May 14, 2004

Retail Research

STATE OF THE RETAIL KIOSK MARKET

STATE OF THE RETAIL KIOSK MARKET
Taking the customer from a state of clueless to queueless
By Vineeta Kommineni, Research Analyst, IT Practice

Kiosk Industry - Small victories, Big Lessons

The Interactive Kiosk industry has risen from the ocean floor.
Inarticulate ROI had sheared the rivets off the industrys hull. Shallow entry and exit barriers
made for icebergs below the waterline. Neither crew at customer nor supplier end had a captain.
Cheap peripherals set projects adrift. The non-mission-critical image of kiosks drove a forceful
gash. The economy swept a violent storm.

However, applications with solid business case are helping weather the storm. Improvements in
remote management software are seeing the industry cruise along steadily and acceptance of
self-service by the consumer is chumming the waters. The industry strung small shells of project
successes and ran a tight ship to resuscitate by over 21 percent from 2002 to breathe easily at
$463.7 million, as estimated by Frost & Sullivan for 2003.

Retail - Pearl in the Oyster

Frost & Sullivan segments the kiosk industry by customer segments into Retail, Banking &
Finance, Government, Telecommunications, Tourism, Transport & Entertainment (TTE) and
Others. The retail segment continues to be the pearl in the oyster for the kiosk industry, ever
since weve been tracking the market since 1997.

Walmarts relentless pricing pressure has intensified competition in a retail industry characterized
by clenched-fist net margins of 1-2 percent, employee turnover upwards of 50% and labor, a
sizable 15% of revenues. To battle with the Beast of Bentonville, throughout the nineties, retailers
hustled for growth by focusing on cost efficiency, range rationalization, inventory management
and space optimization. The spate of consolidation that marked 1996-98 connived with the
Walmart factor, resulting in a convergence of positioning strategies among the large retail
chains. The focus on in-store experience as a differentiator is being renewed.

According to Bob Ventresca, Director of Marketing, Netkey Inc, Retailers first used kiosks to
leverage their investment in e-commerce sites, connecting a companys physical presence to its
online presence. When connected to the retailers back-end systems, kiosks can be a virtual and
infinite shelf for the company. This is particularly important in an environment where product
assortments are evaluated on a daily basis on measurable parameters such as sales per square
feet. A typical supermarket has no less than 25,000 SKUs. By allowing customers to touch and
feel samples and offering products without adding shelf space or floor space, kiosks present the
retailer with the best of the online and physical world.

Retailers IT strategy has been to address two key areas of concern: high employee labor and
turnover costs and customer satisfaction. Kiosks when well implemented can emerge as the
nerve-center of such an IT strategy. HR kiosk applications are increasingly being used to
automate employee benefit selection and related changes. Furthermore, they are being used to
automate employee scheduling; kiosks that allow employees to view their work schedules,
register requests for leave, allow managers to re-allocate schedules, and increase efficient
resource utilization. They are also being used from a hiring and recruiting perspective; the cost
savings from paper-work reduction is a significant driver for growth of this application.

In-store web-based kiosks and product catalogue kiosks characterize the Point-of-Information
kiosks application are an efficient sales adjunct. They have an edge over store employees who
may not have an aptitude for clarifying questions on technology-intensive products, in addition to
up-selling and cross-selling at every opportunity and providing a consistent experience to the
customer. The kiosk can be customized to communicate with customers through several
languages. Kiosks thus not only enable retailers to cut the cost out of training but also to heighten
the customers in-store experience. Further, the decline of mass media and the fragmentation of
audiences have led marketers to rely more on the point of purchase to communicate their product
positioning.

Apart from retailers, third-party kiosk networks such as Coinstar and Blackstone are leveraging
the prime retail space and offering applications such as coin-counting, bill-payment and topping
prepaid long-distance, prepaid wireless and prepaid cards.

More reasons abound. Tom Weaver, Vice President, Sales & Marketing at Kiosk Information
Systems says, Retail is a huge market and by nature is in walking distance to the public no
matter where they are. Government, Gaming and other segments are more selective in the
demographics they attract. In addition, there are so many different applications that can apply or
can be considered retail applications. Human Resource kiosks, Point of Information, Gift Registry,
Photo Kiosks, Loyalty program kiosks, Couponing kiosks that let customers look up and print
coupons freeing them of the hassle of remembering to clip them at home...much more than in any
kiosk vertical.

