Editor's Note: This report has been updated to correct numbers related to chart 14B. The text reflects the corrected numbers.
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Vending has experienced another growth year. The aggregate industry revenue rose 2.4 percent in 2014 to $20.2 billion, exceeding the revenues for the past 5 years. Consumers are more confident in the economy and therefore spending more on snacks and onsite foodservice, driving up sales numbers. In addition, locations are hiring and expanding onsite food and drink benefits.
Aggressive adoption of micro markets among some operations has added upward revenues. While this year’s Automatic Merchandiser State of the Vending Industry report shows less than half of vendors operate a micro market, the number is increasing. Significantly increased revenues were linked to micro market adoption.
Technology is another area that is pushing vending operators farther into the black. It’s allowing operators to eliminate under-performing products, identify growth areas and run their businesses more efficiently. Technology at the point-of-sale has flattened, but its adoption is still higher than in any previous year.
Challenges continue as well
Operators struggle with increasing product costs from manufacturers, a trend reported last year. Fewer operators chose to raise prices this past year than in the previous two years, although it was still the most used strategy for handling higher costs (chart 6). Vending operators cited pressure from consumers as a major reason they did not raise prices despite increasing product costs. Competitive pressures from surrounding businesses, vending and non-vending, were also cited.
Operators found other ways to recoup revenue lost to higher product costs. Many eliminated unprofitable accounts and rearranged routes to produce higher returns (chart 6).
Adding a vending management system or VMS is a primary way for operators to make educated decisions in route management as well as product variety management. A small yet substantial percentage of operators, 5.8 percent, added a VMS this past year. While no comparative data exists from previous years, based on comments, this appears to be a number that is growing. For the industry as a whole, 58 percent of the operators report using a VMS.
For the roughly 6 percent of operators who chose to reduce product variety, it affected the candy/snack/confection category the most — 83.3 percent of operators chose to reduce these types of products due to cost increases (chart 8). Cold beverages were the second most reduced product category with 40 percent.
USDA rule takes a toll
One of the most significant challenges felt by the industry in 2014 was the required change in products allowed in vending equipment located in public schools. The Healthy, Hunger-Free Kids Act of 2010 required the U.S. Department of Agriculture (USDA) to establish nutrition standards for all foods sold in schools – beyond the federally-supported school meals programs. The requirement gives a limit for sodium, total sugar and calories in all snack items. All school vending machines had to be stocked with products meeting the requirements for the 2014-2015 school year. Operators with a large quantity of school accounts reported revenue losses between 30 to 40 percent from that segment.
Finding healthy product options that sell well is an issue the industry will continue to struggle with as more and more vending operators are asked to place healthy items in machines even at non-school accounts. A majority, 82.7 percent of operators, report having locations request healthier products be placed in the machines. This is a trend that is not receding.
Consolidation among vending operations appears to be slowing, but continues. In 2014, 16.1 percent of operators report making an acquisition, compared to 17.7 percent the year before (chart 5). However, there was a small increase, 1.4 percent, to the number of vendors who sold off parts of their businesses. The number of smaller operations, as defined by revenue, has also contracted in the past year, dropping by 4 percent. The mid-sized companies remained fairly consistent, while some large operations grew even larger, adding to the increase in the number of vending operations making over $10 million in annual sales. These extra-large operations represent nearly half of the industry’s sales (chart 2).
Increasing services was practiced by 23.4 percent of operators in 2014 (chart 9A), a number that has been dropping since 2011. Operators are either open to adding services or hesitant. Those who believe new services mean opportunity have added them in the years since the Great Recession in an attempt to rebuild revenues. Other operators are hesitant to invest in additional lines, opting to instead sustain a traditional vending business model.
For those operators exploring new lines, a record percentage moved into drop shipping. Traditionally, this allows customers to order products from the operator by phone, email or via Website. Instead of running a route, the operator arranges the product to be delivered by courier to the customer (chart 9).
More locations served
While the makeup of locations stayed fairly steady, over 40 percent of operators reported an increase in the number of locations serviced (chart 3B). In many areas companies are investing in breakrooms and providing food and beverages to employees and guests. It has become an affordable way to provide desired benefits and win new talent. Other businesses are expanding and inquiring about vending and office coffee service for the first time. Operators are using a combination of marketing and a strong sales force to gain this new business and grow organically.
For operators that said they were serving fewer accounts than last year, they reported a combination of reasons. Many operators eliminated unprofitable accounts. Others explained locations were closing or reducing staff due to an economy that has not recovered in their area.
Technology
Technology adoption has been accelerating in the vending industry for the past few years. However, for payment acceptance technologies, overall percentages remain low (chart 10). In 2014, the percentage of vending machines that would accept a credit or debit card was relatively flat, increasing only a single percent from 2013. Of the projected 5.1 million vending machines in the field, only 564,548 machines accept a cashless form of payment. Large and extra-large-sized operators are 30 percent more likely to have high numbers of cashless payment acceptors installed on vending machines.
Mobile payments was added this year. While intended to calculate the number of machines that took mobile-only cashless payments, some operators answered yes when they had a standard cashless reader as this also allows payment via mobile device. This has likely skewed the percentage of mobile payment enabled machines.
