ATLANTA — Operators today confront a situation in which workplace populations have declined, operating costs continue to increase, skilled labor is hard to find and competition remains strong. It thus has become essential to sell more through every machine on location, said industry veteran Brad Bachtelle, Bachtelle & Associates (Tustin, CA).
Bachtelle, a pioneer vending and coffee service market researcher and consultant, keynoted the annual meeting that led off the National Automatic Merchandising Association’s 2005 National Expo. In a presentation sponsored by Hershey Co., he observed that the present economic environment presents both challenges and opportunities for the vending industry.
“In order to improve consumer focus, we have to function differently now,” the speaker observed. Noting that the only two ways of increasing sales volume are adding new locations or generating additional traffic in existing stops, he pointed out that the second alternative involves much lower costs, and thus a more dramatic impact on profit.
“A 1% increase in same-location sales can improve profitability by 20% or more, in the average operation,” Bachtelle reported. “Why? Because of leverage.”
Most of the costs involved in serving an account are fixed: vehicle and facilities expense, administration, and so forth. Thus, substantially higher traffic at that account involves only the additional product cost, higher commissions payment and sales tax, and perhaps an uptick in payroll and sales commission for the driver.
The long-time industry observer reported gross profit in vending presently runs at around 52.5%; operating expense averages just under 25% – but operating profit has declined to an average 1.69%, half what it was 10 years ago. Given that trend, a method of generating more dollars from each machine at every stop, without increasing operating expense to any great extent, should interest everyone. “Is it worth the effort? Yes, it is,” Bachtelle emphasized. “There is no greater opportunity today.
“If we do business tomorrow just as we did yesterday, then we can only expect yesterday’s results,” the speaker reminded the audience. “And those are no longer good enough.”
WHAT IS VENDING?
In dealing with this challenge, Bachtelle observed, operators must (once again) rethink the nature of the business they’re in. Everyone has been saying, “Vending is a service business” for more than three decades, he recalled. Service is, of course, essential – “but people put money into a vending machine to purchase products: so we’re a retail business.”
Operators who recognize this will see that they no longer can focus primarily on route operations; “We have to think as retailers,” Bachtelle reiterated. Operations remain important, but they cannot remain the principal concern. “Merchandising and marketing have become the key management responsibility,” he emphasized. “Focus the route functions on merchandising execution; this is the critical management opportunity.”
This is not to deny the need to provide excellent service, the speaker noted; rather, the goal must be to add “volume drivers” to that service. “There are three of these: product, pricing and traffic,” the speaker explained.
The “product” component has two parts, selection and availability, Bachtelle continued. “Consumers will only buy from a machine if they see what they want in it,” he pointed out.
Selection, in vending, is constrained by the relatively limited space available in a machine. While today’s glassfront snack venders can accommodate a much wider variety of items than their dropshelf predecessors, they still cannot match the density of a convenience store or other manual outlet. For this reason, it’s essential to stock every machine with merchandise carefully chosen to turn rapidly.
Bachtelle noted that the products for each machine typically are pulled by the route driver from warehouse inventory. “Who decides what those products are? That person controls your sales,” he emphasized. Historically, the route driver was responsible for menuing the machines; but drivers are not trained in product selection nor in consumer demand trends. “Today, the driver should execute stocking decisions, not make them,” the speaker stated.
And the decision-maker must implement good category management, he emphasized. “This is a technique, proven in every retail channel, for matching selection – shelf-space allocation – to demand,” Bachtelle explained. “The space in your machines is your most valuable asset.”
A derivative benefit of effective category management – menuing each machine only with items chosen to appeal most strongly to the range of preferences among the patrons – is that it streamlines warehouse inventory, limiting the stock to SKUs that turn most rapidly. This can lower inventory cost by as much as 35%, the speaker reported.
Eliminating the slow-moving items in each vender necessarily increases per-machine sales and, thus, overall location volume, he reiterated. And route management becomes easier, too, since there are fewer items on each truck, fewer stales, and generally more predictable sales.
Vending has not ignored category management, Bachtelle recalled, but vendors have been inclined to define categories in terms of size (such as wide and narrow-column items) and price (e.g., 50¢ and 75¢ merchandise). There may have been some sense to this in the past, but it is unsuited to present requirements, he explained.