Sylvia Berens, Vice President, Apunix Computer Services adds to the argument, All other market
segments except maybe travel and tourism have relatively high barriers to entry. In the financial
market, security and interface to back end banking systems is an issue. Gaming is a highly
regulated market, plus, it is very costly to deploy into. The Government market suffers from redtape.
Retailers also have the benefit of economies of scale that is not inherent in other vertical
markets. Frost & Sullivan calculates that the average number of stores of the top 100 US retail
chains is around 1500.

Challenges include retailers nursing the notion that they can pull content from their website on to
the kiosk, without realizing that the chains vision statement or latest earnings results are unlikely
to enthuse the average store visitor. Pilots based on such a kiosk model invariably fail and deter
further investment. Internal politics also plays a role with IT personnel sometimes unwilling to
house kiosk projects initiated by marketing personnel on their network, on the grounds of security
and bandwidth limitations. The greatest challenge is in convincing retailers that kiosk projects are
too complex to be developed in-house. As Berens puts it, Retailers dont go out and deploy their
own POS system, they dont deploy their ATM system but they want to deploy their own kiosk
system. A kiosk is a customer facing application and can be as complex or even more than their
other IT projects.

Enter Mini-kiosks

The average price of a kiosk deployed in a retail setting hovers around $5750. Since aesthetics
and visual presentation are key to branding, retail chains focus more on design aspects of kiosks
than other kiosk customers. Cort Johnson, Manager Kiosk National Practice at IBM says, Size
and cost aspects are prime to retailers. Retailers have very limited floor space and measure the
profitability of stores by sales per square foot. Retailers therefore see the cost of kiosks from an
additional dimension - the cost of floor space they occupy. Emerging to fill this gap for a cheaper
and smaller device to interact with customers is a breed from Symbol, Handheld Products,
Unicomp, NCR Copient and RedDotNet. These Windows CE based kiosks, priced sub $1500 and
weighing around 3 lbs typically have a 6.4 touchscreen display, and are equipped with
multimedia capabilities and programmable buttons. Smart card readers and magstripe readers
can be added optionally. Another breed of kiosks such as the ones from Data Display USA that
do not use operating systems, but instead are Compact Flash, Video CD or DVD driven and do
not support network or transaction capabilities. These kiosks are priced between $350 and $800.
Doug Blatchford, National Accounts Manager, Data Display argues the merits of these kiosks,

What most of my customers need is just a 'simple' solution that helps sell the product,
demonstrate how a product works and/or should be installed, or shows a preview of a song or
video. As a support mechanism in a retail environment, these 'simple' kiosks are much more
effective by allowing the retailer to install up to 10 times the number of interactive devices in place
of a single large kiosk. The traditional kiosk performs a lot more tasks than what my customers
really need and does not justify demands on cost or time to implement.

Scott Hallihan, Worldwide Consumer Service and Kiosk Manager, IBM vouches this argument, In
our experience, information-only kiosks havent been the best sellers. Generally it is going to be
kiosks that can deliver something tangible, like say a photo-kiosk. Digital music is a potential
powerful application that can deliver DVDs or CDs with content on them. You need functionality
thats more connected with the transaction, driving revenue for retailers.

These kiosks can be placed unobtrusively mounted on shelves or end-caps as against the front of
store, in the corner or end of an aisle occupied by traditional kiosks. Says Chuck Mallory, Senior
Consultant for Self Service, Radiant Systems, The smaller it is, the closer you can get it to the
point of decision and hence more effective

Tech-averse consumers who may be conscious about approaching a traditional kiosk may feel
less inhibited using these smaller devices. However, as Dave Zoerb, Senior Vice President,
Frank Mayer & Associates rightly points out, It is not so much a consumer preference as it is a
retail reality. That consumers will get more intimate with these devices is a pertinent issue.
However this is not a driver. The real driver for the growth of these kiosks will be the cost and
availability of retail real estate and how products are merchandised.

