With interest rates forecast to remain low throughout 2014 both the economy and the vending industry should benefit. There are however several factors within vending that will be challenges to both buyers and sellers of businesses.
- Health insurance premiums began rising dramatically during 2013 in anticipation of the expensive mandates that insurers face under Obamacare. As a result most businesses, regardless of size, will face much greater expense when insuring employees whether or not they are subject to the new rules.
- The 3.8 percent “health care surtax” will impact successful businesses and reduce the net proceeds when a business is sold.
- Operators both large and small face greater administrative costs and potential penalties under the new law directly impacting operator profits.
- As part of Obama’s healthcare overhaul, nutritional reporting for vending machine operators will be finalized in early 2014. Operators are well aware that “healthier” initiatives usually result in lower sales and margins.
- The mandate will impact 10,800 companies that operate over 20 machines.
- The additional cost to the industry is estimated at $24M per year. The reduction in annual profitability reduces industry business valuations by nearly $100M.
Contracting Gross Profit Margins:
- Micro markets, although a boon to sales, unless very carefully managed will negatively impact gross profit margins and hence valuations. The reported sales lift of up to 20 percent is offset by the fact that a majority of the incremental sales are in perishable, high-cost, fresh food.
- The continued erosion of vended coffee sales significantly impacts profitability. Historically, vended coffee has been the highest margin product in the vending market basket. Generally the loss of $1 in coffee sales requires $2 of other product sales to produce the same gross profit.
- With the soft drink industry sales flat to declining, Coke and Pepsi will continue to raise prices to operators. For most operators these products represent over 50 percent of their sales. Failure to pass the price increases on to the consumer further constricts margins, profitability and business valuations.
- Cashless transactions are rapidly becoming the preferred method of payment. Estimates state that by 2017 approximately 77 percent of all point-of-sale transactions will be cashless. Vending operators that fail to make the transition are not only losing sales, but are deferring a capital expenditure that will ultimately reduce the value of their business.
- The increasing operating costs within the industry requires that operators gain efficiencies through the use of remote machine monitoring, pre-kitting and dynamic route scheduling. The efficiency gains are absolutely necessary if an operator hopes to retain the profitability and value of his business.
In summary, the outlook for business valuations is strong for 2014 but operators need to stay ahead of the rapidly changing environment in which they operate. In many cases, this may require significant capital outlays in order to remain competitive.