Studies such as those by Prahalad & Mashelkar (2010) have shown us that modern day consumers are heavily influenced by the concepts of convenience and accessibility when it comes to their purchasing decisions. The more convenient and accessible a particular product or location, the more likely it is that consumers will patronize it.
Evidence of this can be seen in the study of Baum & Bird (2010) which focused on the importance of location of retail establishments and how this directly correlated to the amount foot traffic and sales such stores would have. It was shown by Baum & Bird (2010) that customers were more likely to spend more on a particular item so long as it was nearby and easily accessible as compared to getting the same item at a much cheaper price at a location that was much further off and less convenient.
This can be seen in the case of the proliferation of convenience stores such as 7-Eleven in various financial business districts which cater to your average office worker looking for a quick snack, drink or whatever else the store may stock at the time. Convenience stores are popular since they address the issue of accessibility and convenience that defines the modern day consumer.
Not only that, due to their limited selection of products such stores do not require as much space as compared to other retail establishments enabling them to be placed in high traffic locations that would otherwise be unusable by other store types. With their selection of snacks, drinks and a few types of grocery items such stores have become a staple of the modern day office worker’s environment.
Based on the information presented, it can be seen that establishing a convenience store within a location that has a high volume of commuters can become a viable business venture. At the present, my own business venture, a small retailing business that occupies 1,000 feet of space that sells a variety of products to the office workers of the building, has been doing rather well with annual revenues of $150,000 to $300,000 a year.
This is more or less in line with the revenue margins of stores of a similar type and is evidence of the profitability such stores have in high traffic locations. In line with this particular bit of information is the opening of a new office building a few blocks away from the current location of the store.
This presents itself as a potential opportunity for expansion to create another branch of the store at the newly opened office building which in itself could be the beginning of a new chain of small convenience stores named “Buster’s”.
As such, this report Will address the various components of the proposed business venture and show that it is a viable investment given the current consumer environment and how the business conforms to the wants and desires of the modern day consumer.
With so many different types of convenience stores and product variations already present in the local business market today this makes market penetration and the creation of sufficient brand awareness of a new convenience store all the more difficult to implement. While one alternative is to buy into a particular franchise, the fact remains that the considerable costs involved in such a venture as well as the level of competition already present in the current market today was perceived by me as being far too resource intensive and risky for us to pursue.
I based this off the affordable loss principle described by Prahalad & Mashelkar (2010) which specifically states that people should invest into a business only what they were prepared to lose (Prahalad & Mashelkar, 2010). Prahalad & Mashelkar (2010) continues to explain that nearly 90% of all new businesses have the tendency to go under within the first year of operation (Prahalad & Mashelkar, 2010).
While this rate is considerably lower for franchises that have a well established degree of brand awareness the fact remains that there is no guarantee that should I either buy into a franchise or establish my own independent shop that it would become a success. Another viewpoint that I examined was that of Baum & Bird (2010) who advocated the use of the Bird-in-hand principle when it comes to establishing a new business.
Baum & Bird (2010) explains that people that wish to start their own business should start with who they are, what they know and who they know in order to create their first business venture and slowly and steadily expand (Baum & Bird, 2010). This forces them to become more “imaginative” so to speak in making do with what they have at the present (Baum & Bird, 2010).
Taking such factors into consideration, I have come up with a new concept that builds up on what I know about my consumers through my experience as business store owner as well as utilizes a more imaginative perspective that should minimize costs and maximize profit. One of the main problems when it comes to establishing a convenience store within a busy financial district are the costs related to rent and electricity as well as the possibility of product spoilage due to a lack of sufficient interest for particular product lineups. Thus, the best way in order to resolve such a problem would be to maximize space and focus only on products that are popular and would sell quickly.
My proposed concept is the creation of a self-service convenience store where everything is placed within vending machines. This enables me to maximize the amount of products sold within as small a space as possible while at the same time enables me to focus only on items that I know consumers will like.
Vending machine technology has advanced to such levels that not only are they capable of dispensing small food items and drinks but they are also capable of producing a variety of premade meals that can be heated within the machine and subsequently served to consumers via a food dispenser located at the bottom of the machine.
This can be seen in the case of Japan where their vending machines were capable of selling a variety of meals that were quite popular to various “on the go” business men that are a staple of the Japanese business culture. Not only that, certain types of vending machines have been developed which enable consumers to use their credit cards to make a purchase which makes the purchasing process that much more convenient.
