Canadian Vending

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A question of commission


January 23, 2015
By Petros Kondos Fraser Valley Vending

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Jan. 23, 2015 – In an attempt to understand the question of how decisions are made about commission payable to the location where
the vending machine is placed, I discovered
that inflating commissions beyond what is financially viable to secure business
is having a long-term negative effect on our industry as a whole.

Jan. 23, 2015 –
One of the peculiarities of the
vending industry is the question of commission payable to the location where
the vending machine is placed. In an attempt to understand this question I discovered
that inflating commissions beyond what is financially viable to secure business
is having a long term negative effect on our industry as a whole.

Commission allows for easy entry into
vending. All it typically takes is investing in a few vending machines, and a family
mini-van. Then, a bit of networking and the offer of an inflated commission and Joe Average can be up and running in the vending industry. This
easy entry is possible pretty much anywhere in Canada as the vending business
has very few barriers to entry.

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Those with a few years behind them in
the industry will, at this point, be thinking: this is a story we have heard
before, and we are well aware of the ultimate result. The lack of
sustainability in ill-conceived commission practices over the long term leads
to much financial loss for the small and unprepared operators.

In my opinion this loss would
probably be in some measure acceptable to the overall national industry if it
did not have such an insidiously damaging effect over the long term across all
stakeholders in vending.

Commission options

To understand the long term risk to
the industry better, let us take a look at some of the commission options
available in vending.

  • Commission on gross revenue. This is
    by far the most popular option.
  • Flat monthly
    commission or fee payable irrespective of revenue generated
  • Structured
    commission based on a number of revenue targets, e.g.  1% on the first $100 revenue, and 2% on the
    revenue after $100 (and varieties thereof)
  • Commission
    based on net revenue. This is where the cost of the product is deducted from
    the total sales, and commission is calculated on net revenue.
  • Commission
    as a percentage of profit. In this option all of the costs associated with the
    operating of the vending machine, and the servicing of the location, are calculated,
    and commission is paid purely on the net profit generated by the specific
    location.

In addition to any of the above
options, there may be a myriad of bonuses, cash payments, placement fees and
other financial incentives. Those that have been around for a long time also
understand the value of a timely offering of a pair of Canucks tickets.

The
threshold is the problem. This is all
fair and well, except that there is a certain financial threshold which the
prudent vending company operator should not exceed when it comes to
commissions. This threshold is pretty similar across all operators. I will not
stoke the fire any further by stating this “golden formula”; we know it is there, and it is pretty firm.

A damaging precedent is set when small
and larger operators in their misguided attempts to grow their business offer unsustainable
commission rates. What happens is that an expectation is created among the
greater pool of available customers. This expectation then finds its way into
the mainstream thinking and is adopted as a “standard within the industry.”

The hard truth

This blog was inspired as a result
of a Deloitte publication: “BC Post-Secondary Administrative Service Delivery
Transformation – Opportunity Assessment Final Report”, dated February 12, 2013.
This report is a detailed outline of a decision by most post-secondary
educational institutions to implement a collective buying strategy. One of
their initial focus points is vending services. This report can be viewed at here .

I was surprised to note that their
research indicated that commission rates across the various vending suppliers
providing services, varied from 3% to 43%. The 43% was a contract that had
recently been won in the Lower Mainland of the Fraser Valley in B.C.  

The problem lies in the fact that the
report authors have very little insight into vending and clearly do not understand
that 43% is an unsustainable commission rate. A simple calculation would show
this very clearly.

Assume that a bottle
of cola cost $0.95 with a vend sell price of $2.00 and $2.50 (for simplicity no
tax or deposit fee is factored into this calculation).

Selling price (two options)

$2-00

$2-50c

Less commission paid – 43%

$0-86c

$1-07c

Less cost of item (approximate cost)

$0-95c

$0-95c

Gross profit on a single sale

$0-19c

$0-48c

Less commission to the driver, assuming that the driver of the
vending company works on a commission salary. For argument’s sake, let us
make this 6% (of the total sale price).

$0-12c

$0-15c

This leaves the vending operator with a total of …

-$0-12 cents (negative).

Somehow the numbers don’t compute. The operator still needs to
pay for a myriad of other costs and make some form of profit as well.

-$0-15cents (negative).

The numbers once again don’t make business sense. The higher the
selling price the greater the loss.

There is only one way that the
vending operator can ever “manage” an account profitably on this basis, and one
could comfortably state that it may not always involve a whole lot of auditable
verification of revenue dollars.

When you read the Deloitte report,
they are not in any way concerned with sustainability. Their concern is to
ensure that the institutions make the most revenue possible. While our industry
is big, and spread across the country, we just do not have
sufficient influence to generate the amount of effort that it would require to
properly educate the customers.

The sales process in vending is
typically rather short and finalized by the comparison of revenue proposals. I
have kept track of the typical weighting allocated to the various aspects as
listed in the formal RFP documentation I have received, and invariably the
“financial perspective” has weightings never less than 45% of the total
evaluation score.

What does
this all mean? The blatant truth is that offering
big commission numbers is probably the easiest way to get business but the
unintended outcomes are many, far-reaching and without a doubt extremely bad
for the industry. Many companies in the industry that follow this practice
should take heed.

–Petros Kondos


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