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Initially introduced in the 1990s, the technology of self-checkout lanes was supposed to alleviate the ever-rising costs of human labor. Two decades later, human cashiers have not been replaced and are showing signs of sticking around. Ironically, the machines might actually be the ones in danger of being phased out. As members of the retail industry reconsider their stances on this semi-mature technology, savvy investors will want to think about how they can take advantage of these changes in the market.

In most industries, automation is typically associated with efficiency and growing margins. Businesses have traditionally been willing to absorb the high set-up costs of new technology in order to realize bottom-line gains over time. The retail sector, however, has seen an exception to this common business practice.

A cursory glance at self-checkout technology suggests that retailers should jump at the opportunity to build more of these lanes. Having customers scan and bag their own goods, essentially equates to free labor and cost savings for retailers, which can certainly have a material impact on the thin margins within this sector. Marketed as a convenient, quick, and privacy-minded alternative, this technology generates cost savings which should also theoretically make their way back to consumers in the form of lower prices.

On paper, this technology seemed like a win-win situation for everyone. Low-paying cashier jobs would be replaced with higher-skilled workers needed to produce, service, and maintain these machines. In practice, however, history has once again shown us the fallacy of a sure thing. 

Some major adopters of this technology have discovered that the drawbacks outweigh its potential benefits. Supermarket chains Albertsons and Big Y have already chosen to do away completely with self-service checkout lines citing diminished customer experiences and incidents of theft. 

Detractors of this technology often highlight the greater speed with which experienced cashiers can ring up merchandise and send customers along their merry way. Shoppers often have problems using self-check-out systems due to a myriad of issues. Sometimes the culprit is a poorly designed system, malfunctioning technology, or even just the psychological pressure of knowing that a bunch of impatient customers behind you are watching your every move. This later point is especially true when trying repeatedly to get the perfect scan on an oddly shaped package or obscured bar code. Unfortunately, a good number of customers end up waiting for that lone attendant to walk over and help them complete the transaction. This ultimately evaporates any time savings and results in an even more frustrating shopping experience. 

Amidst all of this, some flustered customers will sometimes unintentionally or even intentionally forget to scan some of their items. This in turn leads to shrinkage losses that will push margins back down. Costco Wholesale Corporation (COST) arrived at this very same conclusion in deciding to scrap its self-checkout capabilities for its U.S. stores. Doing so not only slowed down merchandise loss, but also raised the average transaction rate per hour, as employees are much more efficient at dealing with the high-volume bulk-sized packages of warehouse retailers. 

On the flip side of all of this are some success stories from the implementations of this technology. On point, Turkey’s Migros Turk supermarket chain began introducing self-checkout solutions from NCR Corporation (NCR). Customer enthusiasm has been so strong that Migros Turk is now considering a new store format that would be based on just one traditional checkout lane and six of these new semi-automated lanes. Turkey’s economic prospects like many other countries have slowed in recent years, and it seems that appealing to the economic sensibilities and insecurities of their customers can bring this technology some success. 

Elsewhere, Wal-Mart (WMT -Free Wal-Mart Stock Report) is planning on adding 10,000 self-checkout lanes across 1,200 stores in the United States. The Dow-30 component has also been testing a new Scan & Go checkout system in 40 Denver stores. This separate system allows the use of a phone app to check items out as customers walk through the store. Before leaving the store, a QR code is generated on the screen that is then scanned at a final checkout payment kiosk. Similar technology has been used at Carrefour and Tesco, but this system relies on random audits, and is somewhat more prone to theft and abuse.

RFID-based solutions provide the greatest ease of use and security, but until its costs come down, optical systems will likely keep its dominance over mainstream retail. Of these, few are more exciting than the scanning tunnel checkout system developed by Fujitsu and Kroger (KR). Products move along a conveyer belt and under a y-shaped optical detector. This innovative device uses traditional scanning in addition to visual recognition for items whose bar codes are not readable, thus resulting in a more automated and accurate system. 

Although some major retailers have abandoned self-checkout altogether, investors should not panic and give up on this technology. As these machines become easier to use and more reliable, retailers will probably consider giving it another chance. Net demand thus far has been very positive as producers of these systems, like NCR and Wincor Nixdorf AG, have seen their share prices rise significantly in recent years. Investors looking to ride this segment as it rolls into the future should see continued top-line support over the 3- to 5-year horizon.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.