Stealth innovation: How a Troy company is reinventing vending machine technology

There is a small, well-worn Post-it note that sits on Joe Hessling's desk, right next to the founder & CEO of 365 Retail Market's laptop. The small piece of paper features a combination of numbers that get bigger the further you read. 

The first number is 42 and signifies how the company generated $42,000 in revenue in 2009. The next is 463 ($463,000 in 2010), followed by 1,066 ($1 million in 2011), 5,176 ($5.1 million in 2012) and 10,081 ($10 million in 2013). The last number is 15,000, which equals this year's projected revenue of $15 million.

'We skipped medium," Hessling says. 'We were a startup and we skipped to our current size."

365 Retail Markets is the type of new economy startup that hits on all cylinders. The Troy-based company can check off every feel-good economic bullet point local leaders love to talk about.

• It's disrupting an stagnant industry (vending machines) with new technology.
• It's hiring people left and right in a variety of job descriptions ranging from manufacturing to software development, including 15 over the last year. 
• It has raised a seven-figure Series A led by a local venture capital firm.
• It took over an office left vacant by a victim of the Great Recession and filled it with new business. 
• It counts the biggest names in the food industry as its customers, and is working overtime to keep up with demand.

I was tipped off to 365 Retail Markets in an email from local venture capitalist Jeff Barry, a partner with Plymouth Ventures. The Ann Arbor-based venture capital firm just raised its third investment vehicle worth $61 million and has made investments in Accuri Cytometers (acquired for $205 million in 2011) and Pump Engineering (acquired for $20 million in 2009), along with 365 Retail Markets. 

'This is the one that is real interesting," Barry wrote in an email suggesting 365 Retail Markets for a story. He agreed to share it for this story. 'It is one of the fastest-growing companies in Michigan, but gets very little press. Dynamic CEO as well."

Eating everyone's lunch

'Reinventing an industry" is a term that is thrown around too often these days, but that is what 365 Retail Markets is actually doing to the vending machine space.

For decades vending machines have worked the same way: A large box filled with foodstuffs spits out a snack if you put in enough cash and press the right buttons. The machines are built so securely with food made to last so long, they are a staple of what's left for the people to survive on in post-apocalyptic movies. Need some quick calories after being chased by zombies? Raid the nearest vending machine -- but make sure you bring the right tools to crack into that sucker.

365 Retail Markets' products wouldn't fare well in the zombie apocalypse, but they are convenient in normal life. The company is branding its platform as “MicroMarket Technology" because it bears more of a resemblance to the local party store than the vending machines tucked in the corner of the company break room.

The MicroMarkets feature a few coolers filled with drinks, sandwiches, and snacks. They are next to shelves of other snacks, a coffee maker, and self-checkout kiosk. All of it is primarily based on the honor system so it's open 24/7, accessible to anyone in the building, and convenient to its patrons. Check out a video of it here.

One of the biggest hurdles 365 Retail Markets needs to overcome is convincing people that leaving valuable objects unguarded is a good idea. Turns out that the fears of theft from the MicroMarkets have been overstated. Theft isn't a problem.

'It's not. It just isn't," Hessling says. 'The reason I know is we started out as a RFID (Radio Frequency Identification) company. Every product we sold in our stores had RFID tags on them. In 2008 we sold 1 million products with RFID tags. We were the second or third largest user in the United States behind the Pentagon and Wal-Mart. We did all those things to try and discourage people from stealing. Well, when we took those off we learned that the cost of the theft was less than the cost of the theft deterrent. That's what it comes down to. You don't put it in every location. You just don't. It's not for everybody. It's not for every place."

MicroMarkets often end up in workplaces and offices. Place where everybody knows everybody else and where word can travel fast. In that scenario, more times than not people will work to protect something they value.

'Most people when they use it they see it as a benefit," Hessling says. 'It was an improvement from what they had before. Since it's an improvement they don't want it to go away."

