Dollars Versus Percentages

For those of us who have been in the vending industry for many years, we are accustomed to looking at our profit and loss statements and our various costs as a percentage of sales. Remember when we offered can soda for 50 cents, candy for 40 cents, and chips were 25 cents? Even a salad sandwich was 75 cents. Our product cost was roughly 50 percent of the vend price. It was a “rule of thumb.”

We looked at and we still look at our product cost as a percentage of sales. If the candy bar cost us 30 cents, we minimally needed to get 60 cents for a price point back in those days.

The problem is that we cannot just look at percentage as a method of determining our vend price. We need to look at what the market will bear. A customer of mine recently told me, “you can’t take a percentage to the bank.” How true!

INCREASING PRODUCT DOLLAR MARGINS

If our quasi competitors, the convenience stores, can get $2.00 for a cup of coffee or $2.99 for a bag of beef jerky, why can’t we? Take a stroll through a convenience store and look closely at the items they are offering.

In some cases like coffee, our margins are and should be well above 50 percent. In other items, we may be able to get a good price that gives us good dollar margins, but we may not get the 50 percent margin.

We as an industry have had the mentality that people will not buy products from a vending machine if the product is priced over $1.00. This is part of the reason why we have the low profit margins today.

NEW TOOLS ARE AVAILABLE

Technology allows us to satisfy our goal to offer the products and sizes that people want at the price they are willing to pay with the payment method they wish to use, no matter how much cash they have in their pocket at the time. Let me repeat that.

Our goal is to offer our customers the products they wish to buy at the sizes and prices they are willing to pay with the payment method the customer wishes to use at that time.

In other words, a customer should never walk away if they had a desire to purchase a product from our machines.

LOOK AT WHAT THE COMPETITION CHARGES

I took a survey of a couple convenience stores in the Midwest to see what was being sold at various price points, paying particular attention to the snack and beverage categories. Here is what I found.

Beverages:

- Fuze White Tea, 18-ounce - $3.59
- Amp Energy Drink Tall Boy, 16-ounce - $3.00
- Caribou Coffee, 12-ounce - $3.59
- Gold Peak Tea, 16.9-ounce - $2.79
- V-8 Fusion, 12-ounce - $1.79
- V-8 Vegetable Juice, 12-ounce - $1.99

Snacks:

- PowerBar Harvest Whole Grain, 2.29-ounce - $1.99
- Snickers peg bag (bite size), 4.4-ounce - $1.59
- Planters Trail Mix, 6-ounce - $2.59
- Jack Links Beef Jerky, 1.8-ounce - $2.99
- Pearson’s Salted Nut Roll Giant, 3.5-ounce - $1.29
- Nature Valley Granola Bar, 1.5-ounce - $.80

We can sell these items from our vending machines. No longer are we dependent on our customers having the cash to purchase the higher priced items. With the advent of cashless solutions, we can now offer items with higher price points and higher dollar margins.

Even if our margin percentage on some of these items is less than 50 percent, our “dollar” margin may be higher than traditional products. Look at the total “margin capacity” of a machine and determine what you can do to maximize total profit dollars per machine per week.

A combination of traditional 50 to 60 percent range margin products and higher “dollar margin” products will accomplish these goals.

Take a look at this scenario when setting up a planogram. Fill a glassfront beverage machine 8-unit capacity column with a product at $1.25 and a 62.5-cent product cost (50 percent margin).

CONSIDER MACHINE CAPACITY

We would have a capacity sales total of $10 and a capacity dollar margin of $5. Now take the same column and fill it with a different item priced at $2.50 with a $1.50 product cost (40 percent margin). Our capacity sales total for this column is now $20 and our capacity dollar margin is $8 rather than $5, even though our percentage margin is 10 percent less than the margin for the “traditional” product. Now let’s expand this to the entire glassfront beverage machine.

A 360 20-ounce capacity machine filled completely with “traditional” $1.25 items would give us a “dollar sales capacity” of $450 and a “dollar margin” capacity of $225. Compare this scenario to a planogram that would include a shelf of energy drinks, a second shelf of “specialty waters,” a third shelf of mixed products such as iced coffee and high-end teas with the fourth and fifth shelves selling traditional soda and water products.

Our “dollar sales capacity” could be as much as $650 with a “dollar margin” potential of $280, even though our “margin percentage” is less than the planogram with traditional products. In order for this model to be true, we also must assure that we obtain the same amount of unit throughput through the column during the same period of time.

The same comparison can be said for items in a snack machine. By and large, our snack machines are filled with “traditional” candy and chips priced at $1.00 or less and pastry items for around $1.25.