Unlike traditional kiosk projects that call for dispersed decision making at Marketing, IT and Store
Operations due to the significant capital outlay involved, sales cycle for the mini-kiosks are
considerably shorter as they usually involve only Store Operations personnel.

Says Bryan Jorett, Director of Business Development, Unicomp, Customers are actively asking
for smaller unit devices. The education curve for retailers in deploying these units is not as steep
as it is for traditional kiosks.

The applications ported on these smaller devices so far include mainly price-checking and
product information. Marsh Supermarkets has just deployed MyMarsh, a wireless interactive
marketing display developed with NCRs Copient, which prompts customers to swipe their loyalty
cards at the checkout to receive customized promotional offers. According to Kenneth Bhella,
Kiosk Product Manager, Symbol, To boost the ROI of these kiosks further, store operations have
also decided to leverage these devices to guarantee employees receive in-aisle access to
mission-critical information from any location on the floor. These types of employee-facing
applications include SKU management, access to work schedules, and time and attendance.

In-store promotional servers that broadcast offers in real-time to customer displays allows
marketers to create promotions instantly without revealing the coupon or promotion value for
competitors to match. Terry Kasen, Business Unit Director, Agilysys Retail Solutions Group
suggests, "Promotions can now be displayed on multiple devices throughout the store based on
where the customer is shopping, day of week or time of day, and with targeted messages based
on their shopping interests. With a well thought out media plan, one-to-one marketing can be
enabled." David McBride, Executive Vice President of Sales, Taurus Display adds, Interactive
Displays can be purchased or coordinated by retailers. The retailers could lease the space and
time to consumer products goods companies. Since these devices can be leased by retailers to
multiple consumer products companies, promotion of seasonal products through these displays
can benefit tremendously, as otherwise it would not be cost-efficient to build the kiosks for short
promotions. Such a model also facilitates evaluation of promotions in real time.

According to Randy Moderhack, Marketing Manager, AGI Schutz, Currently, these kiosks are
primarily being used for non-branded communication. As they move up the product life cycle, fast
moving consumer goods companies that are increasingly being threatened by private labels are
likely to use these kiosks as a channel for their marketing content. However, as Berens points
out, Retailers at this point are more familiar with the print media than any other mediait will be
a while before this model roots itself among retailers. If it does, online content experts such as
Google, Yahoo, MSN and AOL who have the wherewithal in targeting digital content could move
into the physical world.

On the flip side, these devices pose a security risk the security of the device; being small they
can be easily misplaced or stolen. Also they may not be as rugged as the larger devices. While
lesser moving parts mean the devices can be easily maintained, hardwiring and cabling for the
units on the shelves as well as battery life and replacement issues require additional attention.
Pilot fish or shark?

There is no doubt that traditional kiosks have a secure place in the retail firmament,
notwithstanding the advent of the mini-kiosks or shopping carts with Tablet PCs that provide oneto-
one interaction with the customer throughout his shopping sojourn. Applications like photokiosks
or gift-registry kiosks that rely on peripherals such as printers are more suited for
traditional kiosks, just like applications where visualization is more important than personalization.

Says, Nick Daddabbo, Retail Product Marketing Manager, HHP, Retailers are looking at these
smaller devices as an extension of the functionality offered by larger kiosks. They view the two
technologies as complementary. The smaller kiosks take customer interaction to different parts of
the store. Where you dont have the room to put a large kiosk for certain applications, you can
hang one of these on a pole and have the same kind of functionality.

According to Weaver, In retail, more and more companies are coming to us with known,
established ROI in hand. The ratio of educate to fulfill requests has reversed. It used to be more
education on why.

While these mini-kiosks may cannibalize sales of traditional kiosks to the extent applications are
more suitable to their limited form, it is also equally likely that the latters success spurs retailers
to commission the former. The emergence of these mini-kiosks signifies an evolution in the
positioning of traditional kiosks deployed in a retail setting. Retailers kiosk bet will be a sum of
well defined parts.

In an age of category captains and slotting fees, the various owner-operator models of deploying
kiosks also needs to be addressed.

Watch this space for more on this from Frost & Sullivan.

Posted by Craig at May 14, 2004 05:44 PM