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Issue Date: Vol. 45, No. 5, May 2005, Posted On: 5/9/2005


Milk Vending In 2005 Is Work In Progress With Great Potential


Gina A. Monaco

NORTH AMERICA - Milk vending is at a crossroads. With the introduction of plastic, resealable bottles in the late '90s, many vending operators jumped on the bandwagon, hoping to cash in on the sales potential of a product which had been sold for many years as a food item. Now returned to its former importance as an away-from-home cold beverage, milk is being positioned as something to drink outside of mealtimes.

Numerous dairies across the country, including those producing branded milk beverages under license from The Hershey Co. (Hershey, PA) and Nestlé USA Inc. (Glendale, CA), as well as regional dairies such as Prairie Farms, came on board. Nestlé, for example, offers operators dedicated, "Nesquik"-branded machines in the context of innovative programs, similar to what the juice bottlers rolled out in the '70s.

While each initiative offers something a bit different, what they all have in common is that the operator gets a dedicated, branded machine in exchange for exclusivity. But like the juice machine business model, the milk vending model can be oversimplified; the devil is in the details.

The initial flurry of sales ebbed a bit, but sales are now poised to surge forward again because the U.S. is hyped about the benefits of milk as a source of calcium and other essential nutrients. And, as states intensify their efforts to legislate what can and cannot be sold in school vending machines, operators have a real incentive to look at the potential of milk.

North of the border in Canada, one major dairy introduced a vending model in April 2004. Somewhat similar to the "Nesquik" program, the model is working for some operators but, as in the U.S., there are hurdles. It's great for the dairy in the short term, with a sudden surge in sales, but has yet to be proven viable for long-term success.

So what are some of the obstacles? And why is milk vending at a crossroads?

Jeff West, chief executive officer of West Dairy Inc. (Parkerford, PA), and a past president of the Pennsylvania Automatic Merchandising Council, has one of the largest milk vending operations in the country. Since the '60s, the company has operated dedicated milk vending machines (often under contract from vending operators unable or unwilling to handle a perishable product), and operates more than 1,000 machines. In 1998 West helped develop the Dixie-Narco "BeverageMax" vendor to accommodate the new resealable plastic bottles.

"It wasn't easy," he recalled, noting that the Dixie-Narco machine is a descendant of a design originally developed by the late ECC Corp. for Snapple's flavored RTD teas. These are packaged in glass bottles, which have friction and weight characteristics different from a plastic container's. Dixie-Narco engineers applied their extensive experience in cold drink vending to the task of ensuring reliable delivery, and the equally challenging mission of upgrading the control logic.

"Because it was a glassfront, we had to develop the space-to-sales component so that the machine always looked full," West explained. "This also helped us with good rotation of the products." The machine thus can be programmed so that if, say, six channels are filled with the same popular flavor, successive selections of that flavor will trigger vends from each channel in turn.

When it was all said and done, glassfront venders stocked with bottled milk changed the industry. In the '70s, West recalled, he was delivering 60 cases of milk to one typical high school. When the lunch line acquired a soda fountain, that volume decreased to one case. When a glassfront vender was installed in 1998, the average delivery increased to 14 cases. And now, with the state ready to ban soda from schools, he's hoping to get back all 60 cases.

"It's all about choices," he said. "The kids are going to buy something to drink. Market share relies greatly on what's allowed and what you're competing with."

West has been a keen observer of the changes over the years and has witnessed the evolution of the milk industry. Yet, with all the buzz about the importance of milk in the schools, he advises anyone who thinks about joining the parade right now to wait.

"Everything is changing daily. And each state is different," he added. "There is still a lot of confusion right now about obesity and health. And schools are confused as to what they can and cannot allow."

As for the "Nesquik" business model, he has tried it in three districts and, in his view, Nestlé has to rework the numbers. And, although it certainly has great promise in schools, that market presently is affected by the general uncertainty about laws and regulations.

"I believe that the program is in a holding pattern while state legislatures work out guidelines for vending in schools," he said. "There are some challenges ahead. For example, bottle sizes are all over the map." Already, in some states, the recommended size has gone from 16 to 12 fl.oz. And others are further reducing the acceptable size to 10 fl.oz.

While West's advice is for operators to wait, he does see a booming future in milk vending. "If schools eliminate other items and choices, then milk sales will go through the roof," he predicted.

Other operators are not as enthusiastic about milk vending as West, but are hopeful that new legislation will turn their sales around.

