Independents Say Management Firms Create Inequities

Being a medium-size independent (five to 20 routes) has never been easy, but recent developments involving vending management companies and possible purchasing inequities have squeezed the medium-size independent even more. As a result, many medium-size companies, which have traditionally prided themselves on good service, are seeking help from the established buying cooperatives, but wonder if the benefits they have long received from these organizations will be sufficient.

In the past few years, the competitive pressures have increased to the point that many medium-size companies fear they cannot remain viable. Many envision a future populated exclusively by extra large operations and very small companies. This, they claim, will be a world that will not offer customers the choices they have historically enjoyed and could possibly undermine the vending industry’s reputation for professionalism.

The forces contributing to this scenario have been many years in the making. Rising operating costs, more competition from alternate retail channels and a stagnant customer base have attacked the profitability of all sizes of vending operators. However, medium-size players note that the extra large companies enjoy the benefits of volume purchasing while the very small companies reap savings from reduced overhead.

A MORE UNEVEN PLAYING FIELD?

In recent years, many medium size operators have complained that the playing field has become even more unfair since the largest management company, Best Vendors Inc., was acquired by Compass Group, which owns the largest vending operation, Canteen Vending Services Inc., late in 2003.

This is not the first time that a vending operation and a vending management company have shared ownership. There are several other examples. This case is different, mainly in that the largest vending operation and the largest management company are owned by the same company.

It is also different in that in the Canteen/Best Vendors scenario, the service company is an active player in many of the same markets that the management company serves. This is not the case for all other operator/management company arrangements.

Several operators have claimed that due to its affiliation with Best Vendors, Canteen has been able to entice more independent operations to become Canteen franchisees, thereby further strengthening its market dominance.

VENDOR/MANAGEMENT COMPANY RELATIONS NEVER WERE EASY

Vending operators have long complained that vending management companies do not serve the interest of the vending industry.

Automatic Merchandiser, in querying operators nationwide on the role of management companies, found that some of the issues involving Best Vendors apply to vending management companies in general while others pertain specifically to the Best Vendors/Canteen relationship.

The role that management companies play varies depending on each individual market. The impact on operator competitiveness varies considerably, and there are few generalizations to be made nationwide.

Vending operators have long recognized some of the benefits that management companies offer in addition to the disadvantages. Management firms, by securing contracts with regional and national accounts with multiple locations, can provide a vending operator with many accounts very quickly.

Automatic Merchandiser has profiled several operators over the years who have claimed that management companies helped their business grow quickly. Some also noted that management companies offer a small company their only chance of servicing a national account.

The immediate downside here is that the operator can lose the accounts as quickly as he or she gains them. One operator in a big metropolitan market who was praising management companies 10 years ago has since stopped doing business with them altogether.

NEGATIVES OF MANAGEMENT FIRMS OVERSHADOW POSITIVES

The downsides of management companies have always outnumbered the upsides for most operators. The management company stipulates pricing, commissions, product mix and oftentimes the specific equipment to be installed.

Some operators recognize the fact that management companies have been instrumental in helping to educate customers about the full benefits that vending provides. When Automatic Merchandiser last examined operator/management company relations several years ago, many noted that relations had improved because management companies were doing more to educate customers about vending’s benefits.

Many operators also recognize that the management companies have been helpful in winning price increases with accounts that oftentimes resist it.

What has happened recently, however, is that the bar has risen for operators since customers, now better educated about vending, are interested in newer features, such as remote machine monitoring and cashless capabilities. Management company executives are quick to point out that the big accounts they serve continue to seek more in return from their vending service providers.

TECHNOLOGY RAISES THE BAR

While a minority of vending operators welcome vending management companies’ help in offering these benefits, most feel that these are costly investments that will make it harder for the vending operator to earn a fair profit.

Many vending operators also feel that as more management companies have become established in recent years, competition has increased among management companies, and as a result, management companies are offering new technology to customers as a way to distinguish themselves in the market place. An offering that ultimately the vending operator has to pay for.

All of these issues culminated in the minds of many vending operators last year when Best Vendors sent a notice requesting its operator partners pay 2 percent of their net annual sales. Best Vendors has also been one of the more aggressive management companies seeking technology upgrades in its vending machines.

HAS FAIR PRICING BEEN AFFECTED?

Some operators claimed that it was unfair for a management company to charge a fee that some sublicensees were less able to afford than others. Some felt that it was particularly unfair because those who are more able to afford it are the same companies that are affiliated with Best Vendors: Canteen and its franchisees.

According to Phil Grossman, an attorney for the BVA Coop Inc., also known as Better Vendors Association, a vending buying cooperative, the question is about fair pricing. “It would appear that this (fair pricing) is not the case in that certain vending concerns are able to buy product at a lower cost than we (the independent vendors) can,” Grossman said.

