Editor's note: Charts are available in the PDF format.
We are through the proverbial tunnel and can see the light. A slowly recovering economy and increasing consumer confidence has pushed dollars spent on foodservice upwards, including those spent in the vending industry. Overall, the four-year decline in vending operation revenues finally ended in fiscal 2012. Operators reported an average growth of 1.86 percentage point, raising this year’s Automatic Merchandiser State of the Vending Industry Report aggregate industry revenue to $19.31 billion, up from $18.96 billion in 2011. The growth was accompanied by more operators raising prices – 83 percent – in a continuing effort to keep up with increasing product and operating costs. These operators met with less resistance than in the past as end users saw other retailers also raise prices.
Technology was named as one of the top factors contributing to growth, along with the improving economy. Operators reported investing in systems that allow an operation to run with higher profits and lower operating costs, installing more diverse payment options and launching micro markets.
A challenge that affected many vendors in 2012 was healthy vending requirements in schools as well as vending locations. Operators struggled with legislation that restricted the potential products sold and/or that placed taxes on traditional vending fare. They also reported concern about future legislation. Both the Food and Drug Administration’s final rule regarding calorie disclosure required by Obamacare and the U.S. Department of Agriculture proposed rule regarding the items allowed in school vending machines could severely constrict operator profits.
Compared to retail sales growth, vending revenue continued to lag in 2012. According to Technomic, a food research firm, restaurants and bars showed growth of 4.5 percent for 2012.
Medium operations increase
Besides 2012 being a growth year in terms of revenue, many smaller operators were able to grow. There was an increase in medium operations, defined as those with $1 million to $4.9 million in annual sales, as seen in chart 2. Locations hiring more employees and consumer confidence as well as embracing a new business model account for much of this change. The most successful operators reported analyzing business to focus on profitability and limiting waste better than they did in the past, which often required technology implementation.
There was a decline in the number of extra-large operators in 2012, as defined by revenue. Declining same store sales, loss of accounts and location downsizing were the most reported reasons for reduced sales which also led to staff reductions. More than half of operators made no staffing changes in 2012, however.
Of the owners that did make staff changes, more increased their delivery staff than other positions, followed by nearly equal increases in sales and repair staff, see chart 4B. Reductions in staff were also overwhelmingly in delivery personnel and usually brought on by dropping revenues.
Operators used a variety of strategies to handle rising costs in 2012 and were asked this year to report all steps taken, therefore the total in chart 6 will not equal 100 percent. However, the top ranking strategy was raising prices mostly in the candy, snack and confection category, shown in chart 7, which continues a four year trend. Operators were also likely to increase prices in cold drinks, OCS and vended food. Many operators reported they were more comfortable raising prices in 2012 due to other retails segments also increasing prices.
All food retailers having to raise their prices is supported by a forecast from the National Restaurant Association, which tracks data for full and quick-serve restaurants, bars as well as cafeterias. The NRA reports wholesale food prices continued to rise in 2012, by 2 percent, making the aggregate increase for the last six years 30 percent, minus a 3.8 percent drop in 2009.
While more than half of operators reported absorbing extra costs, slightly more operators choose to remove unprofitable accounts compared to 2011, where rearranging accounts was the third most used strategy reported, shown in chart 6. The number of operators postponing part or equipment buys in 2012 dropped slightly, decreasing from the sixth most used strategy, to the eighth. This is supported by operators claiming 2012 into 2013 is when they are investing in technology and new growth opportunities.
Interestingly, vendors adjusting their product mix to reduce service dropped last year to a level seen prior to 2010, indicated in chart 8A. For those that did reduce their mix, the candy, snack and confection category saw the greatest contraction, although again, the 2012 percents in chart 8B will not directly relate to the prior year’s because operators were asked to choose all the segments that applied.
Another way vendors reacted in 2012 was to expand into new services. Fiscal 2012 witnessed the largest percent increase for this in the last five years. One new service reported was micro markets, which were broken out as their own segment for the first time in 2012 and showed more than half the growth, see chart 9B. More operators also began offering water service in 2012 than in 2011 as a way to compete with both other operators and water companies approaching locations with add-on vending. Operators also reported it as a way to increase same site sales and replace a declining bottled water business.
