You’ve probably read a dozen articles about cashless and telemetry over the past few years. Most of them provide a wonderful story of how technology will allow operators to sell more and service less. The real question is — if the success is real, why are we still sitting in 2013 with less than a few hundred thousand connected machines across an industry of more than 5 million? The answer is simple, for the most part we’ve only heard half the story.
A few years ago an operator from New Orleans, La. was explaining telemetry to a group when he made a simple but prolific statement, “We don’t know what we don’t know.” At the time he was talking about the need for daily sales data. Little did I know, but that statement was one that would be repeated over and over through the years. The story of telemetry 2.0 starts with a few more things we didn’t know, but need to understand, to fully leverage telemetry.
1. We didn’t know how our decisions impact the bottom line.
The concept of profit in vending is straight forward enough — take as much money as possible out of the machine every time you open the door. There are a couple of major variables to manage: pricing and product margins as well as service costs. Simple sure, but truly one of the most complicated problems I’ve ever come across. Why? Because vending is a capacity constrained environment where every decision: equipment, assortment, pricing and even other equipment on site all have an impact on profit. Vending is also unique because our service costs are much higher than traditional retail and because they can vary significantly by item. In a typical retail environment the focus is on gross margin — in vending when we leave out service costs, we miss the biggest variable on profitability. Indeed vending is one of the few places where you can make less money by selling more product. Don’t get me wrong, gross margins matter, but they may vary by 10 to 20 percent between items where service costs can vary by 10 times that.
To explain this concept let’s suppose we have two nearly identical operators, Adam and Joe, located side by side in identical warehouses and are supplied by the same distributor who charges $100 for every delivery. They both have the same total sales and gross margins but Adam sells 20 different products while Joe only sells 10.
Because he carries less inventory of each item, Adam requires a delivery every 4 days while Joe can wait to be supplied every 7 days. Who’s business is more profitable Adam or Joe?
You would be right if you said Joe’s is more profitable because his delivery cost is 43 percent lower than Adam’s (52 deliveries per year versus 91 deliveries for Adam). But what if the distributor told Joe “We have to stop next door for Adam, so we’ll deliver every 4 days instead of once a week”? Joe would obviously tell the distributor he won’t pay for deliveries he doesn’t need.
The common assumption is that telemetry solves this problem but operators still pay for deliveries they don’t need every single day. Why, because telemetry deals with the symptom —when service is required — rather than the decisions that created the need for service in the first place. Bottlers have been aggressive in managing space to sales in cold drink equipment. The problem is snack machines, which trigger the most service calls. Every time operators service a machine because they’re at the one next to it, they’re paying for a service they don’t need.
The causes of excess service costs can be grouped into two pools: service bottlenecks and opportunity costs. Service bottlenecks are easiest to understand and quantify. Every time you go to a machine it costs a relatively fixed amount of money. While we rarely factor service costs into assortment decisions, the reality is that some products have less days of inventory and therefore require more service than others. At the machine level, costs are invariably driven by a handful of items with low days of inventory (the bottlenecks) and if we allocate service costs to those items we would end up with a very different view of overall product profitability.