Unmanned Shelves Are Dead, Will Smart Vending Machines Survive?

In half a year’s time, the craze for unmanned shelves has quietly passed, some enterprises left the industry while others turned these shelves into smart vending machines. Reporters learned from a number of unmanned shelf salesperson and smart vending machine manufacturers that apart from Bianlifeng (便利蜂) who have already announced its transition to the smart vending machine business, other companies like Guoxiaomei (果小美), Xingbianli (猩便利), MissFresh (每日优鲜) and more are all preparing to do the same.

The craze that ended in six months

The craze for unmanned shelves left as quickly as it came. Chen Huilu, founder of Youhe Bianli (友盒便利), told reporters that Youhe is now also trying to make adjustments in their shelf operation model and supply chain to cope with the changes in the industry. “A lot of players withdrew at the beginning of the year. At present, there are probably four or five companies left. Attitude from the investment side is also ever-changing. There needs to be more innovations in the business model of these companies; simply setting up shelves without operational optimization has proved infeasible by Xingbianli (猩便利).

The unmanned shelf industry attracted an unprecedented amount of interest in the second half of 2017. Over 50 companies carrying close to 3 billion yuan ($475.4M) o investment flooded the market at its peak.

At the beginning of 2018, there were rumors about layoffs and shelf removals at Xingbianli, and it is said that layoffs and a change of business model is also happening at Bianlifeng (便利蜂).

On March 14, according to Bianlifeng staff, apart from its eight existing pilot cities for smart vending machines and three upcoming ones, the remaining 38 cities with regular unmanned shelves will all be removed. Bianlifeng will then announce their transformation and upgrade to the smart vending machine business model.

Bianlifeng was founded by Zhuang Chenchao in December 2016. Its businesses span three areas: convenience stores, unmanned shelves and shared bicycles. Other than announcing their number of unmanned shelves has hit 50,000, Bianlifeng also acquired Lingwa, an in-office convenience shelf startup, in December of last year.

“Bianlifeng and Xingbianli both made a mistake during the second half of last year when the industry was the most sought after. They thought that the one with the most number of shelf locations will win, but that is simply not the case,” says Chen Huilu who runs Youhe Bianli. Bao Junwei, the head of unmanned shelf project at Suning, one of the largest retailers in China, says that some companies subsidized the goods to boost the numbers for financing purposes, but in the end did not raising any funds, “Because that number might not be realistic, considering these are inflated numbers created by the high subsidies.”

Jiang Haiping, a serial entrepreneur and investor, still feels that unmanned shelf is a good business, but it has been ruined by unrestricted subsidies and vicious competition after capital flooded the market. “Competing for the number of locations without considering the damage of goods ruined the entire industry. And once this injury has been sustained, the damage will be very difficult to repair, possible irreversible.”

Unlike Jiang Haibing, in the eyes of Cheng Hao, the founder of both Xunlei and GoodHope Capital, unmanned shelves is still an untested business model. He told reporters that the heat of unmanned shelves only lasted for six months. “VCs all believe that the craze for unmanned shelves is now over, many were not optimistic about it in the first place.”

“The business is testing human nature here if it relies solely on customers’ self monitoring. Reality shows that the leading companies aren’t doing well,” Cheng says. After considering unmanned stores, unmanned shelves, and smart vending machines as an early investor, Cheng chose to invest in smart vending machines that prevents potential damage of goods.

Cheng believes the companies that have gone awry likely had internal management issues. “Some of them began expanding to second and third-tier cities when they have not paved their paths in first-tier cities, trying to tackle small companies with 30 or so employees when they have not successfully signed ones with 200 employees.” Take peer-to-peer (P2P) lending for example, the scale of P2P lending must increase, but risk control will be weakened once it has scaled up. If things continue like this, there will lie a lot of bad debts in the future.

Replacing unmanned shelves with smart vending machines

Bianlifeng is still trying to expand its market share after announcing their transformation and upgrade to smart vending machines. A common practice in the industry is to buy shelf locations from other companies, with the market price ranging from a few hundred dollars to several thousand dollars. Reporters learned that Bianlifeng currently has close to 200 salespeople in Beijing. They are divided into 20 groups and the number continues to expand. A salesperson gets 300 yuan ($47.7) bonus whenever a new location is established. Each month everyone is assigned the task of signing seven new locations, and those who fail to meet the target will be let go. As a bonus, employees whose company has signed up for the smart vending machines can usually enjoy discounts their purchases.

