Micro markets continue to grow in both the number installed and percentage of annual revenue they account for in operations. Companies such as Tennessee-based Five Star Food Service and Texas-based Accent Food Services have placed more than a thousand micro markets apiece. Mid-sized companies report micro markets by the hundreds, and smaller operations are rapidly moving through double-digit installs.
Regardless of the number of micro markets an operation has, many of the same challenges exist. Especially since micro markets are such a new segment, these challenges keep changing and evolving as operators learn from every new micro market installation. Therefore, every year we gather a few experienced operators together in a forum to ask about what tops the current list of micro market challenges and what solutions are working in their operations and regions. This year they ranged from dealing with capital expenditures to managing food waste.
Complicated cash flow from rapid growth
Operators who have been in business for a while own many of their assets, or vending machines. These assets come out of service when a location is converted to a micro market and they no longer bring in revenue. The loss is felt more acutely because the micro market kiosk and accompanying support are newly incurred costs. Add in the wait time to receive money from cashless processors instead of immediate cash from vending machines and it can require a readjustment in financing and cash flow.
Mike Snyder, vice president of Snyder Food Services, Inc. based in Kendallville, IN, said his company found that after a heavy push to get micro markets into more than a hundred locations in the area, cash flow was suffering. “Some of it is waiting for credit card processers and monies being released,” said Snyder. “We owned probably 98 percent of our assets [vending machines], so to take a paid asset out of the field and do a conversion to a micro market whether with financing or upfront money created a cashflow problem.” Snyder Food Services decided that it needed a more balanced approach. Instead of growing just the micro market segment, it would actively seek new vending locations as well, explained Snyder. “We have tried to maintain a 50-50 vending to market ratio [percentage of dollars],” he said. “That may fluctuate month to month, but overall that is the goal.”
For Accent Food Services, which has branches across the nation, micro markets are growing fast with more than 1,100 installed. The revenue from this segment is increasing year over year. Amanda Sulc, director of category insights & strategy, says one way Accent deals with this issue of cashflow is to have a formula for when a micro market will be profitable.
“We evaluate our customer’s needs and monitor our projected CapEx [capital expenditure] spend,” said Sulc. “We look at the projected revenue and if we don’t think the CapEx numbers make sense, then maybe that’s where we look into alternate solutions.”
“I think with micro markets there is this perception that it’s a lot friendlier than your typical vending machine,” Sulc said. “It offers consumers a lot of variety, especially when you are in multi-tenant buildings. It’s more glamorous to sell in micro markets as it’s able to meet a variety of needs, but knowing that size [employee count] is also key when we are doing this.”
There can actually be an advantage to removing vending machines. Mikal McMath, head of new business development at M&M Sales Co., a Canteen franchise based in Lafayette, LA, says the company typically sees a large increase in sales when it installs micro markets, which helps cover costs.
“Typically, what we’ve seen with our micro markets is that when you convert vending to a micro market you are at 2X, 3X, or 4X the revenue,” said McMath. “At some point in time with the increased revenue generated ... it will allow you to convert more of your vending accounts to micro markets.”
Pulling out the vending machines gives M&M Sales an opportunity to refurbish the equipment and then upgrade older machines in locations that are not potential micro market accounts. McMath says the practice has been very successful as it has increased same store sales from these refurbished vending machines.
“We will take a 15-year-old machine, bring it in, make it look like it was built yesterday and that results in a sales jump — just by having the ‘new’ equipment,” said McMath.
Micro markets provide the opportunity M&M Sales needs to refurbish equipment it acquired through acquisitions. McMath says that it has been difficult to refurbish equipment fast enough, so micro markets ease that a bit.
Five Star Food Service, a Canteen franchise based in Chattanooga, TN, also does a lot of refurbishing of vending machines that have been replaced by its 1,350 micro markets. “We have a refurb department inhouse where we upgrade it [a vending machine] with all the latest and greatest technology, if it needs it, and then repurpose it in either a new account or to upgrade an account,” said C.J. Recher, vice president of marketing. This also allows Five Star to remove the oldest and less reliable machines from locations, increasing its service dependability.
While some operators are balancing cashflow with more vending or refurbished vending machines, one mid-sized operator based in Portland, OR, has come up with another solution. Ryan Harrington, co-founder of Royal Vending, is constantly adding to his current count of 110 micro markets, because he doesn’t want to service any more vending machines. Instead, he has developed a variety of partnership programs, or subsidiary programs, that help micro markets be extremely profitable, even at smaller locations.