While office coffee service has been a big area of expansion, 2012 saw a drop in operators adding OCS, indicating the market is saturated. Most vending operators now offer OCS to locations. However, while the number adding OCS has declined, operators report that the revenue for OCS is increasing, covered in chart 12. The real surprise in 2012 was the number of operators reentering the bulk vending business. Operators reported investing in bulk for a number of reasons. Some did it to eliminate these machines from existing locations. Others used bulk as an add-on service that produces more revenue especially at a location the provider already visits. Many reported it was just a way to utilize every potential opportunity for revenue.
Technology shows huge increases
Operators embraced payment technology at an accelerated rate in 2012, as more vendors recognized the changing need of the consumer. The number of bill recyclers increased slightly, following a 4-year upward trend, as indicated in chart 10A. Operators continued to give recyclers mixed reviews. Some consider them a more affordable option than cashless readers, while others think they increase service calls. The other payment technology added in 2012 was cashless readers, which jumped 3 percent. The projected number of machines that accept a cashless form of payment is nearly 380,000. Most systems are ‘open’ compared to a closed system which only accepts a system specific prepaid card. The number of closed systems has been declining over the last few years, especially among vending operations outside of prisons and schools.
The increase in cashless payment acceptance is a result of higher product price points, increased acceptance of debit and credit in retail for smaller purchases, and the growing research about how the systems increase sales. One of the larger cashless suppliers recently reported that after 12 months of having a cashless reader installed, sales per vending machine increased an average of 28 percent, including a 17 percent increase in cash sales.
Transaction and connectivity fees continue to be the biggest hurdle for cashless, although a small percent of operators are experimenting with charging between 10 and 25 cents for purchases made with a credit or debit card as opposed to cash after recent legislation reversed some restrictions imposed by credit card companies. Operators reported mixed reviews from locations with this two-tier pricing. Some receive resistance, while others have no comments. The higher price is commonly the posted price and a sign is added that details the amount discounted for using cash.
Remote machine monitoring (RMM), sometimes referred to a machine being wireless, also increased in 2012, by 8 percent, see chart 10A. While this increase represents machines with RMM capabilities, operators reported adding RMM even if they just added the hardware, but weren’t yet using the wireless monitoring capabilities to deliver greater operating efficiencies. Based on operator reports, there are at least 80,000 machines in service with RMM capability.
Technology additions continued in 2012 with more touchscreen vending machines and video screen retrofits. Operators added this technology as more options became available, indicated in chart 10A. Many examples introduced in 2012, such as small retrofit vending screens, allowed operators to purchase one piece of hardware but get the benefits of video screens and cashless payment acceptance – making the investment even more attractive. Many operators reported liking that these video screens could also be used to display nutritional information when the calorie disclosure rule is finally published by the FDA.
Micro markets spike
The addition of micro markets jumped 10 percent in 2012, according to vending operators, marking it as the most significant change in the vending business strategy. While there is an estimated 2,800 micro markets in service, operators reported 1.8 percent of their business drew revenue from this segment in 2012. That’s the equivalent to almost 90,000 machine.
The popularity of micro markets are attributed to many things, including allowing more products to be displayed in the same area and increasing variety. Because micro market kiosks use cashless payments, operators can use penny increments on product prices, as well as collect sales tax at the end of the transaction, similar to other retail establishments. Micro markets also drive up all sales, including those of food – typically 30 percent of market sales – and drew more customer to use the system than use the traditional vending bank. Some operators reported losing long-time locations to micro markets if they didn’t embrace the technology.
The largest challenge presented by micro markets is the new merchandising requirement since it needs to be managed more like a retail store than a vending machine. Also, in 2012 micro market data was not able to integration with existing vending management systems (VMS), making it difficult to accurately track and management all aspects of the business using one system. Recently however, micro market manufacturers and software suppliers are developing solutions for data integration that range from cloud-based systems to data standards used by all micro market companies.
