ST. LOUIS — The economic turmoil that erupted in mid-September was a topic of compelling interest at the recent National Automatic Merchandising Association National Expo. Delivering the keynote address at the association’s annual membership meeting, industry veteran Brad Bachtelle of Bachtelle & Associates (Tustin, CA) offered recommendations for managing through tough times.
NAMA chairman James F. Brinton of Evergreen Vending (Tukwila, WA), who presided at the annual meeting, introduced the keynoter by observing that we are living in interesting times. “I’m glad I’m in this industry, not in banking!” he quipped. Still, this industry is not a bed of roses at present: “We confront an unprecedented increase in costs,” the outgoing NAMA chairman warned. “This is when we need a trade association to seek collective solutions, and NAMA offers many programs to help you.”
An economic downturn is not the time to pull back, Brinton warned; “It’s a time to do more. Be sure your pricing is appropriate, and remember Thomas Jefferson’s observation that the harder he worked, the luckier he became.”
National Expo chair Jim Harris, Harris & Pipkin (St. Louis) introduced Bachtelle, who had presented two well-attended early-bird workshops on the Tuesday and Wednesday preceding the annual meeting and the formal opening of the convention. These had dealt with category management – a necessity for increasing same-machine sales and reducing inventory expense – and profit planning. The keynote address on managing during a recession summarized a number of the points that had been made at these workshops.
Drawing on his extensive study of methods for reversing the profit decline that has afflicted vending for most of this decade,
Bachtelle explained that things are, indeed, as bad as they appear – but the situation need not become desperate if operators are prepared to take swift action to upgrade the obsolescing business practices that have made vending less and less competitive in the present marketplace.
“We’re in the midst of the most difficult times in more than 75 years, the most challenging since the Great Depression of 1929 to 1932,” the longtime industry observer emphasized. “Financial institutions that have been in business for 160 years have collapsed. Right now, every financial indicator is down, and things won’t be good for a while. But that doesn’t mean we won’t survive, if we face what’s going on head on and act now. Today! Yesterday is gone and tomorrow is too late.”
He observed that, while some vending companies will not survive the current slump, those that take the measures necessary to restore profitability and regain their competitive edge will enjoy greater opportunities when the economy recovers.
WHAT LIES AHEAD
A report on consumer spending published on the morning of the NAMA annual membership meeting indicated that, in September, Americans reduced their spending at car dealerships, restaurants and bars, clothing, furniture, book and music stores, among many others. This offers a gloomy preview of what lies ahead, according to Bachtelle.
“Consumers had stopped spending, even before the market crashed,” he summarized. “That’s not good for us. It’s a wakeup call for us to manage so we’re ready, and profitable enough to survive in this environment.”
The speaker emphasized that despite the government’s “quick fix” bank bailout package, many negative influences are impacting the U.S. economy and history shows that it does not recover quickly from such downturns. “I don’t think we’ll be able to stand up and cheer for another 24 to 36 months,” he predicted. “And if we, as operators, don’t deal with the current economy, it will deal with us.”
Bachtelle added that vending operators have seen the handwriting on the wall for the past 18 months, with overtime declining, layoffs rising and consumer spending trending down. “The vending industry is always the leading indicator when the economy turns downward. We see it every day because we’re there,” he noted. “Convenience stores, our competitors, have been seeing sales decline as consumers make fewer trips to the store and fill up less because of gas prices.”
Stressing that matters have come to a head, the speaker reported that, when the stock market tumbled just before the National Expo opened, U.S. corporations lost 39.4% of their value in comparison with last year.
Adding to the witches’ brew are widespread commodity cost increases. “There is no category that has not been hit, which leads to price inflation,” Bachtelle continued. “And unemployment continues to rise; it may go as high as 7.3% or 7.5% next year. The U.S. dollar is down; we could always rely on our presence in the worldwide market, but the dollar has lost 50% of its value against the euro. That’s scary, and we should be ‘gloomed and doomed’ by it.”
