Changes in the American workplace, increasing costs and constant competitive pressures from a variety of sources threaten the survival of vending operators who are unable to adapt to shifts in the basic parameters of automatic merchandising. Over the past few years, it has become clear that a new business model is being created. It requires a higher front-end investment, investment in technology, and intense focus on controlling all cost elements.
Operators must provide greater customer service and satisfaction, yet improve their cost efficiency and profitability. There will be no simple formula for putting these steps in place.
Through research and in-the-field knowledge, Automatic Merchandiser magazine has recognized the key areas where the market is shifting, and identified best practices of progressive vending businesses. This "White Paper" highlights the significant changes the vending marktplace must face, emphasizes those areas that operators must scrutinize, and points to facets which will require investment.
The vending industry is at a crossroad. Only those operators who take quick, thoughtful, progressive action will grow in the years ahead.
The Warning Signs
The vending industry has not kept pace with the rate of economic improvement in the U.S., nor has it fared as well as the foodservice industry.
Historically, the vending industry's growth reflected that of the U.S. economy. It was fairly healthy in the middle and late 1990s as the economy surged, then suffered with the fallout of the implosion of the "tech bubble" and the 2001 terrorist attacks. In the post-2001 recovery, Automatic Merchandiser noted that this "matching pace" trend did not continue.
For example, in an Aug. 8, 2005, Wall Street Journal editorial, "The Great American Jobs Machine," the author stated that U.S. payroll employment jumped from 130 million in 2003 to 138 million in the first quarter of 2005 after dropping from 132.5 million in 2001. This, the editorial claimed, marked an end to the "jobless recovery."
Typically, as jobless rates decreased, vending business increased. No longer. Despite having more potential customers in the workplaces of America, vending revenues rose only 1 percent in 2004, according to the Automatic Merchandiser State of the Vending Industry Report. This is significantly below the 5-point increase in commodity food prices and clearly will not cover the more rapid increases in operating costs.
Foodservice industry outpaces vending
Conversely, the U.S. foodservice industry has improved with the nation's growing economy. Sales jumped 5.5 percentage points in 2004, following one-year gains of 4.4 points in 2003 and 3.8 points in 2002, marking steady recovery from the 2001 recession.
It is important to recognize, though, that while the vending industry overall has not enjoyed the economic improvement, the largest vending firms performed better than the smaller firms, though not by a wide margin.
Generally, larger firms are more readily able to invest in human resources, in state-of-the-art equipment and technology that yield greater customer satisfaction and more efficient operations. According to the NAMA Operating Report, companies showing the highest growth rate were those with sales over $10 million. Growth rates were 1.8 percent for companies with sales between $3 million and $10 million.
Sales growth is not in and of itself the measure of success. However, in a growing economy, it is reasonable to expect that a business service industry would rise with the economic tide.
Because that is not occurring throughout the vending market, it's important to understand that larger operators in general have the critical mass or scale that has helped them take advantage of an improving economy.
Not all improvement is in revenue, though. Key changes in internal operations help increase margins and total profitability of top vending operators, providing a greater return as well as opportunity for continued investment.
Return on assets signals weakness
Looking at return on assets, which NAMA, the National Automatic Merchandising Association, deems the best overall measure of financial performance, there was much less variance and there were no trends based on company size. Return on assets ranged from 3.5 percent for companies with $5 million to $10 million to 5.4 percent for companies with $3 million to $5 million. However, the vast majority of the nation's vending operations are believed to generate less than $3 million in revenue annually.
Because the NAMA data represent the "cream of the crop" of operators, these results are not encouraging for the majority of today's vending businesses. In fact, the data show that even the larger companies are not keeping up with the competition from other industries and are not keeping up with the overall growth in the U.S. economy.
While this data can show capability, it cannot isolate whether or not these businesses are progressive. In fact, small vending operations may be better able to more quickly adapt and use technology, and change their business practices, to improve their business position.
