Algramo: The Value-add Vending Machine

How a Chilean startup is eliminating the “40 % poverty tax” on food

 

Photo sourced from fastcompany.com
Photo sourced from fastcompany.com

Background

Algramo, which means “by the gram” in Spanish, is a startup in Chile that is taking Latin America by storm due to its innovative vending machines which sell non-perishable staples such as rice, beans & detergent by the gram. Algramo solves a pressing need in rural areas of Chile and Colombia, where some of the most impoverished citizens are suffering from what CEO José Manuel Moller calls a “poverty tax”. According to Moller’s pitch video[i] customers in rural areas often can’t afford to buy in bulk, and are left paying a “40% tax” for the smaller food packages they need in order to feed their families. To solve this need, Algramo, which has won numerous prizes and accolades including a spot on Fastcompany’s list of  “most innovative companies of 2015”[ii] has installed over 350 of its vending machines in local “almacéns” (similar to bodegas) in rural areas serving over 44,000 people. Algramo captures value by leveraging their triple impact business model, while effectively aligning their operations to guarantee that families get the lowest price on the food staples they need.[iii]

 

Business Model: The Triple Play

Algramo creates and captures value in three distinct ways:

1) Reducing prices by 30-40% for end consumers on key food staples

2) Supporting almacén owners through trainings and by compensating them financially; they split profits 50-50 with owners and cover the cost of installation of the vending machines

3) Protecting the environment by reducing food package waste: Algramo customers use recyclable containers to collect food items they purchase from vending machines.[iv]

Screen Shot 2015-12-08 at 7.18.55 PM

1)Algramo vending machine helps 120 families and saves 2kilos of trash/month/family

Photo sourced from algramo.com

Aligning Business and Operating Models

Relationships with Suppliers

Algramo is able to reduce the end price (between 30-40%) that consumers pay for food staples by leveraging their operating model. Algramo works directly with suppliers and cut out costs associated with the the middle man (see image below) including packaging & marketing. Algramo is able to transfer these cost savings directly to the consumer. Additionally, as Algramo buys in bulk directly from suppliers, it has considerable bargaining power and can further reduce cost for end consumers.[iv]

Screen Shot 2015-12-08 at 7.50.24 PM

Photo sourced from Algramo.com

Translations provided by author

Limited SKUs

Another way Algramo cuts costs is by providing a limited number of SKUs. Algramo doesn’t seek to provide every food item to everybody, instead it focuses on inelastic food products that rural consumers need. Additionally, Algramo only carries non-perishable SKUs which eliminates the risk that inventory will expire if there is a reduction in demand or if they over purchase from suppliers.[iv]

Screen Shot 2015-12-08 at 6.48.14 PM

Photo sourced from Algramo.com

Competitive Advantages from Operating Model

Relationships with Almacéns

In most rural areas in Chile & Colombia there are few supermarkets and the primary way to purchase food is through almacéns.[ii] In addition to being a store, almacéns also serve as one of the key social centers that bring people together. Algramo provides quantifiable value to almacén owners by installing the vending machines for free and by splitting margins with shopkeepers. In fact, according to an article in El Definido, shopkeepers earn twice the margins on grains sold through the Algramo vending machines as they do on competing products.[v] By creating value for the almacén shopkeepers and establishing close ties with local communities, Algramo has effectively increased barriers to entry by limiting competitor’s ability put their products in the almacéns. If a competitor is unable to sell through almacén it’s very unlikely consumers will come into contact with their products.

Simple & Flexible in house design

Algramo has developed a proprietary vending machine which is able to be modified to accommodate a variety of different products based on the customer demand for certain products informed by the almacén shopkeepers. For example, recent customer feedback from these shopkeepers led to the inclusion of sugar as a product in the vending machines; due to the flexibility of  Algramo’s proprietary vending machines, Algramo was able to quickly get this product into the market without having to make large modifications to its vending machines currently in the field.[iv]

 

Conclusion

Algramo’s strong value proposition has led to rapid expansion for the business; Algramo is expected to double the number of vending machines and reach profit breakeven by the end of the year.­­­[iii] Algramo is an effective example of how a social enterprise is able to align their business and operating models to provide greater good to the end consumer.­­­

 

 

[i] https://www.indiegogo.com/projects/the-venture-algramo-chile#/

[ii] http://www.fastcompany.com/3039604/most-innovative-companies-2015/algramo

[iii] http://www.economiaynegocios.cl/noticias/noticias.asp?id=169085

[iv] http://algramo.com/

[v]http://www.eldefinido.cl/actualidad/lideres/1136/Dispensadoras_Algramo_El_ahorro_de_los_clientes_debe_ser_mayor_a_nuestra_ganancia/

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4 thoughts on “Algramo: The Value-add Vending Machine

  1. Remy,

    Very interesting article. It seems a bit crazy that there is a 40% savings on such basic and generic staples just through the process of bulk breaking; I cannot believe that there has not been a store or some sort of business which previously purchased in bulk and then was able to sell it to people at lower prices than the smaller package vendors. Seems like Algramo found pretty good low-hanging fruit to go after and has really provided value both for itself and for its customers, although given its almost non-profit like mission statement, would be curious to see what the actual unit level economics are on an individual vending machine – I have to imagine that the payback period on these vending machines is pretty long given the profit-sharing structure and the low-cost of the goods the vending machine is dispensing.

    The other part of the cost savings strategy seems to be cutting out the distributors in the middle. As we learned, you can cut out people but not functionality in the “place” strategy of the business. Would be curious what they expect to do as the business continues to scale and the machines become more distributed. Part of the original value of the distributors is to be able to distribute these goods to all the small local stores and a lot of different locations. Does Algramo expect to scale its “vending machine fillers” as the business itself scales, especially as locales become more distributed can imagine this becoming expensive and adding a lot incremental cost to the business?

  2. Remy I really enjoyed reading your post. I literally took me back to my summers in mexico where all the small stores had raw inventory stocked and you could buy by the pound. Each of these small business owners would drive out once a month to the larger distributors to buy in bulk for their personal stores. Algramo has found a way to bargain a significant price reduction for all the small store owners as a collective entity. I can truly see the value captured for both the store owners and the end purchasers. Technology has really innovated the experience for the end users improving and enhancing the delivery of a very basic goods.

  3. Great read, Remy!

    I think this is a brilliant model which can widely be scaled and implemented around the world. I think Algramo creates a lot of value for it’s suppliers as well and this could be used as as a strong selling point for entering new markets.

  4. Hey Remy, I really love the business model – the company provides a lot of value to merchants and consumers. I am impressed with the business’ growth. How will they scale to the rest of latin america with limited infrastructure?

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