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Issue Date: Vol. 42, No. 13 / November 25, 2002 - December 24, 2002 , Posted On: 11/25/2002


One Year Later, Operators Ponder Strategies For Success In School And B&I Milk Vending


Emily Jed
Emily@vendingtimes.net

U.S.A. - The groundbreaking school milk vending test conducted by MilkPEP wrapped up just over a year ago and proved that the attractive new generation of single-serve milk beverages, packed in "plastic pint" bottles and offered in a variety of flavors, sell strongly when offered for sale through modern glassfront vending machines in middle school and high school locations throughout the country (see VT Sept., 2001). Vending operators who participated in the study hailed wide acceptance of the healthier beverage option from school decision-makers and students alike, and sales volume far exceeded their expectations.

VENDING TIMES spoke with some of the operators who participated in that test, to learn what further use they have made of their finidings. While some have continued providing a school milk vending program on a more selective basis, others have decided to forego the business and return to their more traditional full-line approach to vending.

Ed Dooley, A&B Vending (Wakefield, MA), found the initial test so successful that he dedicated two routes, run by refrigerated trucks, to milk. He placed a total of 30 milk vending machines by the end of the second school year. A&B Vending added "Nesquik"-branded milk in addition to the regional dairies' products, which further strengthened sales.

"We were buying milk by the pallet and it took two trucks, every day, just to handle the milk," reported Dooley. "It's different from a regular route, because the driver has to go from school to school, from town to town. You visit fewer stops, but the sales justified the two dedicated refrigerated trucks."

So successful was Dooley's program during the test, that the school foodservice directors added the "plastic pints" to the lunch line, replacing the half-century-old "gabletop" paper cartons. Schools had been reluctant to do this, because the new, larger packages are more costly; but the milk vending test had demonstrated such a marked student preference for the contemporary "grab-and-go" containers that the schools bit the bullet and made the change.

This took a huge slice of A&B Vending's business. During its second year of providing milk vending in schools, A&B Vending's milk sales fell off to half the volume they had averaged during the test year.

"All of a sudden they're selling the 'plastic pints' of milk on the line," Dooley told VT. "We convinced the schools that the cartons don't work. Kids see all the attractive bottles of soda, juice and water and they don't like the cartons of milk. The foodservice directors saw the kids lining up at our machines and they wised up.

"Once the test wrapped up, I had to go from $1 to $1.25," he added. "The cafeteria line underpriced me, because they were able to stay at $1. The schools get reimbursed by the government for milk sold on the line, but not from vending machines, so they can undercut the vendor on price. It's a tough deal when they tell you: 'Sure, you can bring the machine in, but we're going to sell it, too, and for less than you do.'"

Once the schools added the "plastic pints" to the lunch line, A&B Vending lost the sales it formerly made during meal hours. The machines drew students only when the cafeteria was closed, during the day and after regular school hours.

"When I made the deal to put the machines in, I often dealt with the principal and foodservice was not involved. When they [foodservice] saw they were losing milk sales, they put it on the line, which makes sense for them. And there was absolutely nothing I could do about it," the Massachusetts vendor summed up.

BACK TO 4Cs

In light of the reduced volume through his milk vending machines, Dooley considered expanding his school program to include dedicated "Gatorade" venders and ice cream machines to generate enough revenue to make the stops worthwhile. However, there were substantial difficulties in the path of such an initiative

In addition to dealing with the logistics of transporting and stocking ice cream, Dooley is concerned that the popular frozen snack might the next target in the ongoing fight against childhood obesity. "I'm not sure the timing is right to get all geared up for ice cream. I think with the schools making a shift towards healthy, the days are numbered for a high-fat, high-calorie item like ice cream," he said. He also knew there would be heavy competition for the ice cream business, compared with the relatively untapped milk vending niche.

New England Ice Cream (Boston, MA) provides ice cream to 75% of the schools in A&B Vending's region and Dooley subcontracts his ice cream vending to that company. Dooley decided that his school milk vending business would be better suited to New England Ice Cream's operational model, and so he turned the business over to the specialists.

"They were looking into milk and I knew we couldn't both do it, so they took over my milk. I'm a full-line operator. I make my money on soda and snacks and I'm keeping my focus on that," said Dooley.

To succeed in school milk vending, Dooley is convinced vending operators must provide a broader-spectrum program that supplements milk with other products.

