With profit margins being squeezed harder than ever, vending operators have no choice but to consider alternative market segments. One business opportunity that remains largely unfulfilled is the small location, usually defined as having 10 to 50 consumers.
For many years, vending operators and suppliers alike have brainstormed ways to serve small locations profitably, but have mostly come up empty-handed. As machine technology evolves, it creates new possibilities for operating more efficiently, but invariably, it also adds overhead.
Success in the small location remains a puzzle. The pieces to this puzzle include: equipment cost, labor cost, product selection, machine capacity and revenue. A successful combination seems to have always evaded the vending industry.
As a result, the small location opportunity remains the domain of the very small operators who have limited overhead and are content to remain small, and the honor box industry, which can tolerate 30 percent product shrinkage.
In other words, the challenge remains largely unmet. Industry observers estimate well over a million work sites in the U.S. have no refreshment service provider since small vendors and honor box operators only serve a fraction of work sites with 10 to 50 people.
In April of 2004, Automatic Merchandiser reported some signs of progress, thanks to the introduction of electronic machines that make use of preloaded shelves. The key advantage these systems offer is reduced service time. The systems were formally introduced in 2001 and have since undergone several revisions.
Five years later, field tests indicate that operators and manufacturers are gaining a better understanding of the service model that is needed to allow locations to be served profitably with these systems. The three preloaded shelf systems currently in use are the Vista Vend, the Multi-max® Distributed Vending® Systems and the Revolution.
Product suppliers follow progress
Major product suppliers have been following the evolution of the preloaded shelf systems closely and have sponsored some tests in different markets to learn more about the nuances of these new systems.
PepsiCo Foodservice, monitoring the progress of the preloaded cartridge systems closely, believes they offer a solution to meet the need of providing snacks and refreshments to work sites. The company has recently been looking at the nuances of the new system.
Maurice Herod, senior manager for vending strategy at PepsiCo Foodservice, said the company sees the shift to people working in smaller population work sites as an opportunity to develop new ways to meet workplace snacking needs.
Herod said he is aware that the honor box industry has been consolidating and facing challenges of its own in recent years. This, he said, is not due to any lack of demand for the service from the consumer. Instead, the honor box operations have faced scale, image and capitalization challenges. In December 2004, PepsiCo Foodservice held a summit for honor box operators to better understand this segment.
"We want to understand more about that small workplace opportunity," Herod said. "We know there is unmet demand out there and want to ensure we consider all go-to-market strategies to satisfy the consumer."
"The consumer trend tells us there is opportunity in the workplace that has fewer than 100 employees; the challenge becomes how does the operator serve the smaller workplace profitably," he said.
Product suppliers estimate that there are between 2 million and 3 million work sites that have no snack or refreshment options because they fall in the 10- to 50-person range that most traditional vending companies are not interested in.
"We believe that these smaller vending sites represent a tremendous opportunity to get Masterfoods USA products next to the coffee pot and are eager to help our operators grow and build their business," said James English, vice president, vending, Masterfoods USA.
Large vending operators also recognize the opportunity.
Mark Bruno, president of All Seasons Services Inc., the Canton, Mass.-based vending/foodservice operation active throughout the Northeast, agreed that growth-minded companies need to explore new concepts. His company is franchising territories to entrepreneurs and giving them access to some proprietary technology. He thinks that small locations might make a good fit for this model if the right equipment were involved.
"The traditional vending distribution method is very inefficient," observed Bruno.
Operators study preloaded shelf machines
Interest in the electronic preloaded shelf systems has also come from honor box operators, OCS operators and independent full-line vendors.
Honor box operators view the preloaded systems as a way to serve their larger locations which would otherwise experience unusually high shrinkage or lose to a regular vending operator.
OCS operators and full-line vendors have seen these systems as a way to increase sales with minimal extra labor.
Because of their size, the preloaded systems are more versatile and less expensive than traditional vending machines.
The testing has revealed that the balancing act of having the right machine in the right location is extremely delicate. The fact that location populations are oftentimes volatile makes the balancing act easy to wreck.
