Canadian Vending

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Is Technology The Key To Implementing A New Business Model?

The industry seems to be at a crossroads


March 28, 2008
By Mike Gron

Topics

Anyone who has followed the vending industry over the past few years
will surely have heard by now that the industry seems to be at a
crossroads, brought on by a rapidly changing business environment.

Anyone who has followed the vending industry over the past few years will surely have heard by now that the industry seems to be at a crossroads, brought on by a rapidly changing business environment.

There has been no shortage of articles and editorials documenting the negative effects of government regulation, changing demographics and increased competition from convenience stores and other retailers. For every commentary that outlines the challenges facing the industry there seems to be one proposing solutions: focus on customer service, create a more positive perception of the industry in the eye of the consumer, improve operational efficiencies and develop a comprehensive category management strategy.

All are proven solutions that operators understand must take hold if the industry is to remain viable over the long term.

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scannerThe question many vending operators are asking is: “Why does vending continue to lose market share while other retailers seem to be capitalizing on a relatively robust economy?” After all grocers and convenience stores face many of the same challenges vending operators do, don’t they?

This excerpt from Canada Safeway’s 2006 Annual Report would seem to suggest so:
“Profit margins in the grocery industry are very narrow. In order to increase or maintain our profit margins, we develop strategies to reduce costs, such as productivity improvements, shrink reduction, distribution center efficiencies and other similar strategies. Our results of operations are sensitive to changes in overall economic conditions that impact consumer spending … economic conditions such as employment levels, business conditions, interest rates, energy and fuel costs and tax rates could change consumer spending or change consumer purchasing habits.”

So if other retail segments are facing many of the same hurdles, and proposing many of the same solutions, where is the disconnect between those industries and today’s vending operators?

A quick look at the financials of some of the countries leading retailers reveals some interesting trends. Despite Canada’s increasing population these retailers are not looking to open new stores. In Canada Loblaws only added five new stores last year to their network of 1,077 stores. Likewise, Safeway opened a total of seven new stores in North America during 2006, down from 51 in 2002.

Instead, these companies are re-investing in their existing asset base and leveraging those locations to do more with less. Safeway has managed to drive same store sales despite the loss of nearly two and a half million square feet of retail space since 2003.

Similarly, Loblaws again managed to improve average sales per square foot while increasing same-store sales growth four-fold for 2006.

Perhaps the best example of leveraging an existing asset base is Couche-Tard, Canada’s leading operator of independent convenience stores. In fact, Couche-Tard added only a handful of new stores to their existing network of Canadian corporate c-stores last year. Instead they have focused on renovating and updating existing locations as part of their Impact lifestyle store program.

Couche-Tard completed some 413 Impact makeovers last year with another 400 scheduled for the next 12 months, compared to just 60 new constructions scheduled for the same period. According to the company’s July ’07 corporate presentation, the program’s main goals are to create value by updating the stores, optimize the product mix to reflect current consumer demand and implement the use of leading-edge technology.

The report goes on to say, the renovations typically cost around US$200,000, with a significant portion of that going towards the installation of various I.T. components including advanced payment systems and optical readers that not only improve the customer experience but also allow the company to collect detailed information on each transaction.

As an organization, Couche-Tard management have made significant investments in the technological infrastructure that allows them to take that detailed point-of-sale information and use it to effectively target customer preferences, optimize product assortment and adapt locations to closely match consumer trends; all things the vending industry has identified as crucial to their own long term survival.

Has that investment proven successful for Couche-Tard? Well, despite the upfront US$200,000 per store investment, the makeovers have lead to “double digit revenue increases” – typically visible within six months.  They will have nearly 60 per cent of their corporate locations converted to Impact locations by the end of 2008 and they have recently completed the installation of advanced optical readers and point-of-sale software in every one of their company-operated stores.

The Couche-Tard example is certainly not unique within the convenience store industry. A 2006 survey conducted by the National Association of Convenience Stores found that roughly 80 per cent of convenience stores have scanning hardware installed in at least some of their locations.  Those same operators cited the point-of-sale data collected through the scanners as the primary benefit.

According to the survey, operators were able to capitalize on that data to implement a number of projects including loyalty programs and optimized category management. That same survey concluded that of the $2.85 million required to open an average urban convenience store, more than one third of that investment was typically dedicated to technology.

Why are convenience stores willing to invest so much of their capital expenditures on technology?  It is because they know what kind of returns those platforms create.

Of those surveyed in the NACS survey, 86 per cent of convenience store companies said that they realized expected return on investment within two years, with investments in wireless and scanning/data analysis software providing the most significant return on investment.

Perhaps the most pressing question facing the vending industry should be: “Is the typical vending operator in the position to replicate the successes we have seen within convenience store industry?”
Do the tools exist to get vendors where they need to be and does the industry have the know-how to make it happen?
The short answer is yes and yes. Most vending equipment sold in this country has been outfitted with DEX (digital exchange) data for almost a decade and the tools to capitalize on that data, including handheld terminals and remote monitoring systems, have been readily available for a number of years.

To most industry observers it would be very difficult to argue that the data collected and compiled by today’s remote vending machine monitoring systems isn’t at least as valuable as the point-of-sale information gathered from a typical convenience store scanner.

So why then has the adoption of largely similar technology been so prevalent in one industry while being largely dismissed in the other?

The answer lies in the diverging growth models the two industries have adopted over the last decade or so. While other food retailers have successfully driven growth by leveraging their existing network of stores, the vending industry has largely interpreted growth as “having more machines in more locations.”

So, despite that today’s vending equipment is more technically advanced than ever, very few operators have made the investment necessary to capitalize on those technical advances. Simply put, no other cash outlay will impact an operator’s profitability as much as incremental sales on an existing machine.

Couple those incremental sales with the reduction in route operations costs that the real-time data that remote machine monitoring provides and you have a return on investment model that would be the envy of any c-store.

Is technology the key to implementing a new vending business model? Well, keep in mind that less than 1:20 convenience stores had an optical scanner in 1994. I am sure they were asking themselves the same questions then that vending operators are today.

Mike Gron is President of e2wireless Ltd in Calgary, AB.  E2wireless is the exclusive Canadian distributor for the market leading Seed Remote Machine Monitoring System.  To find out more about their remote machine monitoring tools operators can check out www.e2wireless.ca or contact 403-233-7413.  To read recent Seed partner profiles, operators are encouraged to also click www.cantaloupesys.com/profiles.