New England Ice Cream, which was founded 31/2 years ago exclusively as an ice cream vending company, is doing just that. It has launched a new program that now includes milk and ice cream vending machines, a dedicated "Gatorade" vender and PepsiCo's "Frito-Lay" snack program. "That's the kind of program it will take to succeed, if the school foodservice is going to compete with us for the milk sales," noted Dooley

EXPANDED MIX

New England Ice Cream reports that product diversification is succeeding. "We realized that just providing ice cream was not as efficient as the product mix offered by most vending companies, whose sales are spread out at each location over multiple revenue-generating machines," Heidi Modaro, senior director of sales for New England Ice Cream, told VT. "First we expanded into 'Gatorade' and the Frito-Lay line, and we added milk this past August. Milk is a very positive sell story, and it has very strong acceptance from all key decision-makers , the PTA, principals, superintendents, foodservice directors and students , which is rare! Everyone has been very positive about milk vending, and it's a nice add-on in, or entry into, schools. Milk has a great, non-controversial image all the way around that we've never had with any other item."

Modaro reported that milk continues to move swiftly through the school vending machines, and that she is amazed at how many students still opt for milk over other non-carbonated beverage choices.

The company's Dixie-Narco glassfront machines are primarily stocked with "Nesquik" flavored milks. "The students are attracted to the brand and it's good for us as operators because it gives us a longer shelf life and more flavor variety," she commented. "At some locations we have a more difficult time with the price point, but for the most part it does very well. We're very, very happy with the results we've seen with milk these past few months, and we continue to expand and to get more and more requests."

Modaro agreed with A&B's Dooley that it would be difficult to succeed in a school with milk vending alone. "It's very operationally inefficient if you just have one or two milk machines, at least in our area where we average 800 students in a high school," she commented. "I recently spoke with an operator in Florida who does milk vending, and he has five or six machines in some schools where there are 4,000 students. With volume like that, I imagine you can do very well with only milk machines, and he does. The size of the school and the number of machines really determines whether you can build the return on investment to succeed exclusively with milk."

HANDLE WITH CARE

New England Ice Cream has six routes, and currently services more than 100 schools in eastern Massachusetts and Rhode Island with milk vending. The company is expanding rapidly, with plans to cover the entire New England region.

"Milk and ice cream vending is a very high-maintenance, specialty niche. You can't just put it in a cooler or the product quality will degrade," commented Modaro. "We take our ice cream directly from a -20·F. freezer, into a -20·F. truck, and then into a Fastcorp machine that maintains the same ideal temperature. And with the milk, we go from a 32·F refrigerator, into a refrigerated truck and then into a Dixie-Narco vender, all at the same temperature. Every step of the way is quality controlled. That's how we are unique." These stringent handling requirements can make it difficult for a four-Cs vending operation that is accustomed to handling shelf-stable products to add milk or ice cream to its existing routes, she added.

While New England Ice Cream has created a winning formula in schools, Modaro admitted she has had to learn how to navigate a unique series of obstacles that accompany the business. "Being a full service vendor in schools is complicated because the major bottlers have the schools trained to expect high commissions," she observed. "We have to work on low margins to keep or pricing competitive and our commissions in line with what we can profitably share."

WORKPLACES, TOO

New England Ice Cream also provides milk vending in business and industry, recreational areas and rest stops. "Milk does not do as well in B&I sites compared with schools," Modaro explained.

This is not so much a question of popularity as it is of layout. "In the larger B&I sites, you're usually dealing with multiple buildings, or at least several vending banks. So you don't reap the benefit of the entire population all going to the one machine," the New England Ice Cream executive told VT. "In a school you're dealing with one cafeteria, contrasted with four to five vending banks in B&I. As long as there are enough unit turns so there is no spoilage, and we only visit the milk machine when we have to, it's still very profitable and worthwhile in the right location," said Modaro.

While A&B Vending is no longer involved in milk vending in schools, the company continues to provide milk in glassfront venders at a number of its business and industry accounts. "It's not setting the world on fire and we don't dedicate a machine to milk. We offer 2% milk, 'Nesquik,' juice, other non-carbonated alternative beverages and water to keep the machine identified as more wholesome and healthy, with no carbonated beverages or caffeinated drinks," said Dooley. The veteran operator added that, given the proven preference for the modern new milk packaging, he has eliminated "gabletop" milk cartons altogether, rather offering the "plastic pints" in his food machines. This has resulted in a substantial increase in milk sales, at a higher price point.