Benefits of Establishing a New Chain of Vending Machine Convenience Stores
No need for franchising fees
One of main costs involved in establishing a franchise such as a 7-Eleven is the franchise fee which can often reach several thousand dollars. This, along with the initial cost of rent, the construction of the store, the hiring of employees, adding products to the shelves and other related costs can create considerable early pressure on any business and at times may cause it to fail.
Not only that, the products that are sold within the store have to come from the franchise chain’s own suppliers which severely curtails the ability of an owner from finding alternative sources that are more affordable. Lastly, it is often the case that store owners are prevented by contractual obligations from selling other items not sanctioned by main franchise chain.
As such, a store owner cannot sell pre-made sandwiches, lunch boxes, certain types of books, or other items which are popular with office workers which limits his/her ability to adjust a store’s product lineup based on what would be the most profitable. By establishing my own chain of stores I can in effect dictate what items to stock, where they come from and create my own product lines that appeal to what I know my consumers want.
Product line up
The product lineup for this particular type of vending machine convenience store consists of machines that sell soft drinks, coffee, snacks bought from a local distributor as well as premade meals consisting of sandwiches and boxed lunches that can be heated within the machine.
By contracting a food production company to make the meals for me, I can in effect control what sorts of lunches are sold from the machines based on bi-weekly examinations of what consumers want. By doing so, this will enable me to better position the store’s products to the need of the consumers within the immediate area.
Eliminates the Need for Employees
It must also be noted that by focusing on this particular type of store concept not only does it make things far more convenient for customers but it in effect eliminates the need to hire multiple employees for one location. All that would be needed is to hire someone to come by on a daily basis to restock the machine and perform basic maintenance. By doing so this reduces the cost of doing business and increases my profit margins.
Analysis of the Small Scale Business Venture
As Lin, Yu, Hsu & Weng (2011) explains, vending machines are a viable business venture since they don’t take much to maintain, have a low initial investment cost and can be placed into various areas such as train stations, schools and even malls resulting in a steady stream of consumers (Lin, Yu, Hsu & Weng, 2011).
To test the viability of this potential venture I created an industry and market analysis which examined the current strength of the vending machine industry and its impact on consumers markets today. The study revealed the following details:
According to various reports published in 2011 which examined the amount of products sold by automatic vending machines, the rate of sales within the market has dropped by 1.1% since 2010, reaching $2.5 billion (Howorth, 2003). Furthermore, by comparing the quantity of refreshing vending machines (soda and juice dispensers) in the U.S. between 2010 and 2009, I noticed a 2.9% drop had occurred in a case study where 449,000 units were evaluated (Howorth, 2003).
Additionally, a survey conducted by the National Statistics Office in 2011 estimated that a 5.3% increase in the household spending on food arose in 2010 following a value of $105 billion, where 1.7% of the sales were maintained by refreshment based vending machines (the ubiquitous machines seen in most university and college campuses that sell coke, sprite, etc.) (Howorth, 2003).
This is indicative of the fact that while the sale of products coming from vending machines has been quite strong ($2.5 billion) the industry itself is starting to wane. While there could be any number of reasons behind this, such as an increase in the number health conscious consumers or fewer consumers willing to spend on frivolities as a result of the current financial recession and the debt crisis in mainland Europe, the fact still remains that despite the 1.1% drop in overall sales the current vending machine market appears to be a viable investment opportunity especially when taking into consideration the fact that there are plenty of high traffic pedestrian locations in the U.S today where vending machines can be placed rather easily since they don’t require much space at all.
I can use this to my advantage my creating convenience stores that do not take up much space at all that are fully stocked with vending machines that have my own products in them. These types of stores, while popular in Japan, are actually a rarity within the U.S. market and as such gives me a first mover advantage in terms of establishing a brand name that can be associated with quick and convenient lunches and drinks that come from vending machines.
Examining the U.S. Vending Machine Market
The market is segmented into three sub-divisions: refreshment vending machines, cigarette/tobacco vending machines and other vending machines. The first subdivision is considered as the leading subdivision in the market today and is composed of and extensive variety of goods such as hot and cold beverages as well as various confectionery and snacks (Howorth, 2003).
The second subdivision of the market is involved in selling various cigarette brands to smokers however this particular market has experienced recent downward slopes as of late due to declining sales (Howorth, 2003). Upon closer examination it was revealed that a decline in the number of smokers as well as recent government restrictions within the U.S.. regarding the number of locations where a person can smoke has contributed greatly to this trend.
This would explain the 1.1% decline in sales in 2010 since this was the same year that stricter smoking regulations and anti-public smoking campaigns were similarly put into effect. The last subdivision of the vending machine industry involves the sale of various condoms, panty liners, tampons, disinfections, mobile phones and a variety of miscellaneous products (Howorth, 2003). This particular sector has had anemic growth within the past 3 years and which could be due to lackluster demand for the products available from such machines.
