On recent years, it has been difficult to find the next big opportunity in vending. At my company, the management team reviews our financial statements on a monthly basis. We are constantly analyzing our key revenue and expense accounts to look for ways where we can improve our organization.
Expense items such as health insurance, product costs, commissions and vehicle expenses, gas in particular, are growing at accelerated rates.
Exacerbating the problem is that we are seeing our bread-and-butter accounts, blue-collar manufacturing, head overseas. What's a vending operator to do?
There are various growth opportunities to consider. One of the simplest has always been to raise prices. In order to do this without jeopardizing unit sales, however, it is usually necessary to provide different products to justify higher price points.
Large-size candy?
Enter the candy companies. The major candy manufacturers are pitching to the vending operator what they say is the best revenue opportunity since large-size snacks and 20-ounce beverages. Their pitch with their large-size candy is very similar to what we heard previously from the bottlers and salty snack manufacturers when they upsized.
I first heard the bottler's presentation when I was a district manager for Canteen in 1997. Coke shared with me a "win-win-win" scenario that would improve my bottom line. The proposition was this:
1) "Win" number one went to the customer. He would receive 20 ounces of Coke's product at a lower per ounce cost than if he had bought a 12-ounce version of the same product.
2) "Win" number two went to the operator. We would hurt on gross margin, but gross dollars "to the bank" would increase.
3) "Win" number three was to the bottler. Margins improved as they sold the 20-ounce products instead of the 12-ounce counterparts.
View Chart A: Turn requirements, traditional versus large-size candy
LSS snacks follows suit
I next encountered the size trade-up proposition as a territory sales manager for Frito-Lay. This time I was on the other side of the desk.
Frito-Lay did not push the third element of the "win-win-win" scenario outlined above, but they required me to share with my customers the other two positive aspects of the trade-up.
Will converting to large-size candy drive our top line? Yes, but there are some considerations to keep in mind.
Two categories of considerations that each operator needs to cover before making the conversion are as follows. The first is non-financial.
You need to be committed to succeed
You must make the decision that you are committed to the conversion. Don't offer the smaller product next to the larger product. As an operator, I saw what happened when I converted to 20-ounce bottles. If I left the 12-ounce products in the account, the success of the conversion was limited.
As a sales manager, I also saw what happened when a regular size was left in the snack machines next to the larger size version. Customers would stay with the smaller bag instead of trading up.
We see this marketing tactic everywhere.
What about that 8-ounce cup of pop that you used to get at McDonald's? Where did it go? It's no longer being offered, is it? Ever wonder why? It's called trade-up marketing.
I also see it in my local market where the dominant convenience store chain, QT, no longer offers a 12-ounce coffee. Do I still buy QT coffee? Sure, but I buy 20 ounces, not 12.
Consider the competition
If we all moved as one body to the larger sizes, we wouldn't have to worry about losing sales. Unfortunately, collusion laws frown upon such things, so we must act independently.
There is a risk at being a leader in the conversion process. You may expose yourself to your competition who will invariably come in behind you and offer the customer the old products and the old price. In my opinion, this is the greatest of all the concerns of the conversion process.
Next, consider service issues.
Although most of the large-size candy line will fit into existing spirals and shelving placements, certain products will require adjustments to the machines. If the focus of the conversion is done to minimize expense, you probably wouldn't use incremental labor hours to get the job done.
View Chart B: Commission to driver, traditional versus large-size candy
Stay on top of location service
The service techs or route drivers will make the conversion part of their daily duties. As they focus their attention on the conversion process, other areas of service may suffer. Competition could exploit those service lapses.
The second category of concern is financial.
Be realistic about your turns. You probably won't sell as many units of the big candy bar as you did the smaller bar. All is not lost, however. The chart on page 56 shows how much percentage drop-off can occur before your gross profit is effected negatively.
There are other costs to consider associated with the conversion. I have already established that gross margin takes a hit. What other expenses are associated with such a major conversion?
Other costs to consider
Consider the commission paid to the drivers. You will pay more money to your drivers to fill that same spiral. Assume a $1.00 vending price and a $.57 blended cost on the large size candy and $.75 on its smaller counter part with a blended cost of $.38. Also assume a 6 percent commission to drivers. The driver commission as a percentage of gross profit is 15 percent on the large size candy and 12 percent the smaller size
Next, consider investment in equipment parts. Most vending machines have adjustable shelves that won't require any additional investment. Spirals are another story. The expense can get costly as the conversion moves into bag candies and thick bars that don't fit into the higher count spirals. This cost can be hidden.
We all may have a supply of lower count spirals that we can use to complete a partial conversion, and we don't miss the spirals because they were not being used. However, in the future, when we need more lower count spirals, they will not be available and we will have to buy more.
Minimum price point is needed
In order for the large size candy proposition to work, the product must sell for at least $1.00. In certain instances, price points above a dollar are required if the larger size line is to be financially beneficial.
I personally see higher price points as a positive move. Incremental price points of $1.10 and $1.15 will wreak havoc on our coin mechs, but that is part of the vending business as we strive for greater revenues.
So what is the final analysis?
We all are looking for ways to be more productive and efficient. Many of our operating expenses are fixed in the short-term. Rent, insurance, depreciation, amortization and interest expense are just a few of the examples. We need to find a way to make our assets, vending machines, produce more with each route driver stop.
Large size candy offers such an opportunity, but it isn't without concerns. The proposition that the candy companies are promoting is almost identical to what we have heard from the salted snack companies and bottlers over the past 10-plus years.
The conversion to the larger product, generally speaking, has been favorable for those operators who have made a commitment to change. The conversion has not been easy for some.
Those who choose to be the market leaders will expose themselves to the possibility of lost business as competition solicits their accounts with the "old" program.
Risks versus rewards
On the upside, those who blaze the trail and are successful will be the ones who can earn more money without having to invest in new accounts or assets.
As with all management decisions, one must keep in mind all the consequences of change. The purpose of this article was to stimulate the thinking process on the positive and negative consequences of LSC conversion. The choice is yours
Paul Humphrey, CPA, MBA, is the chief financial officer at Imperial Companies, a vending and OCS operation based in Tulsa, Okla.