“Price and size are operator categories; products should be categorized for consumer tastes and preferences,” the industry veteran emphasized. “For example, what is an ‘Oreo’? It’s a small-spiral item, so it often is treated as a candy selection. But a bag of ‘Mini Oreos’ then must be treated as a premium wide-spiral snack selection. My daughter will tell you that both of them are ‘cookies,’ and she’s right!”
Equating narrow spirals to “candy” throws together such disparate product types and chocolate and nonchocolate confections with peanuts, cookies, crackers, granola bars, and so on, each of which has a distinct customer base. They are not interchangeable, Bachtelle insisted, and it is past time for the vending industry to look at categories in the light of modern retailing practice.
“And completing a planogram does not equate to implementing category management,” the keynoter reminded the audience. “Your planogram is a guide; it’s not implemented until you’re sure that the menus in your machines reflect it.”
Thus, formally assigning management the responsibility for load plans, and thus for controlling purchasing, only takes effect when the drivers are required to follow the planogram. Bachtelle urged NAMA members to log onto the association’s “Vision” website, namavision.org, for more information on planogramming.
The principal suppliers of products to the vending industry make use of the best available information, from market research services such as IRI and Neilsen, to refine their merchandising programs aimed at grocery and convenience stores. They know that expanded variety creates demand – as it does in vending; but, in vending, shelf space imposes discipline. “We need to manage variety aggressively, but carefully too,” the speaker advised. “Limit the core items so you can rotate the greatest possible variety of discretionary items around them; rotate by design. Select new products when they become available, because they sell.”
Historically, vending operators have welcomed new items, but have approached them tentatively until certain that they would sell. This is no longer the best approach, the keynoter warned. “Don’t be tentative; put it out and let it work,” he urged. “Find out how to make it work.”
Moreover, in planogramming, it is important to remember that “one size does not fit all,” now more than ever. “You have to adjust the planogram for location demographics. Segment your accounts according to their predominant consumers, and then make appropriate adjustments within each.” Decades ago, with nine products in a candy machine, the driver could handle this; today, management must do it.
All operators know that there are substantial differences between public locations and those that have more or less permanent populations that frequent the machines every day. Public sites bring different patrons to the machine all the time.
From the standpoint of variety, Bachtelle said, the thing to observe here is that in public sites, the consumers rotate, so to speak; they impose their own variety because few of them ever become familiar with the machine. Thus, the best mix of top-selling items should be available all the time. However, in an affinity-group location such as the typical business-and-industry account, the operator must practice “guided rotation” to enforce variety. This will maintain patron interest and keep people coming back to the machine, to see what has changed and what’s new.
Operators also are familiar with trends, and Bachtelle urged them to become even more familiar. He pointed out that the perception of what is “healthy” changes every 18 months or so, and it’s important to stay current.
He thinks it likely that a new generation of “trend products” is on the horizon, for example, items that offer anti-oxidants (everyone wants anti-oxidants) or calcium fortification.
These things should be looked at from a sales standpoint, the speaker emphasized. “You can say, ‘this or that is only a fad’ – but so what?” he asked. “If the consumer wants it, you ought to be selling it. You may think that this or that desire will only last for six months; again, so what? Why not maximize your revenue by selling it for six months? You can take it out when appropriate.”
This is an example of an important retailing principle that operators have not always recognized, the keynoter said: “You have to do what the consumer wants, not what you want! Vendors have tended to pull their chocolate candy in the summer months; but grocery stores have found that their chocolate sales peak in July and August. We take out chocolate because we’ve always done it, because it’s easy. Can we develop a route delivery system that can handle chocolate all year round? Of course we can, if we choose to do it.”
Similarly, operators should not resist the desire for more “nutritious” products, Bachtelle advised. Locations are imposing requirements on the kinds of product that can be sold on their premises, and this is happening in all parts of the country.
“What can you do? Merchandise aggressively; involve the location; be aggressive about promoting nutritional programs in all your machines,” the keynoter recommended. “Talk up quality and nutrition; balance your product offerings.”
In order to do this to best effect, the industry must continue its long progress toward an approach that values high demand over low cost. “Products that don’t sell don’t deliver profit, no matter how little they cost you,” the speaker said. “So get the ‘dogs’ out.”
Similarly, alert retailers get maximum leverage from the advertising run by their suppliers, and vendors should do the same. Bachtelle reported that the major beverage, confection and food companies spent almost $7 billion on advertising in 2004, and about $10 billion on sponsorships, endorsements and other sales promotion activities.