Market forces aren't helping the vending operator
In the meantime, the economy is not increasing the number of potential vending customers. While more businesses are being created, companies are employing fewer people. Automatic Merchandiser has documented the declining size of the American workplace for the past several years.
While the vending operator struggles with profitability, competition keeps bringing more pressures to bear on his growth opportunities. According to the National Restaurant Association, the number of restaurant locations in the U.S. is expected to jump from 878,000 in 2004 to 1 million by 2010.
Many of these new foodservice outlets are responding to a major change in the American lifestyle: eating on the run. With more single heads of household, fewer people cooking and fewer traditional family meals, the foodservice industry has targeted its efforts on providing ready-to-eat meals covering all day parts.
Many of the retail food outlets are owned and operated by national chains that have invested large sums of money in marketing and merchandising. They have developed effective environments for enticing time pressed consumers to shop at these establishments.
The QSRs, convenience stores and "G-stores" offer exciting merchandising, they promote their value aggressively, and they offer enhanced conveniences such as cashless purchasing and loyalty rewards programs.
Vending can fight back
The vending industry hasn't been asleep in the face of these rising competitive threats. Equipment manufacturers, software designers and innovative operators have developed their own arsenal of defensive tools.
Key among these are technologies that allow electronic cash audit, line-item tracking, remote machine monitoring, dynamic route scheduling, guaranteed product delivery, energy management, and cashless transactions. These improvements complement more continuing developments, such as more capable and versatile machines.
While these innovations bring new opportunities to the table, they also add cost at a time when the economics of servicing a machine are growing increasingly unfavorable.
Trends all indicate that the cost of doing business is rising, and that sales are not increasing enough for most operators to generate enough profit to sustain their business on a long term.
What needs to be done
Following is an action plan for the vending industry.
1» Raise prices.
It's do or die time.
Sample annual vend price increases based on the Automatic Merchandiser State of the Vending Industry Report are: can beverages — 1.25 percent; bottle beverages —1.57 percent; candy bars — 1.25 percent; gum/mints — 1.125 percent; bag chips — 2 percent; pastry — 1.425 percent.
Operators must identify a gross profit target for every item and establish a plan to achieve it. If the selling price cannot produce the desired profit margin, the operator must consider another product. There might be some products that an operator needs to carry where this is not possible. Allow an exception for these products, but recognize the loss and seek to compensate for it elsewhere.
2» Cut location commissions.
According to the NAMA Operating Ratio Report, the typical operator paid 4.5 percent of sales in commissions in 1999 and 6.3 percent in 2004. This report represents the better managed companies in the industry; performance of NAMA members has traditionally outpaced the industry as a whole, in comparing results of the NAMA operating ratio report and the Automatic Merchandiser State of the Vending Industry Report.
In comparing operating profits to location commissions, it becomes obvious that vending operators are giving up a lot of potential profits to location commissions. Location commissions are a key part of the selling process.
If this 6.3 percent could be recovered and invested in salaries, technology and training, the vending operator would be able to improve efficiencies and deliver a higher level of customer service.
Over the industry's history, operators have taught customers to expect commissions. If customers could be re-educated not to expect them, this line item could be reinvested in more productive areas.
Reducing commissions will require communication with customers. Operators can make the case that providing improved value rests to an extent on lower commissions.
One strategy that every vending operator paying commissions can attempt is: Offer the client a new customer value, such as a specialty coffee machine, cashless transaction, an energy management device, in exchange for less commission.
Operators have to accept the fact that some customers will not accept less commission. There is a percentage of customers that do not view the vending service as a benefit to their employees. When all attempts to educate the customer fail, the vending operator must be willing to walk away from an unprofitable account.
The Automatic Merchandiser editorial advisory board holds the belief that a significant portion of customers can be educated. The bigger challenge is whether the operator community will take the initiative to educate customers.
3» Partner with your customers, but FOR REAL.
"Partnering" is one of the biggest clichés in business circles today. In the vending industry, Automatic Merchandiser estimates that fewer than 1 percent of the operators know what it means, and even fewer actually do it.