During the peak of A&B Vending's milk vending success, about a year ago, Dooley suggested that fellow New England vending operator, Steve Foley of Foley Foodservice (Norwood, MA) get into the business to help satisfy an overwhelming demand outside A&B Vending's service area. "Ed works north of Boston and I work south of Boston and he invited me to work with him to get milk into the school systems," Foley told VT.

Before long, Foley built a dedicated milk vending route, with 24 machines in 20 schools. "Not everyone was open to it, and school foodservice directors are not the easiest people to deal with," said Foley. "They want huge commissions, and we can't do that and make a profit, so it took a lot of negotiating."

When Foley Foodservice first placed the machines, the operator experienced the almost insatiable demand A&B's Dooley had reported, but it also wasn't long before Foley saw a dramatic dip in his milk vending business. Sales never returned to what Foley considers to be an acceptable level, and he has opted not to actively pursue milk vending. Foley Foodservice has six machines remaining in the field, and is scheduled to pull three.

DWINDLING DEMAND

"When we first installed each machine, we saw $700 to $1,000 per week in sales, with a vend price of $1.50 for the 'Nesquik' and $1.25 for the regular milks. Within a month, it averaged off to one-third of what we started at, and then it went down from there bit, by bit, by bit," reported Foley. Foley Foodservice eventually filled all its machines exclusively with "Nesquik" because it offers an extended shelf life. "The generic milk just wasn't moving fast enough and there was too much waste," said Foley.

Foley was hopeful the momentum would pick back up with the start of a new school year this fall, but sales were even lower. "This school year, the sales just fell off the map. I wanted to run the milk as a separate route, but with the sales so low and one machine at a location, it didn't work. I sold the refrigerated truck that we bought. And no one is even asking for milk anymore. I keep hearing 'milk vending, milk vending, milk vending,' and I just don't see it anymore," he told VT.

Like Dooley, Foley turned his school milk vending business over to New England Ice Cream. "It's a better fit for them. They have very strong relationships in a lot of the schools because they already have the ice cream. They put a nice program together, and I hope they succeed," Foley told VT.

The operator has two theories as to why his milk business started so strong and dwindled so dramatically in a year's time. "I haven' t looked into it as much as I'd like to. I don't know if the novelty has just worn off and kids aren't buying as much milk in any retail channel, but are going back to sodas or non-carbonated juice drinks. Or it may be that the foodservice directors are selling the new 'plastic pints' on the lunch line; we know that's what happened in a few instances. I think it was a novelty item; there was a vacuum, and the vacuum got filled up quickly."

SPACE TO SALES

The three Foley Foodservice milk machines that will remain in operation are the only three in which the schools allowed the company to stock beverages other than milk. "Milk vending can work if you have other non-carbonated drinks to generate enough dollars and keep waste down sufficiently to keep it profitable," said Foley.

Foley has relocated a number of the glassfront Dixie-Narco beverage machines to business and industry accounts and stocks them with an assortment of 16-oz. non-carbonated beverages, water and milk. He emphasized that there is not enough demand in any of his B&I sites for a dedicated milk vender. "Some of the machines still have 'got milk?' graphics, which is fine because they're eye-catching and we do sell milk in them. We mostly sell 'Nesquik,' with its extended shelf-life, and it's set up with the proper space to sales. At most, we dedicate a half of a shelf to milk; that satisfies the present demand."

Accent Food Service (Austin, TX), with 32-routes serving the greater Austin market, also participated in the MilkPEP test, and is one of three vending companies taking part in a second test being conducted by Bachtelle & Associates for the International Dairy Food Association's Fluid Milk Strategic Thinking Initiative in blue-collar and white-collar businesses, public locations and colleges. That test will conclude next month.

"When we were approached by Bachtelle & Associates for the school test, we were not enthusiastic about selling milk, but we thought it was a great sales tool to get us into new school districts. We only placed half of the 25 machines before the start date of the test," Don Howard, vice-president of operations told VT.

So hesitant was Howard that he reduced the par level in each machine to one-third of its capacity, with only three bottles of milk per column. "I was afraid we'd have so many stales that we wouldn't be able to handle them. By noon on the first day, all the machines were empty. Some of the schools called us within the first half hour," recalled Howard. "When we increased the par to completely full, we still sold out. During the first week, we sold out once or twice a day. We went through 16,000 pints in three days with 12 machines, and we got the other machines out on location in a hurry!"

