There's nothing like flying for the first time since the pandemic started, especially with a surge in a new variant happening at the same time. Despite the uneasiness I had about some of my traveling, my trip, by sheer coincidence, led to the location of Build-a-Bear Workshop's first-ever Bear ATM as I landed in Terminal 4 of the JFK Airport. Because this ATM opened under two months ago and Build-a-Bear has not given specifics on it yet, this coincidence of flying with Delta made me the first person covering the company to be in a position to give details on what can be publicly ascertained on this partnership between Build-a-Bear and Hudson. From what I could gather, this endeavor seems to be a capital-light method that can materially expand both the addressable market and profitability of the company.
An Expanding Use Case
For context, my visit to this ATM was around 8:30pm on a Tuesday, as I had just completed a cross-country flight from Las Vegas, and this will matter for discussing some projections later. When I first got to the ATM, the design popped out to me. The color scheme fits well with the blue lighting around the ATMs, and it dedicated the most space to showing off inventory out of the five ATMs at the automated retail space (in part because it was the only machine solely dedicated to one company). I'm also a fan of the general decision to have these machines be touchscreen to select items rather than punching in a code because it allows for greater customization as well as better optionality to add multiple items in a single purchase. The SKUs were more limited than a traditional store due to the drastically limited space that an ATM provides, but the intent of the items in the machine is a different use case than the stores as well. While the in-store use case is the experience around making a "furry friend", the ATM seeks to capitalize on impulse purchases for generalized gifting. The advertising on the ATM even says "Give a Gift With <3". This in turn leads the products offered to be heavily skewed to the geographic location of the machine, New York City. About half of the accessory options were NYC related, and many of the bears themselves were designed for this purpose, from the "Big Apple" bear to the "Statue of Liberty" bear, and even a custom New York Giants bear (though that one has to be upset after this season). Notably, there are no third-party partnered product options, such as Pokémon, Star Wars, Animal Crossing, etc. available, it's all NYC or generalized offerings. The intent of this seems to be honing in on impulse purchases related to visiting New York itself, making the purchase something to remember a trip by or to give to someone that didn't go without encroaching on the use case of the rest of the brand.
Financial Impacts
While the broader usage of region-specific bears and accessories is a conversation of its own due to its nationwide applications, (I've seen them actively doing this in Las Vegas as well), I wanted to give some color on the potential financial implications of the pilot program of the Bear ATM, and potential future impacts to the company if it expands. While Build-a-Bear and Hudson have both not made comments beyond saying they are pleased with the results to date, being able to visit the ATM in person and see sales volume has allowed me to create a very rough model of what potential daily and annual sales are, as well as EBITDA. To be clear, this is without knowledge of what the terms of the partnership with Hudson are. I assume the relationship is Build-a-Bear supplies the bears for Hudson to put in the machine, with Hudson also responsible for maintenance. What I am less certain about is Hudson's compensation. I believe it to be either a fixed payment or royalties on the sales generated by the machine. However, because of the very capital-light deployment of these machines compared to opening a full store as well as lower variable costs due to far less staffing requirements, I believe that even after Hudson's cut that Build-a-Bear is achieving higher margins on sales from this machine than they do from a traditional store.
To break down how I made a model for this ATM, I'll list all of my assumptions below
There is one restock each day
There are 12 transactions per day
average dollars per transaction is $54
EBITDA margin on ATM sales is 20%
The assumption on restock timing is the one I know least about, but for the sake of convenience, I assume this is once a day in the dead of night. Transactions per day are based on what I saw at the machine and somewhat tied to restock timing. For clarity, each slot in the machine can hold three bears and a minimum of five accessories. At the time I was at the machine, around 8:30pm, there were 10 bears and a minimum of 15 accessories sold from the machine. From this, I believe there to be a transaction roughly once every two hours during the day, meaning 12 bears sold per day. The average dollars per transaction is taken from the company average, and with it appearing that there is more than one accessory sold for each bear sold, I believe this to be roughly accurate here as well. Lastly, the EBITDA margin of 20% is taken as a premium to the 14.6% YTD EBITDA margin for the company. While the ATM will not have the same depreciation contributions as stores, I believe that the lack of staffing costs and overhead makes this more than reasonable, especially considering that full-year 2021 EBITDA margins for the company will likely be over 15%, making this estimate possibly conservative. With these considerations, the estimated daily and annual sales, as well as annual EBITDA for this machine, is shown in the following image.
The initial assumption that would be made is that the daily sales and annual EBITDA from this location are very small and not worthwhile. Doing so would ignore the fine details, however. The average corporate-owned location is on pace to do around $1.1 million in sales this year, including e-commerce, which is over 20% of total sales. relative to in-person transactions, an unstaffed ATM can generate over 25% of the in-person sales of a fully-staffed store. Furthermore, the returns on capital for this pilot are undoubtedly high. The startup costs on a machine are far lower than those of a full-store, and incremental costs are also materially lower due to the lack of relative overhead and staffing needs. If you assume that the machine costs Build-a-Bear $75,000, it would take under two years to have that cash back. From a net present value perspective that makes these ATMs extremely attractive.
Opportunity Analysis
What's also attractive about these ATMs is the opportunity to scale them. The United States has about 150 international airports. If you had these ATMs in just 25 of them with the same average numbers, you would be looking at an annual sales increase of $5.913 million. While this is just 1.46% of what I project 2021 revenue to be, the impacts of this are heightened by the better margins. 25 ATMs in this scenario would generate an annual EBITDA of $1.182 million, or 1.81% of what I estimate 2021 EBITDA to be. While not a game-changer on their own, these would be highly profitable and require minimal upfront and continued cash requirements, making them an item I believe worth pursuing. The success of this pilot program and possible expansion is something I view as important to Build-a-Bear's future success as a company. They have to both continue expanding their use case and evolve their physical position to match where people are. While 98% of current locations are profitable, that doesn't mean they always will be, and the company has to be forward-looking in this regard. If my assumptions of revenue and profits are anywhere near accurate, then these machines enable a real opportunity to achieve both the objectives I listed. why does a machine like this have to be limited to just airports? The answer is that it doesn't. There are a ton of places where such a machine could be placed. Amusement parks, hotels, tourist attractions, anywhere that has high foot traffic and is a location to capitalize on gifting and impulse purchases is a place for such a concept. While I believe the company still has substantial work to do to fully reposition its physical footprint, this is definitely a step in the right direction.