How to use category management in micro markets and vending

With the growth of micro markets, convenience services operators can offer far more products and meet more customer needs compared to traditional vending.

But the opportunity to provide more products amplifies the challenge of having the product mix that will best meet customer needs.

Fortunately, advances in category management software provide the tools to allow operators to have the most profitable product mix, for both micro markets and vending machines.

During the recent Self-Service Innovation Summit in Hollywood, Florida, a panel of experts described how they use category management during a session, "How to Use Category Management in Vending and Micro Markets."

The Summit, held last month in Hollywood, Florida, is one of several industry events organized by Networld Media Group, the parent company of Kiosk Marketplace and Vending Times. The media company's next event is the Restaurant Franchising & Innovation Summit , March 20-23, 2023, in Coral Gables, Florida.

"Convenience service operators try to use every piece of information they can to meet customer needs and improve their return on investment," said panel moderator Gregory Raffaele, owner and managing director, Fase Vending, a Norristown, Pennsylvania based provider of pizza machines, the session sponsor.

What is category management?

Panelist Drew Munro, co-founder and CEO, UpMeals, a Vancouver operator who prepares fresh food and offers it in vending machines, answered the question with a question: "How do you add the most value for that customer while maintaining that profitable sales mix that is true to your brand?"

Panelist Christopher Smith, operations manager for vending services at Coca-Cola Beverages Florida, offered a much shorter answer, calling category management "understanding the way in which you sell to the consumer."

Panelist C.J. Recher, vice president of marketing, Five Star Food Service Inc., a Canteen franchise based in Chattanooga, Tennessee, gave a more detailed response:

"It's a set of business processes that we go through the lense of the 'four P's' (products, price, place and promotion) plus the fifth prong of analysis," he said, the goal being to maximize value.

Technology improves category management

Recher said his company initially used spread sheets to manage product categories, but during the pandemic, they felt they needed a better way to consolidate data and glean category insights.

"We knew that having as many machines as we do and as many markets, we generate 750,000 transactions a day," he said. "That's a lot of data. We had no mechanism to consolidate that into any sort of meaningful actionable insights."

They brought on a planogram optimizing tool and put together a business intelligence team to come up with category management metrics. They are currently trying to automate the category management process and make it easy to access.

Where to get the data

Given that the foundation for managing product categories is product data, Raffaele asked the panelists what data resources are available.

Coca-Cola Beverages Florida uses a historical internal data as well as Nielsen retail sales data to identify product trends, Smith said.

Recher, whose company operates 50,000 vending machines and 3,200 micro markets, said it is best to rely mostly on your own company data. However, one thing your own data will not tell you is what you are not offering that the customer might want.

"You also need to supplement that data with some external sources," he said.

Recher said his company looks at c-store sales data, which is the closest related industry to convenience services. His manufacturer partners can get c-store data which they can break out based on local geographies.

The c-store data includes categories such as healthy snacks, candy, fresh food and beverages.

"You want to put each SKU that you sell into a specific category," he said. "That way you can do analysis and build programming around it to make smarter business decisions to drive more value for the organization."

Smith agreed operators should get data from the suppliers, but they need to do their own research in the markets they are serving.

"Don't be afraid to have feet on the street," Smith said. "If you are putting a machine in a location, go visit the stores around the location and figure out what they are selling." When he is serving a college campus, he goes to the nearby retailers to see what they have. The category management team also considers the geographic territories being sold to, the income and ethnicity of the customers.

Munro agreed this approach is helpful, adding that it is also important to observe when and how customers interact with the machines. He has multiple machines at a school in British Columbia, and "some of the machines perform radically different even though they're on the same campus."

Is it working?

How do they quantify the benefits of category management?

Munro said he pays careful attention to sell through in the interest of optimizing sales and minimizing waste.

Smith said his company looks at the sales-space-to-sales ratio in deciding what SKUs to carry.

Recher said his company looks at sales, unit movement and profit margin. One of the most impactful metrics is volume per micro market per day, he said.

With cost increases, the company monitors daily transactions and margins. At the present time, profit margins are good, but daily transactions have declined.

"We don't want to be bolstered up by higher margins and selling less," Recher said.

The company also evaluates promotions by comparing pre- and post-promotion performance.

Supply chain issues enter the mix

There are also supply chain issues to consider when deciding on product mix. The panelists agreed that product availability is not perfect. Recher said his company has 35 warehouses and not all can get all the products in demand.

Supply chain issues impacted how Coca-Cola Beverages Florida selected products, Smith said.

"I think the supply chain element actually accelerated our movement into saying we need to expand beyond traditional ways," he said.

For example, cans are easy to vend, he said, but they aren't always available because of aluminum supply issues, so they used more bottles.

"We really had to find creative ways to get products that drove value," agreed Munro.

Consider product packaging

Finding ways to develop value included finding ways to package items to make them more acceptable.

Consumers are often highly influenced by packaging, Munro said.

There are three components to packaging — the cost, the functionality and environmental sensitivity.

"Finding the product that fits right into that is very challenging," he said. Then it must merchandise well in a micro market or vend well in a vending machine.

What about manufacturer rebates?

Asked if product manufacturer rebates compromise sales, Recher said it is something to consider.

"You really have to take it as part of the equation," he said. If you bring in a new product to replace one that has a rebate, you will have to determine if it gives better value than the one with a rebate.

Smith agreed. "The rebate just falls into the financial equation of what the profitability is of the mix of products that you have," he said.

Munro said if there is a rebate reducing the profitability of a certain product, ask yourself if other products' profitability will offset the loss sufficiently to allow you to meet your goals.

What's next?

The session naturally led to a discussion of product trends.

Munro said there will be more healthy products. Modified atmosphere packaging is allowing more extended shelf life without adding preservatives.

Recher said fresh food and hot food are big coming out of the pandemic. There was a need for people to eat at work, so his company installed a "hot box."

Functional products are also growing fast, the panelists agreed. There are more players than ever in this space.

The biggest product related shift has been from vending to micro markets, Smith said, since it allows more sales in a single transaction. Any time he has replaced a vending bank with a micro market, sales have increased in double digits.

"The consumer wants it," he said. Traditional vending won't go away, he said, but multi machine banks will be replaced.

Photos by Willie Lawless.

Raffaele began the session by asking each panelist how they define category management. The answers differed, indicating that category management is a multi-faceted process that remains as much an art as it is a science.