MODERATE PERFORMER

Jerry Stegmann of Triple S Vending (Naperville, IL), said his milk vending sales are okay but not great. "It serves its purpose as a healthy alternative, but our volumes are not tremendous," he pointed out. He operates a few dozen machines, some "Nesquik"-branded and supplied by Nestlé, the others (mostly glassfronts) his own.

Stegmann has been vending milk for four years now and has watched the evolution of the newly emergent category. "I went with a local dairy at first, but the shelf-life of the product was only 13 to 15 days; so, of course, I had to switch." The "Nesquik" line offers an extended shelf-life of 90 days from date of manufacture.

"Then, once that was ironed out, I had to contend with other issues," Stegmann reported. Like other operators, he has to contend with schools that have subsidized milk programs and with principals who want high commissions. Some of his schools have demanded a full 30˘ and, although he can vend the product for a higher price, he needs high volumes to make it profitable.

"But the world is changing, and I'm hoping that with all the media coverage about obesity and the benefits of calcium, school officials will see that milk for kids is a necessity and will consider zero commissions," the Triple S executive concluded.

Scott Stewart of Cardinal Vending (St. Louis, MO), agrees with Stegmann about zero commissions. "Schools should not view milk vending as a money-maker, but rather as a healthy alternative," he emphasized.

Cardinal Vending has been running milk vending machines in schools for three years now, first with the "Nesquik" machines, then with its own glassfronts as well.

"It started out like gangbusters, but within the first year, the newness wore off and sales dropped by 50%," he recalled.

Stewart found that closed-front machines were not as effective merchandisers as the glassfronts, which performed 30% to 40% better. He now operates about 30 machines, and vends his products at $1.25 and $1.50, which is typical across the board.

There are other challenges, too. His product is often short-dated, which increases the risk of spoilage; and, to date, the local schools don't emphasize healthy eating habits. And he was asked by one principal to put his machine on a timer, so that students could only access the milk machine before and after school.

"This is definitely not a business that could stand alone," Stewart observed. "You have to operate refrigerated trucks and you need a walk-in cooler, so there's constant maintenance. But I see where milk vending is headed, and at least I have my foot in the door, if and when the state bans soda from the schools."

These obstacles are not limited to vending operators. Karen Brummer, supervisor of foodservice for the New Richmond (WI) School District, has had her own experiences with school officials who try to limit milk sales. "We have one high school that wants to shut down the machine during the day," she said. "We saw our sales drop 80% at a time when we are trying to increase milk consumption in the district."

As a result of that, she has made the bottled milk available on the lunch line.

These annoyances aside, Brummer is pleased with the milk vending program and with the new products available. The district has used milk machines for three years now, some of which are filled by staff; another is serviced by a local vending operator.

"We're pleased with the packaging, the code dates are good and the bottles are recyclable," she applauded. And Brummer uses the profits to fund the emergency lunch program.

As successful as Brummer's program is, it exemplifies another challenge for vending operators: school foodservice departments that want to operate their own machines.

For Mike Mercer of Webster Vending (Benton, IL), the desire to own his equipment is his reason for not participating in the "Nesquik" program. His first foray into milk vending was a bust. "First of all the product just did not sell, probably because our schools have subsidized milk the kids could buy for 25˘," he said. He also regarded the administrative overhead required by NestlĂ© as excessive.

These questions are the same ones that some Canadian operators are grappling with. Following closely the U.S. trend, Canada recently introduced milk in plastic, resealable bottles into the school vending channel. While the picture is very different from the U.S. market, the challenges are the same.

There is only one dairy in the country that has jumped into milk vending in a big way, offering a product called "Milk 2 Go" in five different flavors, and white milk, for sale through dedicated, branded machines designed by SandenVendo.

Dairyland, a division of Saputo Foods Ltd., is one of the largest dairies in Canada. In April 2004, it became the first dairy to introduce milk vending to the school system through a program that offered branded machines to distributor/operators. Dairyland's sales department went out and signed individual school boards across the country to long-term contracts. While each school contract is unique to that board, there are some common elements with regard to commissions and minimums.

Dairyland pays the commissions directly to each school and, overall, each school board must maintain an average minimum sales volume. Dairyland then contracts with "distributors," some already running vending companies and others experienced in milk distribution. The distributor/operator essentially works for Dairyland and stocks, distributes and delivers Dairyland's products to schools where Dairyland machines are installed. The distributor maintains, services and repairs the machines and collects all the revenues.

David Lynn, senior vice-president of marketing for Saputo Dairy Products, Canada, outlined some of the company's objectives for entering the vending channel.

"First of all, we wanted to make money at it," he said. "Then we wanted to make our 'Milk 2 Go' product ubiquitous in the market. Dairy had lost ground to products like pop, and was not widely distributed. Finally, we wanted brand exposure."