That value creation helped 365 Retail Markets catch an early break with its MicroMarkets technology. Compass Group International, a multi-national corporation, decided to adopt MicroMarkets as part of its growth strategy in 2011. The move solidified 365 Retail Markets' sales for the next 18-24 months. Compass International Group specializes in contract food services and services huge corporations, like Boeing and Bank of America. It's the largest food service firm in the world that has a division that just deals with vending machines. Its embrace of 365 Retail Markets' technology signaled big things to come for the small startup.

'We knew at that point we had to ramp up with people," Hessling says. 'We hired 18 people in December of 2012. We went from small to medium in a day and kept on growing. We really bit the bullet early."

New/Old economy mix

365 Retail Markets oozes new economy startup culture. You see it in its marketing, the bright splashy colors it uses, how it likes to refer to itself as a software company first and foremost. But pigeonholing it is not that simple.

For example, take it's headquarters in Troy. The company occupies a bland office building just off Crooks Road surrounded by a big lawn and an even bigger parking lot. The 24,000-square-foot structure is a combination of offices and light industrial space in the back. Hessling occupies a MadMen-style CEO office with its own personal deck overlooking the lawn.

The 5-year-old company ended up taking it over last year because the space was cost-effective and move-in ready. It gave the company room to grow but more importantly it gave it flexibility for its software engineers and manufacturing laborers to work in their own areas and not disturb each other.

'This is an old economy building for a new economy company," Hessling says. 'We have the typical ping-pong table. That's about it."

It also has a large sign outside advertising open positions. 365 Retail Markets has four of five open jobs at any given time. It advertises them online, through word-of-mouth, and any other way it can attract talent. Even if it means putting an old-school sign out front.

'It's permanent," Hessling says.

365 Retail Markets is growing its staff, fast. The firm currently has a team of 60 employees and an intern. Fifty five of them work out of the headquarters which is near capacity. Those employees include a broad variety of teams. A manufacturing team assembling the kiosks and displays in the back. A software team designing the next generation of the kiosks in the front. There is a call center team squirreled away in a small office overlooking the manufacturing space.

All of these people are working as one larger team to hit its fulfillment goals and also stay ahead of the development curve. To effectively do that Hessling makes sure they use the best technology on the market when it comes to hardware (such as the thumb-print payment system at the kiosks) but also focusing on doing what it can to reinvent the marketplace. That requires striking a tough balance of what to focus on and meeting the staffing demands to get there.

'We're rapidly growing," Hesslng says. 'As the business grows the amount of people we need to fulfill what we already do increases and we're also building new products. Building new products requires different skills that we didn't have before."

Up all night

365 Retail Markets is in a good spot. It's growing rapidly because it's bringing a new product to a market that has been stagnant for generations. Its revenues are soaring. Its staffing levels are spiking. It's getting ready to take the next step in the process of becoming a second-stage company.

It also recently closed a Series A round of venture capital worth $3 million. Plymouth Ventures led the round, which left 365 Retail Markets well capitalized for future growth. The company is also looking at debuting some new products that have the potential of spinning off into their own company.

'We're profitable," Hessling says. 'We have some high-growth products that are in the pipeline that are going into Beta later this year. We have some really promising irons in the fire."

And there are still some things that keep Hessling up at night. He knows that today's dinosaur was yesterday's cool new innovation. He also knows that technology turnover happens much faster today than it did when vending machines first came on the market. So while things like overall market risk and data breeches can be cause for concern for Hessling, he is most afraid of what's out there he doesn't know about yet.

'I don't worry about my competitors," Hessling says. 'I have two or three that are potential competitors. I worry about the 19-year-old kid sitting in his dorm room in Ann Arbor who is coding my demise. That's what keeps me up at night."

Jon Zemke is the Innovation & Jobs New Editor for Metromode and its sister publications Concentrate and Model D. He is also Managing Editor for SEMichiganStartup.com.