Honor box industry seeks solutions
Leisure Time Foods Inc., an honor box operation based in Greensboro, N.C., serving four states (the Carolinas, Tennessee and Virginia), has tested the Vista Vend for five years and will soon begin testing the Multi-Max®. Jonathan Childress, co-owner, believes it is important to find a more profitable way to service his accounts because of the challenges facing the traditional honor box operator.
Childress has seen profits squeezed by rising product costs and higher fuel costs. The high shrinkages associated with honor boxes are becoming harder to absorb.
Honor Refreshment Services, based in Bath, Pa., has been testing the Vista Vend since 2002 and is now using the most current model. The company operates 400 Vista Vends in conjunction with another operation, Honor Snack Inc. in Cherry Hill, N.J., noted Dale Wilson, general manager. Wilson thinks the machine has a lot of potential. He gives Newco, which makes the Vista Vend, high marks for responding to his needs and suggestions.
Preloaded machine allows higher ticket items
Wilson said the Vista Vend is more profitable for him than the traditional honor box, mainly because there is no shrinkage. This has allowed him to use some higher costing items, such as Pop-tarts, that he would otherwise not have used due to the shrink potential.
Another key benefit is that it takes the driver two or three minutes to service it. "This machine has been designed from a variety of standpoints," Wilson said.
The Vista Vend doesn't carry as much variety or capacity as an honor box, Wilson noted, but the elimination of shrinkage has more than made up for it. Machine collections average $18 to $25 every two weeks. "It has not compromised sales or profitability," he said.
The latest version allows for multipricing, a benefit that Wilson has not yet made use of, but expects that he will.
Wilson also has high hopes for the latest software the system uses. He anticipates servicing the machines with handhelds provided by Newco. It will be possible, he said, to change prices using a handheld, as well as transfer transaction data from the machines to the main computer.
Not all honor box operators are convinced that the preloaded machines are the answer.
Bob Herr, owner of Breakaway Snacks Inc., an honor box operator in Lancaster, Pa., said he chose to absorb the most recent candy cost increase after raising prices about a year ago. Like many big honor box operators, he has a few regular vending routes to service the accounts that outgrow the honor box. Herr would prefer to place a traditional glassfront snack machine and service it less frequently, even though the machine investment is higher. He believes he can recover the higher equipment investment more easily than the cost of having more frequent service.
Full-line operators have mixed views
Full-line operators who have tested the preloaded systems have mixed views.
RE Services, a Canteen franchise based in Lafayette, Ga., tested five Vista Vends on its regular vending routes two years ago, noted Stan Ledbetter, president. The sales did not justify continuing with these machines.
Ledbetter said the machines will make better sense on his newly introduced OCS routes, providing they are able to make room on the OCS trucks by prekitting their OCS deliveries. "Once we get into prekitting, that model should work," Ledbetter said.
Another full-line vendor who tested Vista Vends on his OCS routes reported a similar experience. The operator, who wished to remain unnamed, said the machines took in an average of $26.50 and were serviced every two weeks. The company calculated it needed to take in double that to cover the costs of the loading and the driver commissions.
These two operators, it should be noted, did not use the latest version of the Vista Vend machine, nor did they use the prepaid card which the company is in the process of introducing.
Treasure Valley Coffee Inc., based in Boise, Idaho, plans to introduce Vista Vends with prepaid cards to its OCS routes on a cooperative service basis. Tom Boyer, owner, tried servicing units without cards on his vending routes. The $35 collection every two weeks wasn't enough to justify the investment, he said.
But Boyer, who operates vending, OCS, water service and is a roaster, believes that the prepaid card will be a major benefit because it eliminates the problem of not having enough change.
"I see a huge potential in it," he said. "We can do it on the coffee side where we're in there on a regular basis."
Prepaid card creates a new opportunity
Boyer said he believes his locations would be willing to pay a $15 monthly rental fee for the machine in addition to paying for the product.
Because the systems don't give change, the card allows the customer to maintain a credit and reuse it as needed. The systems allow the customers to use cash to load the cards.
"The prepaid card feature is proving to be very popular," agreed Tom Maddock, who operates Superior Office Snacks of Nebraska, Inc. in Omaha. Maddock, his brother Mike, who operates Superior Office Snacks of Olathe, Kan., and Owen Larson, a former honor box operator, are partners in the Revolution machine, which they plan to sell to other operators. The partners have formed a company called Clear Choice International to sell the Revolution machine.
