As this year comes to a close, vending has experienced modest, yet solid growth. All segments, vending, OCS and micro markets, contributed to the overall industry revenue which increased 2 percent from last year, according to our State of the Industry research. The largest contributor to the increase was micro market adoption and technology, which balanced challenges from rising product costs and stricter healthy vending requirements. Operators, as well as other industry professionals, will continue to find solutions to these ongoing challenges, but there are a great many opportunities for growth. In the upcoming year, consumers will play an even more important role in increasing revenues, as long as the industry can respond to demands for item diversification and a 21st century experience in the breakroom.
Increase the OCS ticket
One area of opportunity for operators in 2016 will be in OCS and the operator’s ability to provide a plethora of products to consumers with ever-changing beverage preferences. “Diversification looms large as we think about products and services that we will be offering in 2016,” said Jeff Deitchler, general manager of PrairieFire Coffee Roasters in Wichita, KS. “I can’t remember a time when we’ve seen so many new products, coffee brewing equipment and methods of delivery in recent history.” Despite already being extensive, the number of OCS SKUs PrairieFire offers continues to increase. Dietchler is always looking for the next item PrairieFire should add to its inventory that will inspire customers to increase their purchase “ticket.” One of those items is alternative cold beverage options.
“At PrairieFire Coffee, we have been exploring some of the best options in delivering non-traditional OCS beverages,” Deitchler said. He is aware that carbonated soft drinks are less in demand, and yet consumers still want a similar drink experience. “Now, OCS providers have options that are easily manageable from inventory and space requirements with soft drinks that can be made by the serving right in the breakroom, and are very user-friendly,” he said. These units use cartridges or can be part of redesigned equipment. In fact, PrairieFire offers a combination coffee and tea brewer that brews iced tea right into a decanter under the brewer and can then be stored in the refrigerator. “This allows us to provide a gallon of iced tea for less than the cost of a single serve cup or pod,” he said.
Consumer demand is driving a lot of ingenuity and non-coffee sales, too, especially in places where companies must offer competitive benefits to keep top employees. This will cause an acceleration of the OCS sales represented by pantry sales. Pantry service includes delivery of a variety of different products to a location which can include soda, snacks, food, paper products, etc. that are offered to employees, but paid for by the employer.
“Office coffee is changing its face,” said Pete Tullio, CFO of World Wide Vending and Gourmet Coffee Services in Van Nuys, CA. “It’s really become more of a pantry supply offering.” Businesses in Tullio’s area incentivize their employees with everything from fresh coffee to free snacks in the office. They are constantly paying for new products and services to be offered to their employees. “Our SKUs have doubled,” said Tullio about the OCS business. As the economy is recovering, companies are again beginning to value good employees and contracting services that will keep them in the office. Tullio sees more of this happening in his area than even three years ago.
While coffee is still experiencing growth, vending has flattened. “If you’re maintaining in vending, you’re doing well,” joked Tullio. It has been a hard area to grow especially as micro markets have transformed the better vending locations.
Better micro market food
Micro markets are certainly a growth area that will continue in 2016. Customers love them, and with additional efforts being put into fresh food, a driving factor, and consumer-focused technology, they are prime to continue. Paul Schlossberg, president of D/FW Consulting is most optimistic about the potential of food in micro markets. “We are entering an entirely new generation of food,” he said.
Schlossberg sees more food options available to consumers than ever before. It’s not just the quick service restaurants, but food selections inside drug stores, convenience stores and now even online retailers delivering food to offices in certain cities (i.e. Amazon’s Prime Now). “We have to steal someone else’s lunch business,” stated Schlossberg. “That is ultimately what next year is about.” Schlossberg sees industry pioneers working on unique food offerings and believes this is the answer to compete for the consumer’s food dollar. “We have to find resources to make unique offerings so we become the best in our town.” That means not copying the same standard sandwiches and foods as the area c-stores and fast food restaurants. It’s deploying new foods every two weeks or less, and including items that are only available for a limited time. It’s about using data to see what is selling and what is not. And finally, it means getting consumers used to prices that allow for profit and opting for the micro market option more often.
Schlossberg also recommends leveraging the all-day breakfast trend as well as converting your vending food locations to micro markets, when possible. “You get more money per transaction and there is more sales data available with a micro market,” he added.
Meeting tech expectations
More mobile engagement is certainly another area that many industry insiders are betting on for 2016, such as Paresh Patel, founder and CEO of PayRange. “The iPhone was introduced in 2007. This means those that were entering high school that year will now be graduating from college next year,” he said. “This is the first truly mobile generation that will be entering the workforce.” Patel argues that not only has this coming generation grown up with the smartphone, but they don’t know any other way to bank and buy items thanks to mobile banking and large Internet retailers. “As this generation enters the workforce, they will put pressure on operators because they aren’t the generation used to dollars bills,” said Patel.