He added that there is a ripple effect when the economy faces this kind of stress. At the time of the National Expo, it had not yet fully impacted the automotive, airline and retail industries. Additionally, consumer confidence is extremely low as savings are down and jobs, homes and retirement reserves are at risk. It must be restored before the economy can recover, the keynoter explained. This will not happen overnight.
On a positive note, Bachtelle emphasized that history shows that a down economy always turn back up, grows and becomes positive again. “I believe absolutely, without a question, that with every swing to the left in bad times, things will swing to back to the right in good times,” he said. “Our immediate objective, then, must be simply getting through, because the good times are coming and we have to be ready to benefit and profit. I believe in the strengths inherent in our business, our country and our economy; we just have to get through the gap. For now, though, we are right in the path of the storm. The reality is that it’s headed right for us, even more than other industries.”
Addressing a critical subject that he has explored in depth at his popular Profit Improvement workshops, Bachtelle explained that industry profitability has been unacceptably low since the turn of the new millennium. Operators’ reluctance to take appropriate pricing action has been primarily to blame for this. The rise in product costs, and fuel and other operating expenses, has only exacerbated operating deficiencies that have been in dire need of attention for almost a decade.
“We’re retail distributors,” the speaker stressed. “Gas and other energy costs seriously affect us every day, and we don’t have mechanisms to pass those costs onto the customer.”
Vending also lacks any real capability for mass marketing: “Wal-Mart can put on a promotion to drive sales and bring people flocking to their stores,” Bachtelle instanced. “We can’t.”
The industry is also hindered by the fact that the $1 bill continues to be consumers’ primary method of payment for vending purchases. “There are two industries in which singles are the principal form of payment: vending machines and gentlemen’s clubs! The U.S. mint has reduced the number of $1 bills printed by a third, because people are using fewer and fewer of them,” the keynoter reported. “We haven’t aligned with how people buy today – and we must. Vending is a capital-intensive business with high fixed costs; we have to maintain our sales volume and improve our profitability.”
The vending industry has a long way to go in overcoming negative consumer perceptions, added Bachtelle, pointing to the widespread tendency to link vending unjustly with obesity, and to a recent survey that found 25% of consumers do not believe the products in a vending machine are fresh.
“We have an affinity for doing business the way we did it in the past, but this needs to change,” he warned. “The economic perfect storm is clearly approaching, and we have to take action. We don’t know when it will make landfall, or how long it will last. But business as usual will not permit us to endure it. We don’t have the profit capacity.”
So it is necessary to take action, and responses to the crisis can take three forms, the speaker summarized. “You can say, ‘what recession?’ and bury your head in the sand; or you can freeze like a deer in the headlights as doom bears down on you. Or you can recognize that there’s an opportunity in there somewhere. There is one; but business as usual won’t keep you afloat until you can seize it.”
Bachtelle pointed out that, based on NAMA’s annual operating ratio report, the industry exhibited an average pretax profit of 5.6% in 1997, and that declined to 2.8% in 2000. Following the terrorist attacks of 9/11, industry profitability plunged to a “break-even” 0.1%. In the years that followed, profitability began to inch upward, reaching 1.4% in 2004 and holding fairly steady – until 2005, when it declined to 1%. The slide continued in 2006, as profitability dipped to 0.9%; estimates for 2007, according to the vending consultant, are a dismal 0.3%. And matters may be worse that that: After reworking the numbers to compensate for a perceived glitch in this year’s survey, Bachtelle is concerned that the true number is in fact negative, in the vicinity of -2.2% and -3.6%.
The speaker suggested that an important underlying cause of this collapse in vending profitability is that an average location that had 175 employees in 2006 might have reduced its workforce to 150 in 2007. This decline in volume does reduce some expenses: As dollars decrease because of reduced sales, so do variable costs like commissions, sales tax and product cost. But operating costs, including route, service and warehouse expenses, remain the same – at best; unfortunately, they recently have been going up. “As costs are increasing, you’re getting less money from the same account, because you’re running your business the same way,” Bachtelle pointed out.