In 2010, the U.S. market for automatic vending machines (the sale of the machines themselves and not the products within) has experienced a moderate growth despite the sustained economic insecurity. This subsequent growth in the number of sales of vending machines has been connected by experts such as Barr & Wright (2010) to the statistical rise in family expenditure on food of which the refreshment subdivision of the automatic vending machine industry has greatly benefitted from (Barr & Wright, 2010).
It was based on this data that I decided that for my small scale business venture the most likely means of entry into consumer markets is to utilize refreshment, cigarette, snacks and hot meal based vending machines. This is due to their higher sales revenue as compared to other vending machine subtypes and the fact that I am more familiar with this particular form of food consumption as compared to the other types of vending machines currently on the market today.
Initial funding for this venture will come from a small business bank loan taken out with a local bank. Since the overall amount needed to start this venture is quite low it will be possible to borrow the initial funds quite easily. The initial loan will consist of a $500,000 balloon loan with a 7 to 10 year payment scheme with the bank. The reason why a balloon loan scheme was chosen was due to the fact that it was determined by me that as the business improves I will be able to pay a higher amount down the line as the amount of profits increase.
Having this particular loan type to “test the waters” so to speak also enables me to apply for more loans in future once viability has been established with the proper figures to show a loan officer in the future. To pay for the loan all payments will be deducted from the overall revenue stream of the machine. For this particular venture the initial stakeholders will be me and possibly some family members with future stakeholders consisting of potential venture capitalists that may want to invest in the scheme.
Forecasts and Financial Data
For this project it is anticipated that the 5 vending machines the company will start out with (soft drinks, hot meals, small snacks, cigarettes, and coffee) will generate up to $120,000 in sales each within a single year with a growth rate of 10 to 15 percent in the number of units sold within a period of 3 years. This assumes that within this given period of time no possible situation may arise that could result in a drop in consumer demand within this particular period.
Based on an examination of costs which arise with doing business which consists of the cost of refilling the machine ($5,000 monthly), corporate taxes ($12,000) as well as VAT ($12,000) as well as branding expenses (5% of monthly sales) and the percentage that goes towards the owners of the space (15%) the overall profits gained per year on this particular venture ranged from $300,000 to $400,000.
This takes into account that the first month of doing business will actually be a loss for the company due to low sales rates and the amount that needs to be paid into corporate taxes, ingredients and various associated fees. The highest cost for the business is the $5,000 paid per month for the cost of refilling the machines.
This rate takes into account the possibility of product spoilage as well as the possibility of unsold ingredients within a given month. Based on this it is anticipated that a return of investment for this particular venture (taking into consideration the time and effort required as well as individual taxation on income) will take up to 2 to 3 years.
Year 1 estimate along with costs
|Summary of Financial plan|
|Annual unit sales||1,000,000 or more|
|Average Price Per Product||$ 5.00|
|Variable cost P/Unit (production and sales)||$ 0.97|
|Fixed costs (machine rent, maintenance, etc.)||$ 20,000|
|One-time start-up costs (equipment, marketing, legal, etc.)||$ 300,000|
|Working capital required (receivables, inventory, etc.)||$ 20,000|
|Estimated Annual Gross Revenues and Income:|
|Annual revenues||$ 300,000|
|Annual variable costs||$ 6,000|
|Annual contribution margin||$ 12,124|
|Contribution margin per unit||$ 120,000|
|Annual break-even quantity||500,000 items sold|
|Ratio of break-even to expected quantities||10.4%|
|Starting-up the business:|
|Total up-front funds required||$900,000|
|Additional units to cover up-front funds||$30,000|
|Break-even quantity with up-front funds||500,000|
|Payback period for start-up funds (in days)||728|
|Annual return on start-up investment||30%|
|Variable cost to price ratio||35.3%|
|Contribution margin ratio||58.0%|
The marketing strategy is to provide office workers, maintenance workers, students, commuters etc. with a quick and easy way to buy what they need without the hassle of having to wait for a cashier. Thus, the main focus of the marketing strategy is to emphasize this by showing potential customers how easy it is to purchase a meal from a vending machine via print ads and small rented TV sets showing the process of purchasing a product.
My aim is to reach consumer demographics aged 21 to 57 consisting of young professionals, and old office workers. If split into distinct categories: 21 to 35 would be my youngest potential customers. To appeal to this category I would make sure that consumers would have some measure of “fun” with the machines in the form of some high-tech features and using attractive designs.