During the test period, sales peaked at a level as high as $2,500 per month in the beginning and fell to half that by the end of test, which Howard noted is to be expected of any new program as the novelty wears off.

Once the test concluded, Accent continued providing milk vending in half the schools. "A few wanted to do the milk vending themselves, and we picked the best of the ones that were left to keep. We set a dollar minimum for what we had to do," Howard explained. "We have to restrict where we put milk machines. During the test, we had cooperation from the dairies for pricing; now our margins are tighter and we have to be sure we make money.

"The next school year after the test, sales never peaked as high as they did during the test, but they stayed at 40 to 60% of initial sales, which is still good," the Texas operator told VT.

Following the test, Accent added "Hershey" and "Nesquik" branded milks to several machines. "A third of the schools didn't want the branded milks because of price resistance," said Howard. "Sales of the branded milks are generally slower because of the higher price. Students are likely to pick the generic milk for $1 versus $1.75; it's too much of a price difference for many students. But there are those who are attracted to the brands and who will pay the premium."

He added that 80% of the company's sales come from chocolate milk, with regular milk, strawberry and other flavors trailing far behind.

IMAGE BOOSTER

"The goodwill that you get out of putting milk in schools is a real benefit to the industry. It's a good project that gives our industry a positive image in schools; we're not just selling candy, but we're selling the kids something that's good for them, that they also like. "

Howard added that Accent's overall school snack vending business has tripled during the past two years, and he attributes much of the growth in this segment to the company's participation in the milk vending test. "The milk program has gotten us good attention on the part of the right people in the schools, and we've expanded our snacks as a result," he noted.

Howard added that while the logistics of milk are more demanding than handling shelf-stable beverages, the dairies make it very manageable. "The dairies bend over backwards to give us the freshest milk on time. They deliver it to us and we send it out that same day, so storage isn't an issue," he told VT. "We used ice chests on the trucks during the initial tests. We have some refrigerated trucks, but we couldn't afford to dedicate a refrigerated truck to milk vending. Milk is incremental business, it's not our main product line."

Looking ahead, milk vending is a niche that Accent Foodservice will selectively pursue. "As we add schools, we evaluate each one; we're not just blanketing schools with milk machines. We know the formula; the minimum we like to see is $600 per month in sales," said Howard.

He added that at some schools, Accent has added juice in the bottom rows of the machine, which enhances the machine's profitability. "We'd like to have half milk and half other non-carbonated beverages, but the schools' contracts with the bottlers and what they sell on the lines limit us mostly to milk."

Dahl Vending (Omaha, NE), a 12-route operation, also participated in the school test and was pleasantly surprised with the results. "It was very successful and worthwhile. Milk vending did better than I ever could have imagined it would; I thought it would bomb," Jeff Magill, Dahl's operations manager, told VT. "I was sure kids would choose pop over milk, but I was surprised that milk often outsold pop."

Like the other test participants, Magill reported that milk sales were "sky high" early on and leveled off markedly at about the midway point. "When it was over, sales were down 50% from the beginning as the novelty wore off," he said. At Dahl Vending's most profitable schools, milk machines brought in as much as $250 per week.

OPERATIONAL ISSUES

Operationally, Magill told VT that during the test, the company's biggest problem was that while drivers had the door open to fill the machines, it would trigger the health sensors, which were set to shut the machine down if the temperature dropped for longer than 15 minutes. During the test, the company was unable to change the settings.

"The driver would leave and not know it was a problem. When he left, it seemed like it was fine, but when the machine was not back to temperature, it shut down and the school never called to tell us. They'd let it sit there for two days and we had a lot of spoilage. Now we can set the health sensor the way we want to give the driver time to fill the machine so we're not having the spoilage," said Magill.

Like Accent Foodservice, Magill said that Dahl Vending's dairy supplier made transport and storage extremely simple. "The milk distributor came to us and put the milk right on our truck the same day we filled the machines. Our distributor was real good; we didn't even have to store the product," he said.

