our own solution.”

The costs of data will vary by supplier, but shouldn’t be a deterrent when deciding whether or not to get into micro markets because the investment into micro markets is oftentimes significantly less than a vending installation.

Savvy operators

Despite the sometimes-invisible costs of micro markets, operators agree that when it comes to placing vending or a micro market, it can be done for a similar price, depending on the location and the equipment. “If you’re at a small location where you have the ability to put refurbished vending equipment, a micro market would cost more,” said Curtis. “But anytime you get into a decent sized account where you would put brand new vending equipment, a micro market will be cheaper.” Curtis points to a recent example. “I just put in $20,000 in new vending equipment at a location. A micro market wasn’t a good fit, but if it had been, it would have only cost about $12,000 and I would have made a faster return on investment.”

The upstart cost to micro markets depends on a variety of factors, though, said Capitol Coffee’s Brunson. “We spent a fortune the first few markets,” he said. “We bought everything and financed coolers. After five markets we stopped and said ‘the numbers aren’t right’ and we started leaning on vendor partnerships for equipment and shuffled how we went to market to make it most cost-effective.” Brunson learned that using smaller equipment, like freezers, can dramatically affect the ROI. “With smaller freezers there are less options but it is cheaper by a long shot.”

Micro markets have also evolved enough to the point where operators can make them cheaper through manufacturer partnerships, too. “If you use bottler equipment a micro market can be a lot cheaper than if you were to buy your own stuff,” said Johnson. Manufacturers will sometimes also give operators free wire racks if the operator promotes their product.

Sound investment

With three years worth of micro market data to review, Johnson isn’t concerned with whether vending or micro markets cost more or less — he knows the answer. “If I took a 500 person account and had the opportunity to put a micro market in, I would never ever go back and put vending in, no matter how much it cost to put in a market,” he said. “Your sales increase period. We’ve seen substantial increases in sales moving from vending to a micro market.”

He is not alone. Operators around the country are finding that the investment in micro markets are generally lower than in vending and they can charge a higher price for the same items; maintenance costs are less without machine failures and for many there is no talk of commissions, unlike vending.

“I was very skeptical when I was first introduced to the concept, but now I couldn’t picture our business without markets,” said Tom Bach, general manager of Sirness Vending located in Rochester, NY.
What surprised Good Stuff Vending’s Curtis wasn’t really the hidden cost of a micro market, but the hidden revenues. In a micro market, consumers are more likely to purchase more than one item at a time; they are freer with their spending, Curtis said, which in turn helps drive revenues. Locations are also more loyal, Curtis has found. “Once a client gets 300 people on your micro market system, I have found that they are more likely to stay with you,” she said. “Once you get in, they aren’t so quick to change.”

With any new investment or company diversification there will be unforeseen obstacles but the companies that stick by the investment will reap the rewards — and lead the industry into a new era.