“It appears to me that this is not correct,” Grossman continued. “It is not healthy for the business environment. Ultimately, it is not healthy for the vend customer. The independent companies may be smaller, but they deserve the same level playing field that everybody else does. The need for protection goes unnoticed and it hurts good people.”

Grossman does not believe there is much of an opportunity for an independent vendor or a buying cooperative to correct the problem through litigation. “To start a lawsuit of this magnitude is enormously costly for everyone. However, suppliers who engage in unfair pricing often meet with resistance and lost business from independent operators and buying cooperatives,” he said. “The answer lies in securing stricter enforcement of securing existing antitrust regulations by state and federal agencies charged with the responsibility of this enforcement.”

BUYING COOPERATIVES LOSE MEMBERS BUT ARE STILL STRONG

The buying cooperatives have lost membership in recent years due to the growth in Canteen franchisees since Compass Group acquired Best Vendors. Companies who become Canteen franchisees cannot belong to a buying cooperative since Canteen has its own purchase rebate programs.

It must be kept in mind, however, that the buying cooperatives have overall increased membership significantly over the past several years.

Brian Faley, executive director of the Better Vendors Association (BVA), the oldest and largest buying cooperative (in terms of annual rebates), said BVA lost about 50 members in the last three years, but its membership, at 350, has more than doubled in eight years.

Faley downplayed the competitive impact of vending management companies on his organization’s members. “Many operators don’t think it’s the greatest of business anyway, due to low margins and many small locations,” he said regarding vending management accounts. “It’s a less than clear issue whether it’s a good thing or a bad thing to be losing this (management company) business.”

BUYING COOPERATIVES DISCUSS MERGING

The BVA is currently in talks with the Vendors Purchasing Council, another buying cooperative, on merging the two groups to improve members’ rebate programs, Faley said. He noted that three years ago, the two groups were negotiating with Sodexho Vending Management, another management group, to form a joint purchasing organization, but those negotiations ultimately ended.

Nonetheless, Faley thinks product suppliers need to be concerned about the health of the independent operator. “The health of the industry in large part is going to be based on the independent operator,” he said. “Overall, it’s not a healthy industry.”

One veteran operator who did not want to be named said he has been able to win business from management companies by presenting customers with statements from the management companies that list how much commission they earn. This can take time, the operator said, because it takes time to get the information in the right person’s hands. He said he got a hospital chain to get rid of a management company this way. The process took nearly three years.

PRESSURE ON OPERATORS VARIES

The amount of pressure that independent operators have felt by the recent Best Vendors’ 2 percent fee depends on the amount of business they have under contract with the management company.

A vending operator in Massachusetts who works with Best Vendors said he ignored the 2 percent request and has not felt any repercussions from doing so. He said this might not be the case for operators who have more business under contract with the management company.

Similarly, the operator has not felt pressured to invest more in his Best Vendors accounts, nor has he seen any shifting of Best Vendors’ business to Canteen in his market.

“We did not have enough business to make a difference,” said another vendor who also ignored the 2 percent payment request but did not wish to be identified.

Jim Brinton, president of Evergreen Food Services in Tukwila, Wash., lost a number of Best Vendors accounts to Canteen, but the majority of them were not accounts that he was anxious to keep. He had acquired this business when he purchased another operation, and only a small number of the newly acquired accounts were profitable.

Brinton, unlike some operators interviewed, said Best Vendors actually became better to work with after it was acquired by Compass Group. He said that in order for the Canteen accounts to earn a fair profit for Canteen, Best Vendors gained a better understanding of operators’ needs.

Brinton was among those Best Vendors’ partners to note that the management company has not followed through with its requests that he equip his machines with remote monitoring capability.

Brent Cromer, president of Cromer Food Services Inc., based in Anderson, S.C., said management company accounts are not among the best accounts. He said the vending management companies are usually not worth the trouble needed to work with them. “They’re out of touch with what’s happening in the vending world,” he said of management firms in general.

ONE OPERATOR’S DIFFICULT STORY

A Matter of Taste, based in Van Nuys, Calif., recently lost Best Vendors business that it serviced since 1990, which company owners Joe and Becky Palazzola blame on the Compass Group’s acquisition of Best Vendors.

A Matter of Taste had been servicing several different retail chains for Best Vendors. Shortly after Compass Group bought Best Vendors, A Matter of Taste was told that Canteen would be taking over all of their accounts. The transition began almost immediately, except for seven locations where the store managers had a say as to who serviced their break rooms.

A few years later, A Matter of Taste was told in November 2007 by Best Vendors that they had to be out of the remaining seven locations by the end of November. The store managers did everything in their power to retain A Matter of Taste, but to no avail, the Palazzolas said. They were told the decision was no longer theirs to make.

RELATIONS WITH THE MANAGEMENT FIRM HAD BEEN FINE

Joe and Becky Palazzola described their relationship with Best Vendors as “wonderful” prior to the Compass Group’s acquisition. Even after the acquisition, there was never a problem.