For the requirements of these companies who want to sign up, several Bianlifeng salespeople told reporters that the standard is now stricter than before; there is even an examination and approval process. “In some areas, companies with a size of 30 can be accommodated, these are areas like Guomao, Dawang Road, Advanced Business Park, Zhongguancun, and some other densely populated office areas. Offices in all other areas can only be accepted if they have 50 people or more,” the salesperson said to reporters, he showed them how to win over a competitor’s shelf location.

Bianlifeng did not respond when asked about reasons for the change of business model and their cost. However, some Bianlifeng salespeople told reporters that it had to make the changes because the rate of damaged goods was too high.

At the beginning of March, Bianlifeng announced its upgrade from unmanned shelves to smart vending machines. The explanation given was that smart vending machines could effectively solve the problem with damage of goods by 90%. On top of this, due to electricity and internet connectivity, shelf operators can acquire real-time inventory information of each shelf for more accurate and timely replenishments. It will also be able to provide products that have a higher price tag but a short shelf life to meet user demand.

On April 4th, Xingbianli told reporters: “We’ve also looked at that some locations with high damage levels, we will be replacing those unmanned shelves with smart vending machines, but we are still in the testing stage.”

Regard this, Bao Junwei replied bluntly: “I don’t think it’s about the type of equipment. The core of the problems lies in their basic operational abilities, including the setups of supply chains and logistic systems.” He believes that unmanned shelves has a capital intensive business model with high operating costs that needs to cover the cost of logistics and supply chain setup, daily maintenance of shelves and inventory checking. He revealed that investors are more optimistic about the model of MissFresh than that of Bianlifeng or Xingbianli, as MissFresh has their own warehouse and supply chain. Its competitiveness lies in its lower costs.

On March 21st, reporters tested out the new smart vending machine named “Fengxiaogui (蜂小柜)” at Bianlifeng’s headquarters. After scanning the barcode on the door to take out the goods, the item information and price will appear on the checkout page on the phone and it allows auto-checkout and payment. It is reported that this model is using RFID (Radio Frequency Identification) technology and all current smart shelf technology utilizes RFID, gravity sensors, visual recognition, and a few others. However, no matter what kind of technology is used, smart shelves are far from mature and ready for mass adaptation. The cost of smart shelves is fairly high as prices range from a few thousand yuan to ten thousand yuan ($1588).

A new manufacturer emerging everyday

According to Wu Yili, founder of Shihaoyun Jianbing (食好运煎饼), there are many manufacturers making smart vending machines, and a new manufacturer emerges everyday.

“I think now there is a craze for smart vending machines as way too many investors are interested,” Cheng Hao said. Pan Wei, founder of Hahalinshou (哈哈零兽) which Cheng Hao invested in, told reporters that four or five investors would come to them each day. Cheng Hao believes that the physical smart vending machines are not mature enough, while traditional vending machines are mature but not smart, but smart vending machines should eventually replace traditional ones completely.

He also stresses that smart vending machines are not born from the development of the unmanned shelf industry, its core does not lie in the uses inside office buildings but in its competitiveness against traditional vending machines. Compared with unmanned shelves, smart vending machines have a potential market worth hundreds of billions due to their lower prices, larger selections and more possible applications.

In Cheng Hao’s view, smart vending machines presents a new opportunity, but in Jiang Haibing’s view, unmanned shelf companies operating smart vending machines is just spinning another story. “What’s the point of saying that the basic business model doesn’t work? Isn’t the point of collecting these user data to sell the goods on the shelves? It’s not like these data were collected for the purpose of selling data right?”

Jiang Haibing believes that the cost of the most basic single-door smart vending machine is around 7,500 yuan ($1,191). With such costly equipment placed in an office area, it is very difficult to recover the cost within two years. Bao Junwei believes that the cost of each smart machine must be controlled between 2,000 and 3,000 yuan ($317.6-$476.4). Above this, it will be difficult to make a profit because replenishment and operating costs will be at least 20%, and profit on the shelf goods will not reach 30%.

Bao Junwei, head of Sunning’s unmanned shelf project, disclosed that the approach of Suning is to focus on Suning’s phyical stores. They select reputable companies around each store to put around 30 sets of shelves; the number of shelves in place is now in the thousands. It is worth noting that when Suning announced their entry into the field of unmanned shelves at the beginning of the year, it set up unmanned shelves, vending machines and smart vending machines. According to Bao Junwei, most of the companies who signed up have unmanned shelves, smart vending machines are placed where there are higher rates of theft and damage or with customer requests, while vending machines are placed in semi-public spaces such as housing communities.

“I think it’s good that more people are afraid to enter the market. It’s good for us, otherwise people will constantly jump in and increase our costs,” Bao Junwei comments on the changes in the unmanned shelf industry in the last six months.