Wake Up Vending, Part 1

At the time of this writing, fourth-quarter economic performance was uncertain, but the economy was moving in the right direction. Despite the ominous developments that occurred in the fall of 2005 - hurricanes, $70-a-barrell oil and early signs of inflation - the nation’s productivity posted a 3.8 percent gain in gross domestic product in the third quarter. Good news for the economy,

Wall Street hailed. Yet vending operators were less than thrilled.

The “Wake Up Vending” article in the November Automatic Merchandiser addressed the disparity that had become evident in 2004 between the nation’s overall economic health and the vending industry’s lack of it. The current post-9/11 situation stands in marked contrast to the last prosperity period, the “tech boom” of the ’90s. In 1998 and 1999, vending operators’ pretax profits exceeded 8 percent of sales, as indicated in the chart on page 26.

In examining the forces affecting the vending industry’s performance, Automatic Merchandiser, in its “White Paper for Vending” concluded that the vending industry has entered a new phase in its development.

Industry faces new challenges

For the first time in history, the vending industry has not been able to share in the general economy’s prosperity, as reported in the Automatic Merchandiser State of the Vending Industry Report. Automatic Merchandiser identified the key reasons for this as: ongoing work site downsizing, continued outsourcing by large employers, continued growth of smaller work sites, and rising competition from other retail channels.

In response to this alarming situation, Automatic Merchandiser recommended a 7-point action plan in its “White Paper for Vending,” shown on page 26.

Automatic Merchandiser believes that new technology holds the key to allowing the vending industry to meet its unique challenges and realize new heights. Technology, however, creates a “chicken and egg” scenario.

While technology creates new efficiencies to improve profitability, it requires an upfront capital investment that also has the potential to reduce profitability. The key technologies identified include improved information management, more capable and versatile equipment, and more versatile payment options.

As trends identified in November’s article continued in 2006, Automatic Merchandiser begins a series of articles expanding on the seven action plan steps. This month’s article will address raising prices and reducing commissions, which are usually interdependent.

Profitability factors are interdependent

In researching these two issues, Automatic Merchandiser discovered that none of the steps can be implemented without consideration of other steps. In attempting to raise prices and reduce commissions, for instance, operators will also realize the need to partner with customers and invest in employee development.

Hence, this “Wake Up Vending” series offers operators a guide to operate successfully in a changing industry.

As noted in November, the cost of operating is rising faster than both sales and vendors’ retail price points. These factors weigh heavily on operator profits.

In comparing the cost of goods sold in the late ’90s to two recent fiscal years, a relationship can be found between cost of goods sold and operating profit, as indicated in the chart on page 26. Cost of goods sold as a percent of sales increased by more than 6 percentage points from the late ’90s to 2003 and 2004, which is about equal to the percentage point drop in operating profit.

Retail Vend prices aren’t keeping up with inflation

Another disturbing trend is that retail vending prices have not kept pace with inflation in recent years. The Automatic Merchandiser State of the Vending Industry Report for 2005, the most recent data available, indicated average annual price increases in fiscal 2004 were below 2 percent in most of the largest product categories: can beverages, 1.25 percent; bottle beverages, 1.57 percent; candy bars, 1.25 percent; and pastry, 1.425 percent. While retail price increases on a percentage basis do not usually match whole price gains, Automatic Merchandiser does not believe vending prices are rising fast enough to cover wholesale product increases, not to mention other cost increases operators incurred.