Those expenditures are warranted because they drive consumer demand. “Your suppliers advertise to consumers, but they advertise for their retailers – like us,” the speaker observed. “After all, they don’t really sell to consumers; they sell to us.”
For this reason, operators should strive to gain maximum benefit from consumer advertising. “Align your selection with products being advertised; get advertising schedules from your suppliers, and adjust your rotation accordingly,” Bachtelle urged.
The long and the short of it, he summed up, is that “product control equals improved sales. Every other channel does it, and vending can do it too.”
Another essential ingredient in effective retailing is offering value, the keynoter said. It is not always easy to know just what “value” means, but a useful definition is, “an appropriate product at an appropriate price.” Vending, for mechanical reasons, has tended to “group price” products by their physical size, often in conjunction with product cost. Modern vending equipment and pricing-and-credit technology has done away with any practical reason for doing this.
“Does size equal value? It’s a simple model, but not a very helpful one,” Bachtelle added. “After all, a Volkswagen ‘Beetle’ and a Porsche ‘911’ will fit easily into the same garage space, but they’re priced very differently. Think of your snack machines’ narrow spirals in terms of that garage...”
Convenience stores don’t price by size, and there’s no reason for vending operators to do it, either, the speaker emphasized. It is a simple approach, but that no longer is a valid reason.
“Here again, your drivers have to execute a merchandising plan,” the keynoter said. “And varied category pricing in a machine actually enhances product sales.”
In tests, Bachtelle reported, machines stocked entirely with “standard” candy priced at $1.25 were compared with identical machines stocked with a mix of “standard” candy at $1.00 and “premium” candy at $1.25 and, again, with the “standard” selections at $1.00 and the “premium” ones at $1.50. The machines with the $1.00 and $1.25 selections outsold the single-price machines by 27.7% – and the machines priced at $1.00 and $1.50 outsold the single-priced piece by 17.6%.
The speaker pointed out that the popular retail strategy of “upsizing” should be understood in this light. Each sale is a “consumption event,” and the object must be to maximize the penny profit, every time. Getting consumers to trade up is an effective way to do it. Retailers have found that there are three keys to success.
“You offer both the traditional and the larger size, at least initially,” Bachtelle reminded the operators. “You use point-of-sale materials to draw attention to the choice; and you offer value pricing for the larger option.”
And, especially in an era of downsized workforces, it is to the operator’s advantage to find ways of building traffic to the greatest extent possible. “More bodies represent more sales, so all retailers try to increase traffic,” the industry veteran noted.
The principal traffic-building tool is product promotion, which is why it is so popular in retailing. There are many kinds of promotion, Bachtelle observed; a very popular one, in all channels except vending, is “sale” pricing.
“Why isn’t it popular in vending, too? Because vendors don’t do it,” the speaker said. “In tests, it’s proven very successful, increasing per-spiral sales by up to 81%. And 48% of them were incremental sales.”
On-pack promotions, too, are popular across retailing channels, and they have found some favor with vending operators. “Do they work?” Bachtelle asked. “We tested several approaches, and found that on-pack ‘bursts’ plus supporting POS materials produced an average 9% volume increase; ‘hidden’ stickers plus POS produced a 46% lift; and combining the two raised volume by more than 50%.
“Consumers do respond to retail promotions in vending, just as they do in other channels,” the speaker summarized. “But operators often don’t offer those promotions. So let’s do it, or do more of it.”
Vending always has had a strong technological element, and it has one still; technology affects vender merchandising. Operators have every reason to select the most suitable equipment for each location, and Bachtelle recommended periodic reviews. Questions to consider include, “Should you add a machine, or install a larger model, or go to a glassfront cold drink type, or consider an ‘outside-sitable’ snack vender?”
Vendors also should watch the development of cashless payment systems closely, the keynoter advised. “This is going to come, because the cashless option makes matters easier for the consumer,” he predicted. “Are there implementation issues? Sure; but we can work through them. We must make it as easy as possible to buy from us. We want consumers to see machine and expect that it will take a credit or a debit card.
“The overarching change that this industry must make is to think like retailers, and act like retailers,” Bachtelle concluded. “Be optimistic; accept that change can be good.”
The vending industry always has been willing to adapt, but has inclined to move cautiously, to “try it and see whether it works,” he said. “We can’t afford to do that any more. We have to make it work.”