For an example of what "partnering" really means, look at Wal-Mart. They tell their "partners," their suppliers, what they will offer them in the way of purchase orders and what they want from them in the way of pricing, information, and hardware and software compatibility.
The investment needed to provide a vending service today requires more versatile equipment, better products, and the ability to monitor what is happening at the location using state-of-the-art management software. We're talking investment here. And investment requires a return if the service is going to continue on an ongoing basis.
The standard vending industry cliché, "If the customer doesn't want my service, he can just tell me to go away," has to be thrown in the trash can.
Historically, vending operators have expected to recover their investment in a location from one to three years. Given the cost of today's equipment and the declining number of consumers in the workplace, these benchmarks need to be reconsidered. Longer-term return on investment will require commitments from the customer. Customer "buy in" is needed. This means a higher level of customer communication will be required on the part of many vending operators.
Successful partnerships with customers will create magnificent new opportunities for operators to improve customer service, but it requires a new way of thinking on the part of many operators. Many operators are not accustomed to sharing account information with anyone. In many cases, this is simply habit. This needs to change.
4» Invest in employee development.
The vending operator must invest in education of himself and his employees. These are related but separate issues.
Employee development includes creating opportunities for career advancement. This includes employee education, and offering competitive compensation.
Employee development also encompasses recruiting employees, a major challenge.
Operators need to set targets for employee turnover. High turnover will sabotage any and all profit improvement initiatives. Operators need to monitor employee turnover constantly and achieve success in reducing it to low double digits.
Operator education includes the ongoing education of the owner/operator and all levels of employees. There are numerous options, including vocational education schools, community colleges, adult education, trade organization sponsored seminars, and the NAMA MSU executive development program.
Operators need to have written plans for: account management; staffing for continuance of service at the existing level and for growth; managing assets; and fundamentals of financial management.
5» Get up to speed on health and nutrition.
The industry continues to battle the health and nutrition issue as the products that are specifically identified as "healthy" are virtually negligible to the vending operator's business. However, the demographic momentum of aging baby boomers and continued media scrutiny on obesity are immovable forces.
A dichotomy exists in the consumer's mind between health consciousness and convenience. "You can't have both." This dichotomy is one of the major challenges the vending industry faces in its quest for growth.
The fast food industry has invested heavily in counteracting this dichotomy for its own customers, but there is little sign that it has transferred to vending.
The vending industry has no choice at this point but to accept this challenge head on. The national association has led the charge with "Balanced For Life." This is a starting point. The industry must wage this battle in full force, or lose sales to fast food and other retail competitors.
With the communication tools presently available, vending operators have the means to fight this battle. Ongoing communication about how vending products fit into healthy lifestyles is the theme that is needed.
6» Get back in the coffee business.
No segment of the vending business has taken a beating as hard as hot beverage vending in recent years, and no part of the business offers as much opportunity for growth over the next several years.
The Automatic Merchandiser State of the Vending Industry Report has indicated consistent declines in coffee sales in recent years, a period during which coffee retailers have reported dramatic growth. Automatic Merchandiser has examined the various factors preventing the vending industry from cashing in on the consumer's new appreciation for coffee, and the time has come for the vending operator to stop thinking about why it can't be done. It can be.
Today's state-of-the-art coffee machines allow vendors to provide excellent coffee to customers in the most convenient manner possible at a price no other venue can match. The obstacles to providing these machines, which cost a lot of money, require a stronger commitment to this service than in the past. These machines offer better products, branded graphics, more diversity, and better quality products than the older machines. If vending operators understand the meaning of the word "partnership," they will provide these machines to their customers and give their customers a level of service never before seen.
Good coffee in the workplace will keep employees from spending 45 minutes going to Starbucks. Coffee suppliers have reams of information they are willing to share with vending operators documenting the potential savings to employees.
