A new definition of vending

For the past 20 years, much of the development in the vending industry has been focused on improving back-end efficiencies such as vending management software (VMS), DEX, telemetry, pre-kitting, pick-to-light, and dynamic scheduling.

Over the next 10 years, the industry will focus on increasing sales through creating rich, engaging user experiences, and allowing various payment options. It will be less about the back-of-house operations as it will be about what the consumer faces — the front side.

This will be a very big shift in the way operators think about their companies. But for this to happen, vending operators need to change the way they think about technology. There is a lot of technology investment taking place today. This is good, but most of it focuses on operations as opposed to improving sales.

My purpose in writing this article is to make the case for using technology primarily for the purpose of improving sales. I don’t think anyone would argue with me that improving sales is important for the financial health of our trade.

The key to improving sales lies in improving consumers’ experiences.

Consider the consumer’s experience

Consumers have become far too experienced with technology over the past 10 years to continue accepting user interfaces that require them to insert a dollar bill, have it rejected three times, straighten it up, reinsert a couple more times, and when finally accepted, try to remember which selection was needed, then press A-1 on the keypad. Oh, and if their chips get stuck, the consumer has to shake or kick the machine, or go without.

Consumers have gotten much more sophisticated over the past 20 years and have become accustomed to new experiences. It is not about the technology itself, but rather how the technology improves our experience.

But it is much more — it is about creating a unique, engaging experience for the consumer using the vending machine. It incorporates not only how they interact with the machine, but also everything that leads up to their interaction.

For example, there could be social media involved — a coupon code being sent via text, a Facebook contest, or a brand sending an instant promotion out via Twitter to the first 1,000 consumers who enter such a code at the machine.

It could also involve their personal mobile device. Imagine this: you work on the sixth floor of a building. Using your phone, you locate the nearest vending machines. The vending machines are located on the third floor breakroom. Before you head down there, using your phone you browse the products that are in that specific machine downstairs.

You can do sorting and filtering based on your dietary requirements. You can even build your “shopping cart” on the phone itself. As you’re browsing, you get a coupon from Mars for 25 cents off Snickers. Say you want the Snickers and Fritos. You have the option of using the wallet or other cashless payment and pay right on your phone. And you can see how many points you added to your loyalty card.

Then you go downstairs to the machine, simply present your phone to the machine and it dispenses the items almost immediately as you hold up your phone without having to press anything on the machine. On the displays, it says “Thank you Sarah, your Snickers and Fritos are dispensing now. A copy of the receipt has been sent to your mobile wallet.”

The process is streamlined, yet very rich and engaging. You were able to browse the items at your leisure, review what the top sellers in that machine were, maybe see some reviews from your co-workers, and figure out what you wanted without having to waste time standing in front of the machine. That’s smart vending.

A shift for operators

From the operator perspective, there will be a marked shift from using technology to reduce costs to improving sales. This is a monumental shift that will have a significant impact on the industry.

Fundamentally, there is a limit to how much efficiency can be gained from technology. An operator begins to see diminishing returns with each new technology simply because some costs can’t be eliminated.

More specifically, think about what percentage of an operator’s costs are actually “operating” costs. Usually, product cost accounts for somewhere around half, then add customer commissions and corporate overhead. However a company may perform, typically, it is fair to say somewhere around 30 to 40 percent of total cost is operating cost. So if an operator eliminated all operating cost (obviously not possible), the most that could be saved is 40 percent of total cost. Usually, technology can help reduce operating costs by about 30 percent or so — but that means the operator is really saving just 12 percent of total cost (30 percent of the 40 percent operating expense).

In effect, all the effort of installing a VMS, DEX, telemetry, dynamic scheduling, pre-kitting, and every other operating technology will likely save the operator around 12 percent of total cost. The industry has spent 20 years focusing on this. Don’t get me wrong, I do believe this 12 percent is valuable and certainly worth the investment. My point is simply any further returns will be capped.

On the other hand, using technology to improve sales has no natural limit.

Higher sales versus lower costs

There is another important thing to consider. Oftentimes, the two goals of maximizing sales and minimizing costs work against each other.

Again, taking it to the extreme for illustrative purposes, think about how often you would schedule a machine to be serviced if your only goal was to minimize servicing cost.

The answer is you would only service that machine when it is completely sold out of everything. When there are no items left in the machine, your revenue collected relative to the cost of that servicing is maximized.

However, as any operator knows, you cannot do that. You will be losing sales if the machine is not serviced until completely sold out (not to mention the customer service nightmare). But it is important to note: you have no idea what you did not sell. All you know is what you collected and what it cost you to service that machine.

This subtle, but powerful point is that the opportunity cost is not ever known to the operator.

Intuitively, the operator knows a completely empty machine has resulted in lost sales. But the magnitude is not known. Now let’s go to a more likely scenario with what an operator may strive for with dynamic scheduling — a system in which machines are scheduled to be serviced not based on a regular schedule but rather based on forecasting when the machine will need to be filled (using historical information), or based on real-time telemetry data when a certain level of inventory has sold out.

