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Issue Date: Vol. 46, No. 2, February 2006, Posted On: 2/24/2006


What Are The Obstacles Blocking Way To Higher-Priced Bulk Goods?


Hank Schlesinger
swag@earthlink.net

U.S.A. — Ever since 50¢ vends took hold nearly a decade ago, the bulk vending industry has not seen a significant price increase despite steadily mounting costs for merchandise and overhead. The way the majority of suppliers and manufacturers are talking, not only are per-vend price increases inevitable, but long over due. With profit margins for both operators and suppliers now razor thin, it would seem only a matter of time before significant price increases become a necessity.

Operators and suppliers can pretty much take their pick of reasons for why profit margins are shrinking. Factories in China, once adept at creating low-cost bulk vending toys, are now converting to hi-tech consumer electronics and even large appliances. Trade shows in China that once offered a multitude of low-cost items for the American market are now exhibiting fewer products that fall within the bulk industry’s acceptable wholesale price points.

And the cost of oil has skyrocketed over the past 18 months. For the bulk vending industry, this has proved to be particularly vexing. Not only is petroleum a necessary ingredient in products, but also in the making of capsules. Rising energy costs have also negatively impacted shipping fees and transportation costs throughout the supply pipeline. Once a small cost consideration, energy costs have been taking an increasingly large bite out of the profit margin. In very simple terms, the price of moving products from the factory to the machines has risen dramatically.

Manufacturers and operators have absorbed these price increases both independently and together. However, neither has escaped the bite from their bottom lines.

“I don’t think there’s any question that vend prices will go to 75¢ and $1,” said Peter Becker of What’s Up. “We’ve enjoyed many, many years of increasing product value and low inflation. But this latest spike is what is going to throw us into the next level; the costs are finally catching up to the quality of the merchandise.”

Becker, who pioneered the concept of “premium merchandise” that helped boost the price increase to 50¢ some years ago, has already seen many of his products cross the line into 75¢ vends because of their quality. “Operators are looking for higher quality merchandise,” he said. “And that’s part of our purchasing philosophy. Right now we’re purchasing items that are at the high end of the 50¢ spectrum, so the result of that would be excellent-selling 50¢ items, while the same merchandise could garner a 75¢ vend. The idea behind that is to assist operators in making that change upward.”

This increased quality, of course, is essential. Price increases, as many operators have discovered in the past, do not work without a simultaneous increase in the perceived value of a product. Children, for all their consumer savvy, stubbornly refuse to grasp the underlying principles of pricing when it comes to bulk vending. They want value for their money and accept no excuses.

WHY THE DELAY?

So what, exactly, is keeping vend price hikes from being instituted en masse? After all, it wasn’t that long ago that the industry made a fairly smooth and relatively speedy transition to higher-priced 50¢ items. The answer is not an easy one to grasp. Among the most obvious reasons is the fact that the industry still hasn’t completely recovered from the voluntary lead/jewelry recall that occurred not too long ago. Although quality product continues to flow through the supply chain, the void left by those toy fashion accessories has not been completely filled. The toy jewelry made up an entire product category whose appeal extended from pre-teens and tweens to young adults. And while some products since the recall have tapped into that same market demographic, the category has never rebounded.

And, too, the complaint voiced by many operators a few years ago – that products with a higher perceived value aren’t available in any real quantity – still has merit. Before operators invest in higher prices, they want to be assured of a steady supply of quality higher-priced merchandise. This is no easy task, as most suppliers want to be assured of a steady supply of customers for the merchandise before they make a more substantial inventory investment.

Another reason is the expense of changing over; the investment on the part of operators is not insignificant. With sales down in several parts of the country, many operators are looking to cut costs any way they can.

And then there is the “jingle factor.” While most people can usually count on having about 50¢ in various denominations jingling in their pockets or purse, 75¢ or more is less likely. The obvious answer, of course, is a bill changer, representing another investment for the operator.