He admits that the company had virtually no experience with vending and, through the early testing period, had to make many changes to accommodate the vending segment's distinctive characteristics. "It was new to us, and we learned a lot ," he recalled. "We're still learning."

GEOMETRIC SOLUTIONS

One of the early challenges was the shape of the bottle. At that time "Milk 2 Go" was in cylindrical bottles, but vending tests quickly proved that the bottle was not going to work. The marketing department therefore began experimenting with a number of different looks before finally settling on an hourglass shape, which was strongly preferred by consumers and vended easily.

The next step was designing a label. Wanting to appeal to the youth market, Lynn's group came up with a graphics package that was modern and "cool" looking. "It was a challenge for a middle-aged man like me to come up with something cool," he mused.

Finally, the dairy had to formulate a flavor lineup. "Dairies normally see milk as being chocolate and whole bunch of different white milks, but what we needed was one or two whites and a whole bunch of flavors," Lynn explained.

With all those elements tended to, and distributors in place, Dairyland launched the program last year and embarked upon the learning process that has been underway ever since.

"In vending, we have had to learn what works and what doesn't," the Dairyland executive explained. "We came across a few stumbling blocks, and we found out little things that most vending operators already knew."

Now the company is listening to its own distributors and getting feedback on how to improve the model. The initial rollout is only the first phase of the program, but it has included many school boards across the country. Because it's Dairyland's show, and Dairyland is a large corporation with shareholders to answer to, its approach to vending is, at times, at odds with the operators with whom it works.

"Many of our machines are underperforming, and we believe there is potential to optimize sales; so we will analyze each location and each machine before we move on to Phase 2," Lynn said. "The model also has minimum sales thresholds that have to be met."

He does not anticipate Phase 2 starting for at least another 12 months. This second phase will include the rollout of additional machines. In the meantime, many operators are purchasing their own milk venders.

So far, the program is working, according to Lynn. Dairyland is meeting its objectives of brand exposure and product growth, but he also sees opportunity for improvement.

In Victoria, BC, Glen Jackson of Ryan Vending operates the largest vending company in that area, a company that has been in business for 60 years. He runs milk vending machines along with snack and other beverage equipment , but he did not sign on with Dairyland's program because, he said, the only way a vending operator can be successful is to own his own machines and stock them with the best products available.

"The 'Milk 2 Go' product is a high-quality, excellent item and Dairyland is a good supplier. I use the 'Milk 2 Go' product in many of my venders, but I also use other dairies' products," he reported. The ability to do that is why he insists on owning the equipment.

Jackson has seen many manufacturer-controlled programs and, he said, they invariably fail. The reason for this, he explained, is that the suppliers are not in the vending business.

"The Dairyland model is flawed, and it needs some tweaking to be successful in the long term," the Canadian veteran observed. "The company needs to empower its distributors to be successful. Without that, operators are just working for Dairyland and not for themselves, and will eventually resent the intrusiveness."

Dairy manufacturers don't understand the needs of vending operators, Jackson reiterated, and they don't understand the vending market. In his opinion, Dairyland needs to develop a system that puts the machines into the operators' hands.

Ryan Vending is heavily involved with bringing healthy food choices to schools, and works closely with its school accounts and the community dietitian. Milk is a part of that mix, and Jackson sees the market going nowhere but up. "Milk should be available in every school," he emphasized.

In both Canada and the U.S. milk vending continues to challenge operators and manufacturers. Acceptable bottle sizes, fair commissions, proper equipment and the high cost of running refrigerated trucks are just some of the issues that have to be resolved before milk vending becomes a truly viable proposition for the small to mid-size operators who represent the majority of the market.

These operators recognize the value of brands and the crucial role that major suppliers can play in easing entry into the category and helping to drive sales. And many of them believe that programs designed to build operator participation should be structured so the vendor ends up with title to the machine. Operators prefer to be in control of their own businesses.


GINA A. MONACO owns and operates Monaco Foods,a full-service vending company in Canada. Previously she was a sales professional with The Heritage Coffee Cos. Monaco also served as editor of Canadian Vending Magazine, Canada's trade journal for the vending, jukebox and amusements, and coffee service industries. She has held a number of positions on both the editorial and publishing sides of a wide range of publications. She was news editor for The Manitoulin Expositor, and published Boating Manitoulin. Monaco also has written scripts for a number of informational and promotional videos, and has taught creative writing at Cambrian College and at the Burlington Arts Centre. She also writes for her local daily newspaper, The Hamilton Spectator.


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