The vending industry’s present weaknesses include decreasing profits, rising costs and a challenging economy, Bachtelle said. On the other hand, its strengths are enormous, with very high total dollar volume, tremendous core consumer usage and familiarity, and enviable operational skills. These assets surely can pull operators through the current economic difficulties, but an immediate dramatic change of course is imperative.
“Prepare and act,” urged Bachtelle. “There will be casualties, and there will be survivors. You will survive if you act on key objectives over the next 24 months.”
The essential measures that operators must take to survive include protecting their companies financially, as well as their personal assets, by managing their revenue base and the margins at existing accounts, seeking new business and streamlining operations to be “lean, mean, tough and aggressive.”
BUILD A FORTRESS
The first step in riding out what Bachtelle called “the perfect storm” is to strengthen the company’s defenses. This calls for personal commitment and intense involvement on the part of the operator. It begins with development of a confidential overall plan enumerating the actions necessary to survive each level of impact that can result from current economic pressures. A second, “public” plan should be drafted at the same time, to put employees into the big picture and involve the entire staff in the steps everyone will have to take to help the company stay in business.
The confidential plan begins by identifying basic cost-cutting actions that can be taken immediately. It is evident that any unnecessary expense must be eliminated at once, and it’s important to be strict in defining “necessity.” The operator must then draft a second round of steps that can be taken should conditions worsen, as well as “worst-case scenario” measures that can preserve the core of the business in the event of disaster.
Of course, as bad as things are, worse may not come to worst; it is important to rally everyone in the organization to do what can be done immediately. Prompt and effective action may preclude the need for more drastic steps. This is the reason for the public plan, Bachtelle explained.
READY THE TROOPS
“Your people know that the storm is here, and are scared of being the next ones in the unemployment line,” said Bachtelle. “Challenge them to help you make your organization better; they’re the ones doing the job every day, and they can help you.”
The speaker urged operators to stop spending money unless it’s absolutely necessary. “Be prudent about every capital expenditure. And manage your current assets aggressively. Consider your overhead: Challenge the need for every pen and paperclip before you spend money on it,” he recommended.
It is also more critical than ever to manage inventory prudently and make more effective use of relationships with suppliers and distributors and the promotions they offer.
Vending companies, at least, have the advantage of getting paid at the time of the transaction. While coffee service operations have their own advantages, they do have the problem of collecting accounts receivable.
“Be very aware of delinquent receivables in OCS,” the industry veteran recommended. “Paying you is not your clients’ highest priority, and they’ll stretch the payment schedule. By the same token, pay your bills as close as you can to the day they’re due; but respect your suppliers and don’t incur late charges.”
Bachtelle urged operators to aggressively manage their revenue, taking necessary pricing actions in a timely manner and making every effort to retain “good” business, fix or walk away from “bad” business and seek new business.
He also emphasized that there’s no better time than the present to take control of merchandising. Even if a snack machine has 45 columns, every facing represents 2.2% of the business it can do. “If you have even one ‘dog’ in there, you lose,” the speaker stated. “Product selection must be a management function; control it. Sell what consumers want, and constrain warehouse purchases to what’s in the machines.”
Operators must recognize that gross profit – revenue from selling product, less the cost of goods – is the lifeblood of their business. “We can’t control product costs, so we have to control pricing and margins,” the industry veteran insisted.”
These measures are especially urgent right now, with costs of the full range of commodities – from coffee and milk to wheat and soybeans – up dramatically over the past two years.
PREPARE FOR THE WORST
And worse may be in store, Bachtelle warned. Food prices to the consumer have not kept pace with those commodity cost increases over the past year; vending is not the only industry grappling with the need to adjust pricing to expense. He believes that substantial “subterranean inflation” exists, and that it may burst out unexpectedly.
All the same, retail food prices have gone up, and the squeeze put on consumers is reflected in less foodservice traffic and more brown-bagging, two trends compounding vending operators’ concern.
“All of the commodity price increases are not fully reflected yet, and our pricing establishes our gross profit,” cautioned Bachtelle. “We lag in our industry, but we’re going to have to implement quickly. It can take our industry four months to complete a price change. With the way things are going, we’ll be facing the next one before the first one is fixed.”