Remote machine monitoring saw another modest increase in 2014. A technology that works in conjunction with many VMS, remote machine monitoring produces more efficiency in route management. Even with the lift, the percentage of machines online remains less than 5 percent. There are more than twice as many vending machines accepting cashless payment than are reporting data via remote machine monitoring despite both systems requiring Internet service.
Markets may indicate success
Micro markets continue to be a fast growing segment for the vending operator. The number of operators who installed at least one micro market in 2014 was up substantially compared to 2013 jumping to 80 percent from 24 percent, respectively (chart 10). Operators report the micro market segment is driving 8.9 percent of their revenues, second only to office coffee service (for non-vending services).
An interesting trend occurred when respondent operators were sliced into those that had a revenue increase in 2014, and those that did not. Those operators who increased sales (the majority) overwhelmingly added micro markets in 2014, 83.3 percent. While this doesn’t prove that micro markets automatically lead to higher revenues, it strongly implies that micro markets are a revenue generator.
For many, micro markets continue to be an exciting growth opportunity despite the challenges of inventory management and theft. Several operators indicated they were moving their businesses towards more micro markets, rather than more vending as the sales generation of a market is much higher than a bank of vending machines at the same location. In addition, locations are more aware of micro markets and are asking for these systems, driving up placements.
Product segment review
Product categories versus services were broken out further this year to illustrate more clearly how products contribute to vending revenue as a whole (chart 11A &11B). The candy and snack category saw an increase in its share of revenue in 2014, while cold beverage’s share actually decreased. Vending food also saw a decrease.
Services other than vending made up roughly 40 percent of revenues in 2014, with the top contributor being OCS with 13.3 percent. Micro markets are a quickly growing second, increasing from 5.11 percent to 8.9 percent of revenues in just one year.
Digging deeper
Candy/snacks/confections enjoyed a nearly 3 percent increase in share of sales, reaching $7.24 billion in revenue for the vending channel. According to product sales data provided by Cantaloupe Systems Inc., chocolate gained the most share in sales in the candy/snack/confection category although the change was less than a percent (chart 14B). Chocolate-based items have seen price increases over the past few years as cocoa prices have steadily increased since March 2013, according to the International Cocoa Organization (ICCO). The price of cocoa per tonne is $3,096.00 as of May 2015, up from $3,030.00 from May 2014, reports the ICCO.
Snacks saw a strong increase of 1.5 percent attributed to nutritious snack sales, shows Cantaloupe Systems data. Nutritious snacks, or healthy snacks, constitute two percent of sales by dollar revenue. That is a higher percentage than some of the other categories like food snacks and nuts/seeds, according to the Cantaloupe Systems data. The top three products in this category by unit volume were Mars Chocolate North America’s M&M peanuts, Frito-Lay’s Ruffles Cheddar & Sour Cream large single serve bag (LSS) and Frito-Lay’s Doritos Nachos LSS.
The most substantial decreases among product categories recorded in the Automatic Merchandiser State of the Vending Industry report were vended food and cold beverage. Traditionally, consumers have been reluctant to purchase food from vending machines, especially with the increase in quick meals from competition such as convenience stores and quick service restaurants, therefore the decline is not surprising. Also, the introduction and proliferation of micro markets is having an effect as a micro market replaces a bank of vending machines at a location that usually includes at least one food vender.
The cold beverage category saw a decrease in share of sales in 2014 of 2.3 percent. In looking at Cantaloupe Systems data in chart 13D, large and small sized soda has lost the most share of sales. This trend is found in many retail segments. The Beverage Marketing Corporation (BMC) reported that while carbonated soft drinks claim the largest share of the beverage category, they lost both volume and market share in 2014. Volume slipped by 1 percent from 12.9 billion gallons in 2013 to less than 12.8 billion gallons in 2014, which lowered their market share from slightly less than 43 percent to just above 41 percent. Bottled water growth accelerated, reports the BMC, in addition to ready-to-drink coffee and other premium beverages such as energy and sports drinks. Cantaloupe Systems data also shows a strong year for energy drinks and large, non-carbonated beverages. In 2014, vending operators report a drop in sales for milk, a trend echoed in many retail segments. The International Dairy Foods Association (IDFA) reported earlier this year that the total U.S. per capita consumption of milk has reached a record low based on its measurement in 2013. Sales of milk fell by 2.8 percent, the fourth largest year-to-year decline since 1955, wrote the IDFA. In vending the decline was 1 percent.
Conclusion
There are five factors really pulling at today’s vending operation. Those factors are: rising product costs from manufacturers; technology adoption in operations management and at the vending machine; regulations that changed the face of school vending; changing consumer preferences; and, most importantly, taking advantage of new product and service opportunities.
Many of the operators experiencing a lift in revenues are managing to balance the change in product variety needed by schools and changing consumer preferences as well as benefiting from adding VMS, remote monitoring and additional credit and debit card readers, which also take mobile payments. They are looking at services outside the typical, whether that is micro markets, becoming a wholesaler for the consumer or offering their repair services for hire. It’s this ability to adapt and give the locations what they need and want that will help grow the vending industry in the future. The core concept of automated retail is as strong as it has ever been and with the economy promising to strengthen further, operators will be able to take advantage of the changing times. There will always be challenges, but keeping up with them and adapting is what will drive the industry forward.