“Given the price increases, and the fact that everything is going up, merchandise has to go up to 75¢ and $1, but some operators have met resistance,” said Michael Fishman of Five Star/TJ King, a leading supplier based in Niles, IL. “There is consumer resistance out there. And there also is a lot of competition out there with dollar stores.”

According to Fishman, there are several products on the market today that could fetch a 75¢ vend, such as 55-mm high-bounce balls, but other items are “stuck” at the 50¢ level. “Operators are going to have to raise the price, but they need the right product to do it,” he said. “It’s happening now out there, but selectively.”

Despite all of the reasons not to switch to higher price points, an increasing number of operators are making the move. Some are forward-thinkers who want to be at the forefront of the trend for competitive reasons, while others see it as a matter of survival. According to several manufacturers, an increasing number of operators are retrofitting machines with the higher-value coin mechs. Richard Bolen of Northwestern Corp. has reported increased sales of the high-value mechs. “From our end of it, we have seen more and more people converting from 50¢ to 75¢ and to the dollar,” said Bolen. “Before, there was just a handful of people and we did it ad hoc. As it became more prevalent, we redesigned the ‘80’ mech so it could handle the higher prices.”

Bernie Schwarzli of Beaver Machine Corp. has also noted the same trend, and sees no let up in sight. “If the fuel prices continue to go up as anticipated, the capsule prices are going to inevitably rise,” he observed. “I strongly recommend that operators begin preparing themselves. Going along with this, though, will be a greater need for suppliers to offer products that have a higher perceived value.”

Service Vending (Aurora, MO), has been in the vanguard of higher-priced vends for years. It was among the first to adopt the 50¢ vend several years ago, and more recently it completed the changeover to 75¢. The move to the higher-priced vend, which the company first initiated in 2001, was completed nearly 18 months ago. The strategy was simple: Service Vending adopted the higher price for all of its 2-in. capsules, then jumped the price of 1.1-in. capsules to 50¢.

According to Service Vending’s Tyler Sumners, the changeover dropped the number of vends by as much as 40% in some locations, but the extra profit increased net by as much as 20% to 25%. “At this point, it’s easier to increase the value of merchandise in the machines,” explained Sumners. “We do this through dedicated products as well as mixes. We’ve been able to enhance the value.” He is quick to note, however, that 1.1-in. capsules at 50¢ have not performed as well as expected for him or other operators who have made the change.

“I see a lot of 75¢ machines popping up, but not that many 50¢ machines for 1-in. capsules,” said Sumners. “I think [these operators] they may be getting away from the 1-in. capsules altogether, and going to gum and candy.”

CANDY TAKES A BITE

Candy and ball gum have not been immune to slimming profit margins. Manufacturers are feeling the pinch in the face of rising commodity prices affected even more by a particularly bad hurricane season. Sugar and other raw ingredients have all seen increases.

According to Mahesh Pohoomull of Oak Leaf Confections, a leading manufacturer of ball gum, 850-ct. ball gum typically vended for 25¢ is in danger of a shrinking profit margin.

“There are two alternatives: One is to move to a 1,080-ct. gumball, which for a slightly higher price yields 230 extra gumballs and a very minimal difference in the perception of size from a consumer point of view,” said Pohoomull. “The other option is to go with a larger-sized gumball – perhaps a 600 count – and move to a 50¢ vend.”

Will customers pay 50¢ for a gumball? Maybe. Although a doubling of the now-accepted price of a quarter, the 50¢ vend is still less expensive than most confections sold through traditional retail channels.

NO SURE ANSWER

One thing is for certain in the pricing dilemma: operators can be assured that no easy answer will suddenly appear on the horizon. Gas prices are not expected to come down in any dramatic fashion in the near future, and product costs will most likely remain high. Whether operators can manage to raise vend prices to maintain profit margins or diversify their range of equipment to increase profits remains to be seen. But, as any experienced operator knows, bulk vending has never been an industry of quick fixes and easy answers.


Topic: Bulk Vending

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