Out of dozens of vendors I’ve spoken with over the last 12 months, the majority tell me that their sales are up. But most of those admit that their net profit is either down or fluctuating somewhere around breakeven. But with most good businesses, if sales go up, profitability is sure to follow. What gives?
Over the years, I have considered many of the reasons given to me by industry insiders as to why profits have been hard to come by and are continually declining. Among them are higher commission payments to clients; low product pricing; new government taxes and regulations; higher overhead, fuel and employee costs; and increased competition from non-vending outlets. More recently, the general shift away from a manufacturing base in our economy and proliferation of vend management companies are placing downward pressure on profitability in vending. These last two reasons merit discussion.
We all try to remember the good old days. In our personal lives, as we age, those pleasant thoughts of the past can be rewarding and uplifting. In our business lives, thoughts of the good times of the past can be deceiving and destroy our vision of the future. Too many operators are living in yesterday. They either don’t care to take the time, or maybe they are not sure of how to gather the information necessary, to make the sound judgments they need for tomorrow.
THE UNYIELDING ECONOMY
Since just before the war in Iraq started, and with the resulting recession that it helped cause, there has been a major shift in not only the manufacturing base in this country, but also the way the major U.S. corporations are planning their financial futures. I read the financial papers and headlines every day. I want to know what’s happening to my personal investments, as well as to get a feel for what will be happening to the general economy, as it relates to the vending and service industries in this country.
The news is not good. Not only do we see major downsizing and outsourcing of employees in most sectors, but we see a new trend developing that is hurting our service industry. Acquisitions between major global rivals are growing. Proctor and Gamble buying Gillette, AT&T buying SBC, banks buying banks everywhere, Lucent selling out, drug companies are discussing buyouts and mergers. On any given day, I see the announcements of at least five to six potential acquisitions.
As these companies acquire, one of their main purposes, besides eliminating a competitor, is to find enough upside synergies to make the acquisition work. Most of these strategies focus on the layoff or outsourcing of employees and other resources.
In addition to these acquisitions, we have companies such as General Motors trying to buy out up to 20,000 employees with early retirement incentives, another blow to service industries like ours. We all know that even distribution and service sectors like call centers are being transferred to India and elsewhere in the Far East.
The acquiring company’s main objective of elimination of employees and overhead will drive its bottom line, which will be pleasing to shareholders. Who will this leave for the vendor to service in the future? White-collar workers, schools (which have become mostly unprofitable), government establishments that are hard to procure, and lots and lots of retail. Typically most of these, because of high commissions, have not been the bread and butter accounts over the past 10 years and will they will be even more worthless in the future. Why?
VENDING MANAGEMENT COMPANY
This industry has become riddled with vend management companies. The VMC trend began to take shape with Best Vendors, and grew as Sodexho and Universal joined in. Today, I have identified at least 27 individual VMCs vying for any and every corporate account that even loosely resembles a national client; accounts like school districts, universities, government offices and military installations, hospital chains, supermarket chains, retail chains, major manufacturers like General Electric, National Forge, Aon, Dow Chemical, IBM and Johnson Controls, just to name a few. Of course, it is known in the industry that many of the major retailers are already under VMCs. Wal-Mart, Cosco, Home Depot and others.
Most good-sized vendors have a place for these accounts, and in more desperate cases, generate as much as 30% to 40% of their business from VMCs. We know it’s difficult to make a good profit from an account in which the operator doesn’t own the contract, negotiates the financial terms or has the guarantee of service. In many instances, the operator will keep these accounts as long as the VMC that owns the contract allows it. Because VMCs compete vigorously with one another for these accounts, there is the likely opportunity that another will take over the national contract and assign it to another vendor. This is very risky business.
In all cases, the independent vendor will not be able to control what the major corporations or the VMCs are doing. This industry will continue to shift gears, and vendors will need to learn how, if there really is a way, to make profits from these traditionally marginal accounts or those acquired through VMCs.
The first thing operators should do is look very carefully at all of their existing accounts. Try to put any of those without a contract under contract. This will help if a VMC takes over an account as part of its national agreement. With an ironclad contract, in most cases they will have to continue to let the operator service the account until the contract expires.
A year ago, I was hired to appraise a vending operation out West for a buy-sell agreement between the partners. In looking over the supplied information, I was disappointed to see that the operation’s biggest account, a distribution facility for a major national corporation, represented more than 20% of their business, and without a contract in place.
I suggested that they get a contract in place immediately. The vendor told me the account manager would have no problem agreeing to a three-year contract, but in doing so corporate policy required the contract to go out to bid after it ended.
