Retailers betting on honor system to streamline checkout

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In the race to make shopping as easy as possible, a growing group of companies has turned to a strategy that seems impossible in our security-saturated world: the honor system.

From Russia to Japan to the U.S., retailers are betting on the good side of human nature. In exchange for being able to grab an item and walk out, shoppers are relied on to be honest and pay—much like an unmanned roadside produce stand. So far, theft rates are low, which means these companies have hit on a way to offer a cashier-less experience similar to Amazon.com Inc.’s Go technology, but without the big expense of cameras, sensors and software.

“Our answer to Amazon Go is a store based on trust,” said Andrey Krivenko, founder and chief executive officer of Vkusvill, Russia’s fastest-growing grocery chain, which started opening what it calls “micro markets” in Moscow office buildings last year. “People scan everything themselves and, in our already sizable experience, there’s virtually no theft.”

Across the globe in downtown New York, beverage-maker Iris Nova sells $10 bottles of brands like Dirty Lemon in a small store in the bottom of a building that doesn’t have employees or a cash register. Customers are trusted to use their phones to pay for drinks via text message. The space has visible security cameras, as well as mirrors that may subconsciously push visitors to pay because they don’t want to see themselves stealing—although the company says the mirrors are purely for aesthetics.

Such a setup works because “you want to show yourself you’re a good person,” according to Kelly Goldsmith, an associate professor of marketing at Vanderbilt University’s Owen Graduate School of Management, describing it as “self-signaling.”

The Iris Nova location has a theft rate below 5%, according to founder and CEO Zak Normandin. Many retailers have rates of stealing, or what the industry calls shrink, of about 2%, but they also pay for deterrents like security systems and employees.

“People know it’s not right to take things that aren’t yours,” said Normandin, who plans to open similar stores in Los Angeles, Chicago and Miami. “When you give consumers an easy way to do that, people are going to choose the right thing.”

In Japan, Ezaki Glico Co. has also made a business out of selling on the honor system. The company places snacks such as Pocky and Pretz biscuit sticks in drawers, shelves, and sometimes the office fridge. Those who want to indulge simply drop a coin in a container. Glico says it’s installed more than 100,000 of these units since 2002 and has a 95% recovery rate on payment.

That may not come as a huge surprise in Japan, where social harmony is prized and crime rates are low, but the same phenomenon is playing out elsewhere.

In Moscow, Vkusvill’s micro markets are similar, but customers pay using a credit-card machine after selecting snacks, ready-to-eat meals and from fridges and shelves on the office floor.

The Russian company launched the concept last December as a supplement to the grocery stores it has run since 2012 in residential neighborhoods. Vkusvill, part-owned by private equity investor Michael Calvey’s Baring Vostok Capital Partners, now has more than 160 of the honor-system stations in offices housing companies such as Alibaba Group Holding Ltd., Procter & Gamble Co., Sberbank PJSC and SAP SE.

“It’s hard to imagine they don’t get robbed blind,” said Nathan Hunt, the head of Ronald A. Chisholm Ltd.’s Moscow office, who has bought food at a Vkusvill micro market in a skyscraper in the capital. “But the convenience factor is great.”

Vkusvill is also developing unmanned shops to roll out to the general public that will involve more technology like facial recognition to increase security, Krivenko said.

Selling based on trust could be hard to expand to general retail environments, said Ilia Filimonov, who runs DC Daily, a cashier-less food service in Moscow that uses sensors and other technology to enforce payment. The idea works best in offices, where employees can easily afford to pay and feel like they’re part of a community.

Another limiting factor is that such shops are best-suited to non-perishables. Higher-margin fresh food is difficult to maintain because it spoils without regular human intervention. That’s one reason why cashier-less stores from companies like JD.com Inc and BingoBox that sprouted in China over the past few years shuttered as the economy slowed.

There’s also the danger of the cool factor wearing off. Jack Irv, 24, said he came back to the Iris Nova location, which is branded The Drug Store, for a fifth time simply for the novelty of it.

“People like new things,” said Goldsmith, the marketing professor. “It’s becoming increasingly difficult to break through to consumers. So you have to get increasingly creative in this crowded space.”

Bloomberg News