Maddock said the introduction of prepaid cards resulted in 20 percent more sales. He also noted that some product manufacturers have sponsored cards in exchange for having their logos on the cards.
The Multi-max® Twin Win system is targeted to a slightly larger account than the Vista Vend — the over-25-person account. The Twin Win, as its name implies, is a set of machines, one snack and one soda.
Multi-max® changes its focus
Bert Cortez, operations manager for Multi-max®, said the company has decided to focus on selling the system to somewhat larger operators than initially planned because of the investment needed. The company operated some of its own routes to learn more about the support that an operator needs to succeed.
"After becoming an operator, we realized there were a lot of things necessary in the software," Cortez said.
The largest Multi-max® operator, Corporate Refreshment Services LLC, has placed more than 200 machines in San Diego, Calif., in one year. Owner Mark Miller, a former software consultant, began with five machines. Miller upgraded the system's software so that it is now possible to download the transaction data on a chip-imbedded smart card and upload it to a personal computer.
Dedicated operator finds a willing customer base
Miller initially spent one day a week finding locations, and in a few months, had 20 accounts. He then hired a full-time salesman, a driver and a packer, and rented a 2,500-square-foot operating facility. In 10 months, he had 180 locations.
Miller has found that most locations with 20 to 100 people are less than satisfied with their current vending service. Those with honor boxes feel the variety is insufficient in an honor box, while those with vending machines are dissatisfied with service frequency.
Miller services his machine every eight days on average.
He also provides "money cards" for the location. Each card is loaded with $1.00, which serves as a gift for new locations. He typically recovers 80 percent of this, however, since there is usually 80 cents left on the cards at all times. The cost of the card has been covered by his Pepsi Cola bottler.
While the machine does not give change, it accepts up to $20 bills. "It [the card] allows us to capture the sales if people want to use a larger bill," Miller said.
The data from the cards allows the software to determine the most profitable product mix, Miller said. "It looks at what was sold globally, what has sold at that location and what the profit margins are," he said. He can also input special requests.
Bar codes tag paper order to its location
A paper order indicates which location the menu is for. The packer then knows which machine gets which menu. The paper order and the machine are both given a bar code, making it possible to know which order goes with which machine by scanning the bar codes. The software determines the next day's route schedule.
Each location has two to four Multi-max® machines. The driver currently services 20 to 24 stops per day. This will increase to 30 per day once a second driver is added, Miller said.
Each location does an average $39 per eight business days.
Miller calculated that on average, each account requires six minutes for packing cassettes and 10 minutes for service.
The optimum service schedule is determined by analyzing daily sales. Miller noted that some locations have higher sales on the weekend than during the week. The system also adjusts for seasonal variances.
Miller said his business will become profitable when he reaches the 250 machine mark.
How long it takes to recover the investment will depend on how large the company wants to grow. His company, with four employees (two drivers, a packer and a salesman), has had to invest $7,000 per month to add 20 to 25 locations per month. He pays virtually no location commission.
Miller noted that he found it does not pay to invest in direct mail or telemarketing. On average, he invests $175 to $185 to gain a location.
Operators and preloaded shelf machine manufacturers alike noted that product manufacturer support could help more operators tap the small location market.
Jason College, national sales manager for Vista Vend, a Newco company, said he is trying to arrange a product rebate program for Vista Vend operators.
Steve Warech, who operates Honor Snack Inc. in Cherry Hill, N.J., has been working with the Vista Vend from the beginning and believes the system has improved with each new version. Warech's own investment will depend on how much support the product manufacturers will provide him.
The journey that these new systems launched five years ago has taken longer than anyone expected, but the reasons are understandable. There has never been a successful model for servicing small work sites that could be used for a large geographic area.
Successful business models slowly emerge
The testing over the last five years has revealed that the business model will make use of specific metrics and will require a large number of locations to be profitable. The tests also indicate that specialized software and prepaid cards will prove highly beneficial.
One question no one can answer to date is the degree to which existing vending and coffee service operators will participate in this emerging segment. But one fact no one will dispute at present is that a major market exists for small location vending.
