Dispensing Strategies: Healthy Margins
By Michelle Brisebois
By Michelle Brisebois
As the face of vending changes, it’s becoming more and more apparent
that vending machines must offer a wider breadth of product and a wider
breadth of payment options. The old “coin and pulley” machines likely
won’t morph into cash cows in the years to come – it’ll be the machines
that offer more value to consumers.
As the face of vending changes, it’s becoming more and more apparent that vending machines must offer a wider breadth of product and a wider breadth of payment options. The old “coin and pulley” machines likely won’t morph into cash cows in the years to come – it’ll be the machines that offer more value to consumers.
Machines with more bells and whistles are more expensive to purchase and maintain and this means that vending has to find ways to increase its profitability. It’s really a matter of managing consumer perception of value. The question isn’t simply “should I raise my prices?” The flipside of the question is, “will they object?”
Automatic Merchandiser (November 2005) published an article titled “Wake Up Vending.” The piece spoke to the gap that had become clear in 2004 between the nation’s (U.S.) overall economic health and the vending industry’s lack of prosperity. A post- 9/11 lag had replaced the “tech boom” of the 90s.
In 1998 and 1999, vending operators’ pretax profits exceeded eight per cent of sales. The conclusion was that vending had entered a new phase. Key changes in the competitive landscape for vending were identified as; ongoing work site downsizing, continued outsourcing by large employers, continued growth of smaller work sites, and rising competition from other retail channels.
The white paper on the vending industry also illustrated that cost of goods sold as a per cent of sales increased by more than six per cent from the late 90s to 2003 and 2004, which is about equal to a percentage point drop in operating profit. It’s suggested that new technology holds the key to allowing the vending industry to address these challenges and continue to grow.
“While technology creates new efficiencies to improve profitability, it requires an upfront capital investment that also has the potential to reduce profitability.” The study identified improved information management, more capable and versatile equipment, and more versatile payment options as the technological vending options most necessary for growth.
While costs of goods have increased pressure on the bottom line, there’s also evidence that vending has not increased its retail prices in step with inflation. A 2005 report indicated average annual price increases in fiscal 2004 were below two per cent in most of the largest product categories: can beverages, 1.25 per cent; bottle beverages, 1.57 per cent; candy bars, 1.25 per cent and pastry, 1.43 per cent.
While retail price increases on a percentage basis do not usually match whole price gains, the U.S magazine said it does not believe “vending prices are rising fast enough to cover wholesale product increases, not to mention other cost increases operators incurred.”
On the flipside, the foodservice industry seems to be keeping pace raising retail price points by 2.9 per cent in 2004, (National Restaurant Association).
“This indicates that the vending industry’s competing channels are doing a better job of recovering their costs.”
When consumers are content and secure, the environment for increasing retail prices is friendlier. Economic forecasters are predicting Canada’s economy will grow at a healthy 3.1 per cent; in spite of recent increases in energy costs and mortgage rates, Canadian consumers remain optimistic. It’s the perfect time to increase prices – but the window may not last more than a year or so since interest rates may continue to creep upwards and at some point, consumers will start to cool their spending and be more sensitive to price increases.
Look at your products and understand how sales velocity relates to price. The most profitable price may not be the highest price the consumer will accept. It’s a balancing act between number of units sold and price per unit. You may choose to raise prices on some second tier items while maintaining prices on your top sellers. This however is probably not the most effective way to increase your profit.
Another option to consider is portion sizes. A larger bar can command a higher price and the consumer will readily accept a higher price because they perceive greater value for that price. Trends do indicate consumer preference for smaller portions so; carefully consider your target audience when playing with portion sizes.
Make sure you’re on top of the competitive landscape. If the neighbourhood “five and dime” is selling a chocolate bar for $1.35 and you’re selling it for $1 – there may be money you’re leaving on the table. Look at the commissions your paying as well; is it still a viable win/win situation for both you and the customer? Is the cost of servicing the machine outpacing the profit it’s making?
Consider sitting down with your customers and being honest about the machine costs – transparency can be a good thing towards a more equitable business relationship. Think of ways that you can partner with your customer, an account might be interested in special product promotions regularly that you can provide at minimum cost with support from your product suppliers. Nurturing a close relationship with your partners will ensure everyone wins financially.
“Self serve” technology is moving to the forefront of consumers’ lives. It’s a rare day that doesn’t involve some sort of interface with a machine to go about our business. This opportunity is huge for vending but will separate the “men from the boys” as technological demands (and financial demands) accelerate. Be vigilant about your profitability. Monitor the competitive landscape, measure your business results and make the necessary changes to ensure you’re bottom line stays very healthy.o