“Best Vendors never had to call us to say this store is not happy, or you need to do this,” Becky Palazzola said. 
“It was fine.”

Joe Palazzola said they had even complied with Best Vendors’ request to equip all machines with DEX reporting capability. “We did all of that,” he said.

“It’s not about quality,” Joe Palazzola said. “What a sad thing for our industry when you get punished for setting the standards too high.”

Another operator who did not want to be identified told a similar story. This operator said he actually paid the 2 percent fee to Best Vendors, only to be almost immediately asked to give his Best Vendors accounts to a local Canteen branch. This vendor said his Best Vendors rep actually told him that his service had been good, but Canteen needed the business.

“As soon as they got that check deposited, they threw me out of their locations,” he said. “It was not a service issue at all, but Canteen here had lost some business.”

Tony McDonald, president and CEO of Best Vendors Inc., said there has been no move to totally replace independent operator partners with Canteen. “We’re not going to do that; we haven’t done that,” he said.

BEST ACQUISITION INFLUENCED ONE DECISION TO JOIN CANTEEN

One operator said he was persuaded to join Canteen’s franchise program as a result of the Best Vendors acquisition. The operator had a lot of Best Vendors managed accounts, and he felt that becoming a Canteen franchisee would help secure this business. He said he was considering becoming a Canteen franchise before the acquisition, but when the acquisition occurred, that sealed his decision.

This operator did not wish to be named for fear of jeopardizing his relations with other management companies.

Vending operators noted that some management companies are better to work with than others.

Some feel that many of the management companies are beginning to burden them with installing new technology. Competition among management companies is fueling this, many operators claim.

“There is a lot of competition among them,” said Todd Elliott, vice president of Tomdra Vending Inc. in Tucson, Ariz. As a result, Elliott said there are more demands being placed on vending operators to deliver on the promises management companies make to customers. “It just pushes the commission up or the cost of the investment in the account,” he said. “It’s a tough scenario.”

MANAGEMENT COMPANIES PROMOTE NEW TECHNOLOGY

Elliott said some management companies are requiring an investment in remote machine monitoring. In those cases, the management company provides the remote monitoring devices, but they deduct the cost of it from his rebate. “It wasn’t (immediately) out of pocket,” Elliott said. “They bought the equipment, but we ended up paying for it.”

In the last two years, VendingMarketWatch.com reported on several vending management companies investing in remote monitoring equipment. The companies were uncertain as to who would eventually foot the bill for this.

“The competition between the management companies is costing the operator,” said a technology provider who did not want to be identified. “They just keep slamming it to the operator.”

Several operators interviewed noted that certain management companies have announced new technology requirements for certain customers, but for the most part, they have not enforced these directives. One reason is that management companies do not have the clout to enforce such mandates in all their locations since their operator partners are oftentimes limited, especially in rural markets.

“They are promising these big clients stuff that they can’t deliver,” said the owner of a large regional company who did not want to be named. “The vendor certainly doesn’t win.”

In addition, the operator said, some accounts are playing management companies against each other, to the detriment of the vending operator. “The management company has to inform the buyer about the constant price increases we’re getting from our suppliers,” he said. He said some management companies give him the freedom to seek his own pricing from clients.

UNREASONABLE REQUESTS DRIVE OPERATORS AWAY

This operator was outspoken about the fact that in general, management companies allow for commissions that are unreasonable. Some commissions are in excess of 30 percent of net sales. “This is millions of dollars in business,” he said. “There are vendors walking away from it.”

He said Best Vendors did not steer its business in his area to Canteen affiliates, and he noted that it would not make sense for them to do this. He said management companies need to have more than one company in a market to work with since all providers eventually encounter problems with customers.

Other operators interviewed shared the same view, including some who are not affiliated with Canteen in any way.

Nevertheless, many independents are concerned. “Unless something happens, the small operator can’t make it,” said another operator who did not want his name used.

BEST VENDORS INC.: WE’RE PAVING NEW GROUND

Tony McDonald, president and CEO of Best Vendors Inc., the nation’s largest vending management company, believes that his company is playing an important role in working with operator partners and customers to introduce new technology to vending.

McDonald noted that his company has formed relationships with numerous providers of remote data monitoring and cashless transaction systems, and is working to introduce these new benefits to the market place.

“It’s progressing,” he said. He further noted that because the introduction of this technology in a lot of accounts is a new endeavor, they have not determined the best formula for allocating cost among the different parties: Best Vendors, the customer and the vending operator. He noted that Best Vendors has made a substantial investment already.

“We’ve taken a very balanced and friendly approach to the introduction of the technology,” he said. “The introduction and implementation of technology needs to be done correctly. We, as an industry, are not there yet. The cost of the technology in the vending industry needs to be allocated and it needs to be balanced. It’s an exciting area, but it’s a real challenge.”

McDonald is the first to recognize that the bar has been raised on the vending industry in general. This is one reason that his company has pared its operator partners, although this is a process that began nearly 20 years ago.

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