“When new business calls in, we are not trying to place anymore vending machines,” said Harrington. “We’re really just focused on finding the right fit for the customer by offering a micro market and then offering our subsidy programs as part of their employee program or part of a healthy eating program.”
Harrington has a strong desire to add micro markets because he sees a much higher level of customer satisfaction, which helps him retain accounts. He is better able to meet the demands of corporate wellness initiatives or make the breakroom an employee benefit, which helps him retain customers.
Sales are also higher in micro markets than vending for Harrington. “When we are in a bid with a vending machine company the location wants a commission or we get in a price war with a competitor,” he explained. “That means we actually make less with vending machines. On the other hand, when we submit an RFP [request for proposal] that features a micro market, especially when up against a vending competitor, we usually win that account without ever submitting a price list. We are able to charge a lot more for items in that micro market and don’t get any pushback. We are more profitable in micro markets.”
The ever-evolving quest for healthy
Royal Vending’s use of subsidiaries is a great way to deal with the special product and healthy product requests without losing money. When an existing customer suddenly wants different products in the market, Harrington uses the request as an opportunity to re-negotiate terms.
“We get this all the time with our current markets,” said Harrington. What happens is that when the market is first pitched, with the healthy subsidiary, the location wants just the market, explains Harrington. A few years later, the location will come back to Harrington and ask for healthy items or specialized products.
“We view this as an opportunity to schedule a meeting again and go over our programs,” Harrington said. “We say, ‘We are willing to do whatever program you want. We will put these products in. However, we just ask that you get involved. That you subsidize these products, so they will actually sell. And then organically, it will re-merchandise your market ... you will see the shift in merchandising towards healthier products anyway because your employees will start purchasing them and because we are going to put in what sells.’”
He cites a recent example. A large, 660-employee micro market location that Royal Vending has had for two years just implemented a wellness program. The company began subsiding healthier items in partnership with Royal Vending and sales have increased in the market by 40 percent. “We are going to end up remerchandising that market to 70 percent healthier-for-you products,” said Harrington. “We see it as an opportunity in education, and to say that if you want us to put this in, make all these special orders, then partner with us and invest in it.”
The idea of partnering with a location is one McMath also feels very strongly about. He says the only way the convenience services industry will thrive is if operators step outside the vending box and utilize the clients and the resources they have.
“Too often we are afraid to ask the client for anything,” he said. “Because what happens in vending is that when we ask for something, they ask for something back, like commission. Why on Earth are we paying commission? We are operating a business inside their company, providing a service, and we have to pay them for that? We don’t do that in the coffee business. They [other corporate services] don’t do that for paper products, rugs, masks, etc. They don’t pay the account to provide a service.”
This will sound familiar to many operators who struggle with commissions. Micro markets present a way out, a different service type that allows a deeper relationship with the location. “If you want your employees to eat healthier, how about you offer them a stipend each month to eat healthier? Or try a Bevi machine, etc. We need to ask the customer for something, rather than giving something all the time. That is really going to change the industry we call convenience services,” said McMath.
“Human resources want healthier lifestyles for employees. They want micro market offers that match their lifestyles,” said Sulc. “The seat that I sit in, I’m getting a lot more requests for customized planograms that include keto-friendly items, paleofriendly items, better-for-you and items associated with the American Heart Association because the customer is going to subsidize it.”
This has been a change from when the industry was just vending and often dealt with a different department. Even today, if it’s not the HR department that calls, the conversation happens differently.
“Purchasing or facility managers don’t want to deal with it,” said Harrington.
These were the liaisons for vending and still are often who contact Harrington for service. “They want the least amount of headache. When it comes to vending, they have the mentality, ‘If it’s not broken, don’t fix it.’ Therefore, a lot of them feel that a vending machine will be sufficient — they don’t have to worry about employee problems, no theft. It just sits in the corner and works.”
When Harrington gets one of these calls from a purchasing or facilities manager, he immediately asks if they can schedule a meeting which the human resources person can also attend. During the pitch, Harrington stresses how Royal Vending can be an employee benefit, take care of employee needs and with a partnership, it will also keep employees more productive and onsite, which will help the business’ bottom line.
“If we can reach HR, then they will go to the purchasing or facilities manager and tell them, ‘Hey we are going with this company and this is what we are going to do. Then the manager is just the liaison through the install,” he said.
Always ask for a definition
Getting the HR department’s attention and agreeing to a partnership is just part of the process. After making the arrangement, it comes down to finding healthy products.