CONSIDER HIGHER PRICED, HIGHER MARGIN PRODUCTS

Consider “expanding” your planogram for your snack machine by offering higher priced, higher dollar margin products such as bagged candy, bagged beef jerky or protein bars that I found for sale at the convenience stores.
A 15-count Snickers candy column priced at 80 cents with a 40 cent margin yields a “dollar margin” of $6.00 for that column.

Now along with the standard Snickers column, add a bagged “bite size” Snickers item priced at $1.75 to the 15-count chip column with a 75-cent “dollar margin” and obtain a yield of $9.00.

Even though the margin percentage is lower, the margin dollars are higher.

WHAT WILL THE MARKET BEAR?

Also, remember to price the product on what the market will bear, not on what the item costs you. If the convenience store sells a product at $3.00 PLUS TAX, then consider pricing the product in your machines at $3.00 INCLUDING TAX or higher.

I have noticed a few operators who have utilized one snack machine for “traditionally priced” items and a second machine or “companion” machine side by side with the first machine selling higher price, higher quantity and higher margin products.

Utilizing a cashless system in this model pretty much guarantees that you will have the proper product at the maximum product quantity the customer desires at the highest price the customer is willing to pay, with the guaranteed purchasing method they wish to use to make the purchase.

Another benefit to this model is that unlike the old days when all can soda or candy was priced the same in a particular machine, the prices are across the board, reducing the need for formal price increases. Simply add new items that provide a higher margin. In these days of reduced margins and reduced sales in our operations, what do you have to lose?

Raising sales is important for operators not only to protect the company’s profitability, but the livelihoods of our key employees, the route drivers. Strategies that make drivers more successful will improve employee retention, which is critical to the company’s long-term health.

Employee turnover is one of our biggest challenges. Our route supervisors are probably spending the majority of their time filling in for route drivers rather than doing “supervisor” duties. Why? Do we really know what a day in the life of a route driver is today?

As an owner of a vending company, you probably did a route many years ago. When was the last time you spent a day with your drivers, riding their route with them, taking the time to ask for their suggestions as to how to make their route more DOLLAR profitable?

LISTEN TO THE ROUTE DRIVERS

An answer you may get back from them is: “My customers wish we could try this new energy drink or the new iced coffee drinks that they currently buy at McDonald’s.”

“I seem to waste time by having to go into my location twice per stop. One to inventory the machine to see what I need and one to fill the machine.”

“I have determined a way in which I can reduce the time it takes me to take my truck inventory.”

I still remember the times I rode with my route people during my operating days. I not only learned from them, but I was able to talk with them in between stops about what was going on in their lives. I would ask them questions such as:

“How’s the family?” “What makes your job difficult?” “Can we work together to come up with ideas to make
your job easier, make you more efficient and make you more money?”

“What do you think we can do to increase the amount of dollars you bring in from your route each week?”

CONSIDER DOLLARS PER EMPLOYEE

Labor is an area of our profit and loss statement which we look at as a percentage of sales. Again, look at dollars spent per employee along with your percentage.

Begin measuring your employee retention rate at the end of each year. What is the average lifespan of employment of an employee at your company? How does it compare to 10 years ago? What goal do you want to set for next year?

In summary, take a look at how your sales dollars and margin dollars come in and how they go out rather than just looking at the percentages on your profit and loss statement each month.

Can you increase margins by offering higher end products? Can you reduce labor dollars and increase route sales dollars by reducing employee turnover, creating more efficient employees making more money for their families and yourself?

The ultimate goal is to improve the company’s profitability. Given the changes taking place in the refreshment services industry today, with consumers more value conscious and competing channels “raising the bar,” the vending industry needs to do a better job of meeting consumer needs.

The traditional methods need to be reconsidered. By taking a few basic steps, you may be surprised how quickly your “dollars” add up.

Traditional Higher dollar margin
  Item 1 Item 2 Item 3 Item 4
Units 360 72 72 72 144
Unit price $1.25 $2.50 $1.75 $2.50 $1.25
Dollar sales $450 $180 $126 $180 $180
Dollar margin $225 $50.40 $50.40 $72 $90
Percent profit 50% 42.70% 42.70% 42.70% 42.70%
Total units 360 ? ? ? ? 360
Total dollar sales $450 ? ? ? ? $666.00
Total dollar margin $225 ? ? ? ? $284.40

 

TALKING POINTS

- Vending operators remain stuck in the past when it comes to pricing strategy by basing prices on gross profit margins.
- Consumption habits for single-serve products favor products that have higher price points.
- Vending operators can increase their profit per column by using more higher priced items.
- Vending operators should consider what the market will bear when establishing prices.
- Introducing higher priced products eliminates the need to formally announce price increases on older items.
- Introducing cashless payment capability improves chances for success with higher priced items.

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