What is the ‘opportunity cost’?

When the vending machine is about one third sold out (about 15 out of selections), what is the opportunity cost of that? The operator may know he is collecting $250 per servicing and $20,000 per week per route, and that sounds great because the average collection per route has increased significantly as compared to a fixed schedule.

However, what is not known is what sales have been lost — the people who did not buy anything. My thesis is that by the time the machine has 15 out of stocks, the cost of lost sales starts exceeding the operational savings. Especially since the first items to sell out represent a disproportionate share of the consumers’ demand.

While the opportunity cost is inevitable, the heart of the issue is that the opportunity cost must be balanced with operating cost. This is a difficult balancing act because the true opportunity cost is never known. But through experimenting and refining the optimal point at which the machine should be serviced, profitability can be maximized.

It’s important to note the opportunity cost is not the same across all machines. A key factor to consider is the extent to which demand for an item can be substituted for another item. In some office accounts, if all the customer wants is Diet Coke, it is unlikely they will buy another drink. A lost sale will result. But at a school, if one item is sold out, it is likely the students will take an alternate item.

Shift to focus on sales

As operators migrate to “smart vending,” the focus shifts from minimizing costs to increasing sales. This shift will not only be magnificent, but also imperative to save the industry.

Without change, the industry cannot survive in an environment where consumers are shifting to cashless payments, demanding more information, and desiring choices. The single biggest issue is the problem of the $1 bill.

Cashless is changing the industry. Many of us realize this. What many of us don’t realize is that in order to allow this new tool to work to its full potential, we must stop thinking about our product offerings within the old cash dominated mindset. When a cashless reader is placed on a machine, the operator must understand that he is no longer restricted by the same rules that cash imposed on him.

This industry and some other industries are so dependent on the $1 bill that the design for the $1 bill has not changed since 1963 — almost 50 years! Every other denomination of U.S. currency has changed multiple times in just the past 10 years. This isn’t going to change any time soon for to political reasons.

Less than half of people today will have $2 cash in their pocket. Hence, every operator who installs a vending machine that only accepts bills and change can sell to only about half the people. The Gen X and Gen Y population with dollar bills is even lower, and these are often the targeted users of vending machines.

The dollar bill also limits items we put in the machines. There is a longstanding $1 price point barrier.

But once we start accepting cashless forms of payment, we can get really creative of what we stock in the vending machines. After all, the vending machine is simply a distribution channel.

For example, at a hospital my company services, we installed cashless acceptors. I decided to take two of the 40 items and convert to non-food items. I bought iPhone/iPod charger kits and headphones and placed them in two separate slots.

My thinking was that anyone who wanted a snack would still purchase from any of the other 38 slots. But at a hospital, people may often come and forget their headphone or charger.

We priced these two slots at $12.50 each. Again, I knew that no one would have purchased these items with cash. But with cashless, they can. I figured I could watch the sales of these two items, and at minimum, whatever they sold would be purely incremental sales.

These two items soon accounted for one-third of the machine’s sales by dollar volume! And even better, my margin on the items was significantly higher than on food items. I was paying $2.75 and selling for $12.50. Think about that! That price was almost five times cost.

Another account was a park. For that, I went to the dollar store and bought things I thought people could use during a picnic. We converted one entire shelf to items like water guns, sunscreen, hand wipes, etc. The water guns cost me 50 cents a piece (two per pack of $1.00, but we sold them individually), and I priced them at $2.50 each. I figured no parent would buy just one water gun, so I priced it at $2.50 so they could get two for $5. My cost is 50 cents, but I again am charging five times cost.

And we couldn’t keep them stocked.

The point is smart vending will open doors that we can’t even imagine today. Not only can we sell higher priced items, sell more items per person and have more frequent visits, but it opens the door to sell all kinds of things that can help improve operator profitability.

Operators who embrace smart vending will realize the opportunities to increase sales far exceed the opportunities to save costs. But it does take a bit of a leap. To justify investments in smart vending, operators will inevitably try to do a return on investment calculation.

That has inherent problems because the operator is trying to justify a future cost with historical sales. The two don’t match up. There is no accurate way to do the calculation. Any calculation will require unfounded assumptions. But astute operators who embrace smart vending technology will reap gains that simply cannot be calculated today.

Our industry is at the point where it must change, and become much less reliant on the dollar bill. Moreover, we must broaden our use of technology to improve the user experience, not just try to save on operating costs.

Without change, things can spiral downward rapidly, just like the movie rental stores, film processing stores, or pay phones. As an industry, we can do better. And we will do better. Changes will happen fast, but operators will need to be committed. Are you ready?

About the Author
Paresh Patel, Ph.D., M.B.A., is owner and president of Courtesy Vending LLC in Portland, Ore.