The vending operator simply can't wave the white flag in the war to keep the coffee business. The competition is making a mad dash for it like never before, and investing billions of dollars to take it away. The vending operator also needs to realize that when the consumer stops in at the convenience store, coffee shop or QSR for his morning coffee, he's getting his pastry, cookie, candy or breakfast sandwich, too.
7» Become an industry leader.
A successful operator will have to view himself as an industry leader, not a follower, and act accordingly. Ways to do this include:
A» Get involved in trade association activity.
This is necessary for the industry's survival. Vending remains a small industry that is vulnerable to unfair regulation. Fortunately, association involvement pays the operator on an individual level as well. Networking with colleagues is the fastest way to learn about new products and ways of doing things. It also creates education opportunities for owner/operators and employees, which is another "must do" for the industry.
The level of association involvement at all levels has been abominable. Only a minority of operators belong to associations at any level.
An association is only as good as the members that support it. Fortunately for the vending industry, at the present time most existing associations are serious about providing members real benefits. This holds true for the national association.
B»Commit to new technology.
Because technology will play a major role in the vending industry's future, it is incumbent upon all operators to have a plan to incorporate the use of technology. A plan is needed for no other reason but to keep tabs on the changes taking place in technology. There is a lot of overlap in the benefits that different vending technologies provide.
For instance, DEX handheld computers, curbside polling, global positioning systems and electronic locks all provide an "electronic trail" for a route driver. The company that is using one of these technologies therefore does not have to use all of them to gain the benefit of an "electronic trail." Each of these technologies has its own set of benefits.
Technology raises the bar. In order to gain the benefits that technology provides, operators need to invest more money upfront than ever before.
The newer technology requires trial and error to determine a profitable operating model. Historically, operators have waited until the operating model was established before investing in new technology. For credit/debit card readers and remote data monitoring, it will be several years before this happens.
This is an area in which operators should consider positioning as "value added" propositions for customers. They should offer a customer a credit card reader or the opportunity to be able to view machine activity over the Internet in exchange for less commission.
The Hudson report, released by NAMA in 1998 to assess a 15-year industry outlook, states: "Successful technological innovators in the vending and foodservices industry, as in any other industry, must develop an institutional capacity to evaluate the business merits of new technology and to deploy profitable technology fast and efficiently."
The Hudson report also states that telemetry, which refers to the monitoring of machine activity from a remote location, via some form of telemetry, will be commonplace by 2013. A bold claim, to be sure, but don't ignore the fact that the Hudson report has an excellent track record in most of its predictions.
One point to bear in mind about technology is that costs usually decline over time. This has already proven to be true with regard to telemetry, cashless systems and global positioning systems (GPS). GPS has proven especially useful recently as gasoline prices have soared, since these tools allow managers to know not only where vehicles are traveling at all times, but at what speed.
Operators, to succeed long term, must have a plan to incorporate new technology that will make them more efficient and deliver higher customer satisfaction.
The most obvious example is cashless transactions, an area where QSRs and convenience stores are already a few years ahead of vending operators. These retail competitors have found that credit card acceptance speeds service, increases purchases and improves customer satisfaction.
Similarly, the benefits of DEX handhelds and telemetry bring bottom line benefits to vending. They provide full cash accountability, prekitting, dynamic routing, more timely machine sales reports, and improved machine menu analysis.
Vending operators that are faster to incorporate these technologies will be able to use them to their competitive advantage.
To implement these technologies, vending operators need state-of-the-art equipment, which requires capital.
C»Have a plan.
Given the amount of capital, both financial and human, that is needed to succeed in vending, operators need to have a plan. "Seat of the pants" management will not allow operators to have the capital needed to cover investments. Instead, professional financial management is needed.
New operating model, a synopsis
The new business model is all about identifying every cost aspect of a vending operator's business. It requires investment in technology that will provide real-time data to help improve inventory, category management, route efficiency and staff competency. It requires developing customer relations that allow operators to best serve their needs, offering quality products and service at a profitable price.