The speaker urged operators to prepare their operations internally for more price increases, while preparing their accounts. Vending clients are well aware that food prices are rising, and do not really think vending can be immune to the effects.
“When you get a price-increase notification, make a decision and take action the very next day, “ the keynoter urged. “Within 10 days, every account should have received a letter, and you should be out visiting them to explain the need for vend price adjustments,” he said. He noted that Crane Merchandising Systems is currently testing technology to permit wireless price changes, eliminating a major logistical hurdle to taking swift pricing action. Operators are also in a position to renegotiate commissions to offset the rising cost of goods as well as higher energy costs.
“Which of your accounts are profitable? Look at your P&Ls. Fix those that don’t deliver a profit. You can’t subsidize them,” Bachtelle emphasized. “You need to make a profit, or else walk away. A smaller, profitable business is better than a larger one that isn’t going to survive.
“And now is the time to seek new business, too,” he observed. “But make sure it’s profitable. Also work together with your accounts; tell them to let you know if and when they’re planning layoffs so you can prepare.”
Operators must also demand more of every employee involved in operations, to help boost efficiency, and should make every possible effort to consolidate routes and implement all-around belt-tightening. “If you can find an expense to cut, cut it today,” Bachtelle suggested. “Even lay off, if you have to. Can you decrease the frequency of your route stops? Can you stretch your service cycles? Can you reduce your repair service stops?”
To do all this effectively, the company must establish performance metrics based on realistic current expectations rather than on historical activity, which usually will require employees to strive to perform better, the speaker suggested.
“Every route should be treated as a business unit,” Bachtelle explained. “The ‘storm’ has changed customer populations, and establishing route stop metrics can help mitigate the impact. Review your route frequency. Traditional weekly service schedules based on the day of the week, not the interval between workdays, leaves huge inefficiencies.”
Bachtelle recommended that operators use the longest workday gap between route visits as their scheduling standard to increase efficiency. For example, a traditional weekly service schedule might call for visiting an account every Monday, Wednesday and Friday, with a “workday gap” of one day. But there really is no “workday gap” between Friday and Monday. Therefore, simply adjusting the schedule so the account is visited on Monday, Wednesday and Friday, then on Tuesday and Thursday, will eliminate one stop every two weeks without affecting service at all. It also frees the truck and driver to make a stop elsewhere.
“Now is the time to restructure and consolidate your route system. If you have 10 routes and business is off by 15%, shift your service schedule, and three routes can go! Don’t just do this because you can: Do it because you have to,” the keynoter urged.
KEEP IT TIGHT
Reiterating the need to recognize the severity of the current economic environment, Bachtelle recommended that operators consider layoffs if they are necessary for profitability. “Layoffs are painful, but necessary to profit and survive,” he commented. “Account populations are down because your clients needed to lay off employees. It’s something you have to consider, too.”
He also advised operators to sell any unnecessary assets, from vehicles to desks and chairs. “When the economy strengthens, buy what you can afford and justify. If you’re making money, spend it. If you’re not, don’t,” he recommended. “When you tighten up and get your expenditures and budgets down, even if your routes are down, you’ll be more profitable, especially when you take control of your pricing and margins.”
Effecting these belt-tightening measures and streamlining operations will not only help operators through the current economic storm, but also prepare them to respond aggressively to the opportunities that will open up when the economy recovers. “People will still buy from your machines in this economy, so you still can make money; you just have to do it right,” urged the speaker. “Will you allow outside forces to domino your profit down?” Recalling the “domino effect” in which tipping a single domino in a long line causes all of them to fall down, he recommended removing the unstable “dominos” so they don’t trigger a cascade of loss.
“Take a domino out; don’t let it cycle down,” he urged. “Hoping for better times won’t work. You must manage more effectively, efficiently and profitably. Everything we need to do is right there. The economic environment is forcing us to make changes to improve our profit – and this really is a blessing in disguise. The survivors will be capable of doing many more things in the future.”