The age demographic of 21-35 consists of young professionals and/or university students. In this segment and especially in the central business district, I identified the need for quick service and reliable products. Buster’s will appeal to people who appreciate convenience and would rather get what they need in a quick and simple manner instead of having to wait in line. In a few seconds my customers would be able to take away a quick and snack/dessert/drink etc. at any time day or night.
Strength, Weakness, Opportunities and Threats –
The main strengths of this particular type of business venture is that it does not require a store attendant to mind the products since the entire process of purchase, assistance and product distribution is seamlessly integrated into the machine itself.
This significantly reduces the cost of doing business especially when taking into consideration the fact that a set of vending machine that sells snacks, drinks and hot meals can be placed in a far smaller location as compared to an average convenience store thus reducing costs associated with rent and utilities expenditure.
The weakness of this particular type of venture is that it lacks the product diversity seen in most convenience stores and as such severely limits the type of consumers that would normally patronize such an establishment.
Brand awareness by introducing the vending machines in strategic locations (high demographic reach). By placing the convenience store/vending machine concept within high traffic areas such as the new office building this could potentially increase not only that brand recognition of Buster’s but would also create more sales for the company.
7-Eleven and other convenience stores.
In all business districts there is bound to be some form of competition between the various restaurants and convenience stores that cater to the various office workers within that location. The main problem in this particular situation is one of brand recognition wherein certain convenience stores such as 7-Eleven have better brand recognition that Buster’s.
Taking this into consideration it is thus important to focus on the affordability and quality of products within the vending machines to show customers that it is actually far better and more convenient to order from a Buster’s vending machine than it is to go to 7-Eleven.
Distribution and Sales Strategy
It was determined that I will need to use different distribution and promotional channels in order to attract customers. At first, it is necessary to increase people’s awareness about the vending machine concept. This news could be spread through social networks such as Facebook and Twitter, which is the least expensive method of promoting the product and attracting customers.
Additionally, fliers could be distributed in the venues where the vending machines will be installed and will act as the main distribution channels for the company. The average cost of this would reach $50 or less and will come out of out-of-pocket expenses. Overall, the main advantage of this approach is that it will allow me to increase my customer base within a short time.
Furthermore, word-of-mouth can also greatly benefit the venture as this communication channel will become particularly important at the initial stages when customers are not aware of the products on offer. In order to implement this project, I will need to form alliances with two groups of business partners.
While targeting office buildings, the main goal of the company will be to make the purchasing process as easy and as convenient as possible so as to encourage repeat usage. This will come in the form of making sure that paying for products is a simple process of either cash or utilizing their credit card.
Implementing a “Cashless” Sales Strategy
Another factor to take into consideration is that consumers within the U.S. market have as of late been shifting towards “cashless” transactions utilizing credit cards. Heap, Chua & Dornhofer (2005) expounds on this by stating that business should take this particular method of transaction into consideration and incorporate it as either a primary or secondary means of creating transactions with customers (Heap, Chua & Dornhofer, 2005).
This is similar to the opinion of Picker (1993) who indicates that taking advantage of new methods of consumer transactions is one of the best ways to “get ahead” in today’s competitive market economy (Picker, 1993).
Further research by me into local markets has revealed that the prices for convenience store goods were quite high in comparison to their counterparts in supermarket department stores. One of the main reasons behind this is connected to the markup such stores have in order to make a profit yet it must be determine how consumers view the price difference and how this impacts their spending behavior.
Informal interviews were also created through surveymonkey.com and distributed online as well as in person with various potential customers revealing that they would prefer convenience instead of other alternatives due to time constraint and the fact that such stores are usually the closet to their respective office buildings as compared to supermarkets that are often quite far away.
Upon asking whether they liked the idea of automatic vending machines to dispense hot meals and a variety of other products, customers gave a positive reaction admitting that they like the idea of Buster’s vending machines since it would make things considerably easier for them when it comes to buying their daily lunches due to the inherent time constraints associated with normal office lunch hours.
The key element that needs to be considered at the start-up of this kind of a business is which location would be the most suitable for the business’s needs. Based on this, sites with a great quantity of pedestrian traffic would be essential in order to obtain adequate levels of revenue. Widespread locations for positioning a successful vending machine would be: central business districts, areas with high commuter traffic as well as business parks with a considerable amount of businesses concentrated into one area.
It must be note though that the business offers the possibility of trying different places (due to its mobility) until an option that fulfills the targeted aims presents itself. It must also be noted that placing a machine in a particular location does come with a cost of 15 to 33 percent of the profit going to the location owner due to costs related to electricity and the space provided. It is based on this that I should take into account different price markups depending on the rental charge for a particular location.
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