Risk Management

Self-checkout’s swan song

Retailers are increasingly pulling back from the ubiquitous technology, creating tough financial decisions in the process.
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Francis Scialabba

5 min read

This story is part of our collaboration with Retail Brew on investing in changing consumer habits.

In a distant, forgotten epoch called the early 2000s, self-checkout machines, those infuriating devices in seemingly every grocery store waiting to inform you there’s “an unexpected item in the bagging area,” seemed like a good, even great, idea.

They’d bring retail stores into the modern age: Customers would whiz through lines, companies would save on labor costs, and everything would be new and shiny and good and perfect. Lately, though, they’ve started to look like a vestige of the boom years.

Dollar General, Target, Walmart, and Costco, among others, have all either pulled back on or tweaked their self-checkout process recently. And in California, there’s a newly proposed bill on the table that could force some stores to close self-checkout lanes without adequate staffing.

There’s just one issue: Retailers spent the start of the 2000s convincing people this was a worthy and effective technology. Largely, it wasn’t. But dialing back on a botched tech experiment is a delicate art, and for CFOs managing the cost of the pullback, getting out of this mess intact requires rethinking what could have been.

But instead of just jumping on board and pulling back from self-checkout because everyone else is, retail CFOs should run an extensive cost-benefit analysis on existing self-checkout technology, experts argue, because ultimately, it’s all a return on investment calculation.

Boom years. The first self-checkout machines in the US were introduced in 1986, at an Atlanta Kroger store. That continued a tradition established by self-service grocery store Piggly Wiggly, which debuted in 1916, of offloading work onto customers with the promise of lower prices in exchange.

As self-checkout took off in the early 2000s, though, retailers missed a crucial opportunity to adopt that same low-price promise, according to Chris Andrews, associate professor and chair of sociology at Drew University and the author of The Overworked Consumer: Self-Checkouts, Supermarkets, and the Do-It-Yourself Economy.

“The one thing that I think retailers screwed up on this time was that at the original Piggly Wiggly self-serve supermarket, they offered customers a discount,” Andrews told CFO Brew. “If they had initially said, ‘Hey, we’re going to give you these marginal fractional discounts, like less than a cent by using self-checkout lanes,’ Americans would have flocked to it.”

Farhana Nusrat, assistant marketing professor at the University of San Diego’s Knauss School of Business who has studied the consumer relationship to self-checkout, agrees that the technology could use a moment of reckoning.

“In the long term, like 15 years ago, they were actually thinking it’s going to be a great financial decision,” she noted. “At different locations, they realized it’s actually becoming a bad financial decision and probably, it’s just better to have a cashier do all the work and pay them.”

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Loss leader. Self-checkout has also become a theft magnet. Would-be shoplifters have a ready-made excuse, while loyal customers can run into issues with self checkout’s often finicky tech.

A 2016 study of retailers in the US, UK, and European countries found the use of self-checkout lanes and related apps generated a loss rate of nearly 4%, or double the industry average at the time. The profit margin for European grocers at the time of the study was 3%, meaning self checkout had become “practically a nonprofit venture,” according to the New York Times.

“Of course, this becomes a vicious circle because the stores aren’t going to eat that; they’re just going to pass that cost on to us in the form of higher prices, which then, in turn, we feel more aggrieved at having to do this unpaid work,” Andrews pointed out.

Now, self-checkout is “essentially a loss leader for the store,” he explained. “They worry if they won’t have it, they might lose customers, but the net effect is they lose more money than they earn through those lanes.”

No more follow-the-leader. Solutions will be individualized, with Nusrat emphasizing the importance of tailoring your plans to the spending habits of suburban versus urban locations, or based on the average age of clientele at a given location.

For now, though, many retailers have been playing follow-the-leader. “There’s a lot of the bandwagon effect in the retail industry,” Andrews pointed out. “They’re very concerned about losing even just a fraction of their base, so I think they’re all looking over their shoulders at each other.”

Andrews suggests asking: “How long does it take for this technology to pay for itself? Are you saving money on labor and how does that balance against what you’re losing in terms of theft?…What is the store’s labor costs? How much does this technology cost? How much are we losing, on a monthly basis, or an annual basis from theft?”

Nusrat adds that it’s crucial to consider the long-term customer satisfaction equation of self-checkout. “I found in my studies that a lot of customers would not go back to a store where they are not feeling like they’re getting served,” she explained. “So even if they feel like it’s not hurting them financially right now, long term, that could be a really big issue with loyal customers.”

Nusrat is optimistic that if companies ever end up investing in self-checkout en masse again, “that it might be a much better self-checkout instead of the machines we have now, which are already 15, 20 years old.”

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CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.