Of its initial 12 test machines, Dahl Vending still has four in the field, all in high schools, and stocked primarily with Hershey's ready-to-drink "MilkShakes" and "Hershey's" and "Nesquik" flavored milks. "Hershey's" Cookies and Cream "MilkShakes" sales are "fantastic" and strawberry is the slowest mover overall, according to Magill. "We also sell the new milk beverages through food machines at industrial accounts with high a Hispanic concentration, and strawberry outsells chocolate, so it all depends on demographics," he told VT.

The operations manager added that Dahl Vending goes through 30 cases per week of milk in its food machines at business and industry locations. "Because of the success of the test in schools, we put out 'Nesquik' and 'Hershey' in our refrigerated food machines, and we sell a whole lot more milk than we used to," he said.

Magill does not consider any of Dahl Vending's business and industry accounts large enough to warrant dedicated milk machines at present.

Dahl Vending plans to maintain the milk machines it already has in the field, but is not looking to expand the program further. "The machines are expensive and it's seasonal business. When school is out the machines sit and generate no revenue," said Magill. "In some schools, the milk was out of date before it sold out. And the schools want large commissions. It's hard to sell the product and make money."

TIMING'S EVERYTHING

He emphasized, however, that the time is right for vending operators who do choose to pursue milk vending in accounts with high enough volume. According to Magill, a dedicated milk vending machine should make $100 per week, minimally, to be profitable, and many operators would do well to pursue such a program.

"In California, they're taking the pop machines out of the schools, and other states will probably follow. They see that milk is a health benefit to kids. I think you'll see more milk machines moving into schools and there's an opportunity for operators who decide to dedicate themselves to such a program," Magill emphasized.

The IDFA and the Milk Processor Education Program (MilkPEP) launched the Fluid Milk Strategic Thinking Initiative to make milk more competitive with other cold beverages in the away-from-home market. The vending tests it has organized are paralleled by tests in other retail channels, and were designed after extensive consumer research.

This activity has demonstrated what many experienced full-line operators always have known: milk is popular with vending patrons, especially when sold in conjunction with food and sweet snacks. Milk was one of the mainstays of the full-line vending revolution half a century ago, and its relative decline since then seems to have been as much a matter of industry inattention as of dramatic shifts in consumer tastes.

By identifying product characteristics that needed updating , the package, for example, which today's patrons expect to be suitable for "grab-and-go" enjoyment , and by sophisticated, aggressive promotion, the dairy industry has reawakened public interest in milk as an option for out-of-home consumption. Alert operators are benefiting from this new interest.

While the United States has paced the world in consumer use of credit cards, it has lagged some other nations in wide availability of prepaid instruments, especially smart cards. However, wide acceptance of card-actuated automated teller machines has led to the rollout of more broadbased debit or "bank" cards. In conjunction with major credit cards, which enjoyed their explosive growth in the last quarter of the 20th century, these have increased consumer noncash payment options.

In recent years, the fast-growing popularity of cellular telephones has prompted extensive experimentation in "mobile commerce," generally involving the owner of a cell phone placing a call to purchase a product. The actual process can entail communicating with a bank to authorize debiting the user's account, or having the telephone network operator add the charge to the customer's monthly bill. Like smart cards, "m-commerce" applications appear to be finding favor more quickly in Europe than in the United States.

The Vending to the Year 2000 study conducted for NAMA by the Hudson Institute in 1986 predicted that cashless payment systems, probably based on smart cards, would become prevalent by the turn of the century, and advised operators to stay alert to developments in "electronic funds transfer" with an eye to adopting cashless technology as soon as it became practical (see VT, November 1986).

In a follow-up study commissioned by NAMA four years ago (The Future of the Vending and Foodservice Management Industry), the Hudson Institute researchers reiterated their belief that cashless payment systems are coming, but observed that the process was taking longer than they initially had predicted.

The corner may have been turned, and cashless vending thus has been a hot topic at industry meetings over the past several years. The most recent was a panel discussion moderated by Dr. Michael Kasavana, NAMA Endowed Professor at Michigan State University; panelists were Michael Lawlor, USA Technologies (Wayne, PA); Greg Westnedge, Marconi Online (Norcross, GA); and Warren Philips, Validata Computer & Research (Montgomery, AL).

Dr. Kasavana provided an overview of the present state of the cashless vending question (his term for the combination of technologies that make this possible is "v-commerce"). He pointed out that the industry's adoption of NAMA's vending industry Data Transfer Standard has made it much simpler for third-party developers to propose "v-commerce" applications based on data communication (often wireless), and one of these applications certainly is cashless vending capability.


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