Product segment review
In 2012, most product segments experienced an increase. The largest segment by revenue, cold beverage, grew more than 1.5 percent in the vending channel, beating the 1 percent growth reported in overall retail by the Beverage Marketing Corp. (BMC). According to BMC, growth is attributed to the strengthened economy. Ready-to-drink tea and coffee, as well as energy drinks, were the beverages that grew the most, while established segments like carbonated soft drinks and fruit beverages didn’t grow much in 2012, reports BMC data.
Cold beverage machines, both closed front and glassfront, were relatively flat in 2012, up just 2 percent, with the number of placed venders hovering around 3.6 million for both bottlers and vending operators, shown in chart 13. The canned cold beverage segment gained market share as vending operators used them to offer beverages at a lower price point. Cup drinks grew for a similar reason as well as well as some being placed in micro market locations.
The national average canned cold beverage price remained at 76 cents in 2012, shown in chart 13C. The average bottle price increased to $1.33 and the cup to 71 cents.
The candy, snack and confection segment increased in 2012, posting a 3.85 percent growth, the first growth in five years. The CSC segment also grabbed more market share of operator revenues, shown in chart 11. According to Management Science Associates, Inc., which tracks UPC level sales data from vending machines and projects it to a national scale, vending operators raised prices in this category an average of 2.17 percent in the past year, see chart 14E. While the segment revenue increased, unit sales fell in candy, nutritional snacks, baked foods and nuts/seeds. Conversely, the number of crackers as well as food and meat snacks showed an increased in 2012. Overall snacks gained market share in 2012, continuing a six year trend, while candy again lost ground due to increasing costs driving up the price. Sales for chocolate candy did show a slight increase again in 2012, as did mints, see chart 14B.
Hot beverage sales rebounded in 2012. The number of machines increased to 2009 levels while operators also increased coffee prices, shown in chart 15A and 15D. Most notable, in the hot beverage segment, is the increase in specialty, flavored drinks and tea. Many operators noted seeing an increased interest in these segments by consumers.
OCS continued its trend of growth in revenue for the fourth straight year, proving it’s still a thriving segment for profits, according to chart 12. OCS sales, as a percent of total revenue, continued to post higher than hot beverage, a trend that began in 2007. Of the major product segments, OCS posted the most 1-year sales gain. Consumer research still points to OCS opportunities to include more specialty drinks as well as single cup. The OCS Update on page 13 shares some tips for increasing OCS sales based on NAMA commissioned research.
Food sales in 2012 showed an increase as well, especially in freshly prepared items. Operators report growth in this area is due to the increase in micro markets. This is supported by the fact that food sales increased despite a decline in refrigerated machine sales, shown in chart 16A. Operators also reported increasing different types of food offerings both in markets and food machines. There was a large jump in operators offering cups of soup and packaged items that could be a snack or food. Operator success with juice and desserts were also reported in this area. Prices remained flat in this segment, other than vended food, see chart 16D.
Milk, ice cream and cigarettes all showed growth as well in 2012, although they still remain small product segments in vending, see chart 12. These segments are doing better through a combination of an improving economy as well as operators offering more product variety, especially in micro markets. Operators also reported doing more bulk vending in 2012 than in previous years, which is part of the other category in chart 12.
2013: Getting into the new vending business
Vending operators were somewhat divided about the future. Those that proceed with the same product mix, machines and business practices from 5 or 10 years ago continue to struggle. They suffer lost locations taken by savy competitors and consumers wanting more variety. They report that location employees still hesitate to buy vending products due to low wages. The operators who have acknowledged vending is a different business now have raised prices, invested in technology at various levels and started investigating new revenue streams, like micro markets, which eliminate commissions, in most cases. They’ve strengthened OCS programs and started offering teas and water service to better serve the needs of the consumer. This is still a challenging market with negative consumer perception of vending machines and leaner workplaces, but the growth in 2012 looks like it will continue. Already in 2013 many operators who have embraced new and evolving technologies and business practices report seeing even more growth.