“When I’m talking to anyone about a market, planogram or products, and the word ‘healthy’ comes out of their mouths, I laugh,” said McMath. “Everyone has a different definition.”
McMath has learned to ask what healthy means to whomever he is talking. He asks if it is specific buzz words such as organic, even if it is paired with chips; trendy diets such as keto or something else?
“It frustrates me, because healthy for you and me and anybody else is completely different,” he said. “I think you really have to drill down to where their goal is — what they are really wanting to accomplish.”
It also means working with an onsite nutritionists, wellness directors or dictatorial HR professionals employed by large locations. McMath has had several instances where one of these individuals has contacted him about a product that should not be sold in the market. “I say, ‘OK, but I need to know, for you, what healthy means. Is it number of calories, is it the sodium, is it the sugar? You have to give me the criteria ... Because you can determine anything is healthy. What does healthy mean to you? And what is your ultimate objective?”
Recher couldn’t agree more. “As a Canteen franchise, we have the Choice Plus program which has specific guidelines, but there are many personalized ones determined by the HR manager or nutritionist they have onsite,” he said. “It changes the planogram based on what they want to see and to offer in their micro markets.”
It can even change the branding of the micro market. “Recently we met with a large client who is rolling out a wellness program,” said Recher. “We are matching the branding in their wellness program to the products that are going to be in the market. It will be a branded section within the market that is healthy items.”
Perfect SKU management
Meeting the demand for healthier products in micro markets also includes proper product management by SKU rationalization.
“In talking about all these clients that want better-for-you products, and about how they want this specific kombucha they found at [a retailer], it also has to be a discussion about space constraint,” said Sulc. “Because when you bring products into the warehouse, something else has to go out,” said Sulc. “We want to meet all of our consumers’ needs ... We would like to carry anything and everything, but managing that in warehouse space, it’s not feasible.”
The reality is that Accent has to watch its planograms in the micro market closely to keep the right products in the warehouse, indicates Sulc. Are the right share of categories represented, the right share of brands within those categories and what do the flavor extensions look like? The company does this on a national level, but also gives its branches some autonomy to meet regional preferences or individual customer requests.
As another large company, Five Star does a lot with managing its SKUs. It focuses on a few key aspects of products including planograms and pricing.
“We look at planogram optimization — what products are staling out,” said Recher.
Biannually the company does a trade out of the SKUs that aren’t moving fast enough and instead puts in the latest and trendiest products from the grocery and c- [convenience] store channels, according to Recher. Five Star will also look at how the products are priced within the markets. “We make sure we are in line with or as close to the market as we can in order to ensure all our locations remain profitable,” he said.
An additional SKU management challenge exists for Snyder Food Services as it includes many nonfood items in its micro markets. “We want to be viewed as more of a convenience store rather than vending to get these decision makers away from price points,” said Snyder. “We want them to compare us to the grocery stores and the convenience stores, so we offer some ear buds, [lip balm], hand sanitizers, etc. and not just the same [candy bar] that was in the vending machine last week.”
Food waste management is a struggle
While the sheer number of SKUs is a trial when servicing micro markets, one category is particularly difficult to manage: Fresh food. With its extremely short shelf life compared to prepackaged alternatives, fresh food has a high percentage of waste while also generating a large portion of overall sales. This makes food an important part of micro markets, one that can‘t be ignored and yet is difficult to manage, even for large, experienced operations.
“We have our own exclusive food line for micro markets made in commissaries connected to our branches,” explained Sulc. “We use a forecasting tool to help with predicting orders by account. We are continually improving the tool while also putting more local control and accountability in the hands of branch managers and the micro market managers.”
Even with companies covering part of the food cost through subsidiaries, Royal Vending feels the need to better manage fresh food. “We are still trying to find ways to get that fine balance of ‘There is not enough fresh food in the market’ and ‘We are throwing too much out.’ We are looking for that magic number,” said Harrington.
Snyder shared that Snyder Food Service is also fine-tuning the fresh food side of its business. It has contracted with the company Blue World and plans to test a solution that will allow for forecasting and waste management of fresh food items.
Benefits in other areas
While preventing theft, refreshing micro markets and finding profitable ways to service smaller markets also found their way into the discussion, many of these can be managed with the same solutions. In particular, working to partner with the location rather than sustaining the view that something is owed to the location, such as a commission for providing a service, will help operators.
Partnerships will be the future of micro markets, whether it’s balancing the service line with other service segments, offering subsidiaries or asking for co-investment by the location in design. It is a new way of looking at vending, but the only way to look at convenience services