I clearly showed the vendor his choices. This was a national account without an agreement at this time with a VMC. But because I know how these guys are going after everyone, it would only be a matter of time until the account would likely be under a national contract. At that point, he would most likely lose the account. His choice was to obtain the three-year deal and worry what happens later or to continue to run the account without a contract and risk losing it at anytime. He saw the light, and now has a contract with the account. Other operators should do the same with any account they feel can be awarded to a VMC.
Another operation, with which I’m involved in the process of selling, was advised by a major account that it wanted the latest in OCS and snack equipment and free icemakers. The owner questioned whether it was wise for his company to invest an additional $35,000 in the account when his company was currently for sale.
I advised him that he needed to run his business as if he were never planning to sell. If this account is worth keeping by giving it new equipment, then he should do so. But like the other vendor I mentioned previously, he had no contract with the account. I told him he must reason with the account to secure a contract in order to assure him he has the account long enough to pay for the new investment.
He talked to the account, negotiated a five-year contract and installed the equipment. I advise operators who encounter similar situations to do the same. With the high cost of new equipment, the likelihood of an account downsizing, selling out or awarding business to a VMC, vendors cannot run their businesses on hope.
Today’s vending industry has great technology to manage its routes and product inventory efficiently and profitability. The benefits of most of these technologies will manifest over time, but the cost to upgrade equipment to support them can be prohibitive, and there is a tremendous amount of training to complete the learning curve that is necessary before they pay off.
Many vendors just don’t have the money, time or patience to implement these programs. Truthfully, even the best of the programs out there may be of no consequence if in fact an operator’s client base keeps changing as rapidly as it has. It’s great to have new gadget-laden equipment…but only if it’s not sitting in the warehouse.
PLANNING FOR THE FUTURE
Vending operators started in the business to create wealth. For many years, the automatic merchandising industry was a good way to do that. But the world and the business have changed dramatically. With all the negative factors we have discussed, many are finding it difficult just to keep their doors open, much less create more wealth.
The most difficult decision today’s operator will make is whether and when he should sell his business. The dynamics of the industry have changed to such an extent that some operators have few choices. In a consolidating industry, the largest corporate competitors buy the smaller ones.
For independent operations, unfortunately, the industry is not behaving normally. Many larger competitors are facing the same problems and risks that the independent vendor confronts. They are very careful with their limited funds and in many cases are just not buying at all.
I was recently involved in the sale of one of the nation’s top five independent operations. The sale came down to the fact that there was only one possible buyer for this company. It turned out that even though the market share in this operator’s market would increase and its cash flow would grow four times through the acquisition, it did not buy. One of the reasons the buyer pulled out was that the seller had almost $10 million in VMC accounts.
The seller has no choice but to continue to run the company and do the best he can for as long as possible. There is no exit strategy for him. The larger the company, the harder it is to sell. No one wants to take on that amount of risk in an industry experiencing cash-flow constraints.
OPTIONS TO CONSIDER
The majority of operators still have a reasonable opportunity to sell. Most of the buyers will be these same large, local and regional vendors who have no choice but to remain. This opportunity will not last. As more and more good accounts downsize, outsource and merge with competitors, the chance of a good sale will diminish.
Selling is an option if an operation is geographically desirable, and if it’s the right size and fit for a competitor with cash. This scenario is still viable now, but won’t be in another few years. Many of the likely buyers have already sold. There are fewer potential buyers available each year.
If an operator determines that his business is in jeopardy, but he is not in the area or lacks the contracted accounts that his competition wants, there are still choices.
There will be a good chance that there are others in an operator’s area in the same boat. Through careful investigation, an operator may find that merging with a competitor will drive market share for both concerns, and make it more difficult for the national or large regional operator to establish a presence in their market. The right merger will reduce overhead, increase cash flow and rebates, and reduce risk. But partnerships are like marriages. Only the right ones will last.
And operators may also be in a position to become a franchise or subsidy division of a larger competitor. However, this is very finite and more difficult to accomplish. But if the fit is right, it can happen.
I’ve started another program through which a vendor could lease his business to a competitor. There are numerous details involved in executing this relationship, but in certain circumstances it can work well.
The last best choice is to acquire. If a vendor cannot sell, he should consider buying. Major U.S. corporations do this daily. If conditions are right, it could work.
Whatever your plan, make sure you have covered all your financial, emotional and client-related issues. Start the process. I speak to too many operators who do not prepare, investigate and take action. Our industry and your accounts are changing rapidly. This won’t wait. You need to be forward thinking, now.
Many choice clients and their employees are already gone. I urge all vending operators to take a slow, long look at their accounts and try to imagine what the chances are of them being there tomorrow.
MARC ROSSET is founder and president of Professional Vending Consultants Inc. (Chicago). PVC has sold over $800 million in vending and OCS gross sales, and has done more than 200 appraisals for operators since it was formed in 1993. Rosset can be contacted by calling (312) 654-8910.