Anant Agrawal, president and CEO of Cantaloupe Systems also thinks the generational shift will push vending operators more quickly into advancing cashless and mobile technology. “Older generations grew up on Coke and Pepsi and will continue to do so, but as we age, not as frequently,” said Agrawal. “On the other end of the spectrum is the huge wave of Millennials who grew up with $5 double shot lattes from Starbucks and go to vending machines for $2 bottled water and $3 energy drinks.” While the previous generation fed in quarters, the Millennials will expect to ‘flash’ their smartphone and ‘gift’ a friend or use a mobile wallet. Agrawal also believes this group will drive merchandising. “It will be consumers’ cell phones and companies that can leverage simple user experiences through smartphones who will win the consumer.”
A positive aspect of the changing way consumers engage with vending and micro markets is the valuable data it can provide to manufacturers. That has spurred more promotional programs being offered by the major consumer packaged goods (CPG) companies, according to Agrawal. Vending operators can leverage these specials to improve their bottom lines.
“I think we are getting closer and closer to a retail-esque environment with more tools being released to vending operators each week to help them connect with their customers,” said Joe Hessling, CEO of 365 Retail Markets. The technologies are in all aspects of the industry, not just micro markets. Hessling mentions examples like PayRange, Sprout, USConnect and Canteen’s vending app. “All of these are bringing the consumer closer to an experience they are used to in everyday life.”
Chuck Reed, senior director – sales & marketing, Vending Americas with CPI, believes in the power of technology to better address the changing consumer. “Providing excellent customer service becomes a much easier effort when an operator has real-time information and can deliver product and other services in a timely and efficient manner,” he said. Telemetry has proven invaluable in leveraging this type of information due to its real-time and item level tracking. Early adopters have proven that connectivity across their vending machine assets can increase their return on investment, according to Reed. Vending sales and data will only become more valuable to operators in order to meet consumer demands in the next 12 months.
Part of the evolving consumer demand will be the ability to pay by any means. The newer cashless readers allow many different forms of payment, which will be crucial for vending. “Notes, coins, cashless including mobile wallet, and payback in notes and coins will enable operators to fully compete with alternate refreshment outlets,” said Reed. “Anything less potentially forces a vend patron to decide against vending as their preferred option.” However there is also the increasing prevalence of EMV® cards, or chip cards. “Operators will be faced with investment decisions regarding the timing of moving towards the newer EMV plunge capable readers,” said Reed.
Glenn Butler, a long-time industry veteran and now general manager, North America for Nayax, sees technology, and specifically EMV adoption, as the top consideration for operators in 2016. Many of the card readers in the past were not EMV compliant in the U.S. “When a fraudulent card is used, whoever didn’t comply the most eats the charge,” said Butler — a simple explanation for the liability of covering fraudulent transactions with the new EMV cards. The person to “eat the charge” may be the vending operator if they are the “merchant of record” or it may be a cashless provider or bank. It will be different based on a number of factors. But the real issue for the industry is that when an EMV credit card used at a vending machine is reported stolen, operators have to eat the transaction cost, and also get charged a “chargeback” fee by the cashless processor. And the fee is per transaction, not per card or customer. “One company [has] received $11,000 in chargebacks in one month already,” warned Butler. “It will be a huge issue for other operators in 2016,” he said.
The future does bring challenges to meet the needs of the consumer who likes unique food and cashless payment options. However, these challenges can translate to opportunities to increase revenue. That is why many are optimistic about 2016.
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Have micro markets plateaued?
Some operators are wondering how long micro markets can continue to grow at their current rate. “The vast evolution of the micro market must reach a plateau at some point,” said Carl Moser, sales manager of Cardinal Canteen Food Service. “I think this time is getting very close.”
Gregory McCall, senior vice president of sales and marketing for Five Star Food Service, Chattanooga, TN, on the other hand, believes micro markets have not yet reached their potential. “Even with over 450 markets, Five Star is still seeing annual growth rates in excess of 45 percent,” he has said. McCall sees a saturation point far in the future, and even then there will be opportunities to morph the idea for hotels, upscale apartments and other venues.
Challenges to the industry
While the forecast for 2016 is growth, there are some factors challenging the industry beyond product costs and healthy vending restrictions.
Government/Advocacy. The uncertain outcome of the next presidential election has some operators less inclined to make major investments as they are unsure how politics will affect businesses that they rely on in their local economy. Fighting against bills that will burden the industry as well as for those that will assist vending operators is also an important consideration in the next year and one all industry members need to lend their voices towards.
Equipment costs. Both micro markets and newer office coffee service equipment offer a superior consumer experience. With that comes a price tag that is challenging for new entrants. This will likely create even more of a legacy industry that is difficult for startups and the addition of new operators.
Competitors for the food dollar. If operators don’t innovate food programs to rival local quick service restaurants or food-focused convenience stores, micro markets might not reach the potential many people are anticipating. Industry competitors are recognizing the consumer eating trends and acting to increase their take of the consumer’s food dollar as well.