Micro Markets Lift Vending Industry Revenue to $20.9 Billion

The full State of the Industry PDF report with graphs included within the text can be found here.

Since the industry started recovering from the Great Recession, there has been a new business model emerging. During the hard years, it became apparent to many operators it was time to gain operating efficiencies and better control costs. This has led to a steady increase in the investment in vending management systems (VMS) as a way for operators to manage their businesses more effectively. In 2015, operators using VMS report it has helped increase same store sales, cut unprofitable accounts, cut labor and vehicles costs, increase product variety, all while maintaining or increasing sales and profits. Cashless payment acceptance is also being adopted at a faster rate. It has increased sales in many locations, according to operator comments. In part due to this strengthening of business practices, the aggregate revenue for the industry has grown nearly 4 percent in the past year to reach $20.9 billion, the highest it has been in 6 years.

In addition to vending technology, micro markets have been invigorating revenues. Thanks to the open shopping experience with new products and broader appeal, micro markets are driving interest by workplaces and consumers. Both are requesting this type of solution from operators at an increasing pace. Micro markets have also brought new equipment providers, new smaller location solutions, and additional product suppliers to the industry. In 2015, the percentage of revenue associated with micro markets rose to a record-breaking 10.2 percent of the total, making it the highest revenue-providing service segment after vending machines.

It’s not surprising that micro markets have been doing so well. Many of the challenges vending has and is currently facing don’t exist with a micro market. One example is that many consumers no longer value convenience as they once did. Instead, having grown up with restaurants and convenience stores on every corner, they like product variety, and trendy items as well as saving time. A vending machine’s limited choices can’t compete, especially now that healthier items are being required in many places, taking up real estate in the already limited vending machine. The open concept of micro market shelving allows additional product choices, better meeting the expectations and needs of the consumer. Micro markets also come with an inventory management system, which makes determining profitable products easier from day one. Despite the benefits of micro markets, the segment is not without challenges. Managing the increased number of SKUs in the warehouse, hiring the right staff to analyze reports and making changes in the markets is challenging, as well as training or hiring the right type of driver to best service the market. Plus, locations are much more individualized when shopping a market. The same product doesn’t work everywhere, keeping it from being a one size fits all type of service solution.

Acquisitions remain fairly constant

While the number of operations that divested or acquired business in 2015 shrank a little, the percentages stayed pretty consistent with prior years. Just less than a quarter of operators reported acquiring companies last year (see chart 6). Many of these acquisitions appear to be smaller operations. The percentage of operations making under $1 Million in revenue each year dropped by 1 percent in 2015 (see chart 2). Mid-size and large operations grew. The number of extra-large operations declined. Comments suggest that pricing challenges among very competitive regions as well as those that are not utilizing technology are struggling.

In 2015 there was a shift in some of the locations operators served. Manufacturing and offices remain very important, but vending operators are diversifying their location mix which makes those percentages shrink due to the total percentage of 100 (chart 3). In actual numbers, it is unlikely these locations are decreasing. In chart 3B, nearly half of operators report servicing more locations in 2015, which would support the theory there are a greater number of vending, micro market, and office coffee service customers now, than in 2014. One area that has been added is military bases which showed a substantial increase, despite still only representing 8.7 percent of the total serviced locations. Operators report economies increasing, many slowly, but businesses are hiring, leading to additional services and sales.

Non business and industry sites, such as restaurants, hospitals and correctional facilities have seen more service from operators as well. Even schools, which initially suffered due to the U.S. Department of Agriculture rules about what products could be sold in school vending machines, has rebounded. New products that meet guidelines have been introduced to the vending channel, which has allowed operators to successfully serve this niche. Some of the new products are a result of suppliers no longer keeping certain products available only in vending or only in retail channels in a siloed sales model as well as new product entrants. It has resulted in a greater variety of healthier products available to operators today, although more are still needed with longer shelf lives and broader consumer appeal.

Technology combats rising costs

The cost of doing business is ever increasing. The vending industry is no exception. Operators have raised prices at a greater level in 2015, than in the previous year, and over half of them have absorbed cost increases as well (see chart 5). Taking better control of the vending business and managing it more effectively, is another solution operators are using to handle the increased cost of doing business. More than a third eliminated unprofitable accounts, rearranged routes and reduced service frequency. Much of this was done with VMS.

In 2015, operators were asked if they utilized a VMS; 54 percent said yes. When looking at the operators that reported increased revenues in 2015, the percentage rose to 62.6 percent. For operators that reported a decrease in their revenue for 2015, only 32.1 percent used a VMS. Using a system to manage vending data seems to help operators stay in the black. Many commented on technology innovations saying “it helped me learn my business better and grow our overall sales within locations” as well as “it has been a huge positive.” Those operators embracing VMS are also looking at other systems such as business intelligence software, e-commerce, warehouse picking solutions, customer relation management (CRM) tools and more, suggesting a more modern, innovative future for automated retail.

Boost in cashless vending

The number of vending machines that accept credit and debit cards has hit 15 percent, the highest on record (see chart 10). Not just the percentage, but the actual number of cashless readers has also increased, because in 2015 the approximate number of vending machines dropped to 4.5 million, down from around 5 million, predominantly to the addition of micro markets. Operators adding cashless payment acceptance tend to comment that it has produced a sales lift. It benefits the operators’ bottom line, but also increases customer satisfaction.

Many operators use two-tier pricing now that it is available, to cover the fees charged for taking credit cards. Despite this movement towards a more cashless vending experience, the majority of vending machines still only accept cash or coins — a statistic that puts the vending industry at a disadvantage compared to its competitors for the consumer snack and daytime meal dollar.

While there has been conflicting information about how the Europay, MasterCard and Visa (EMV) or chip cards will affect vending, this is not a top critical issue for operators, who are working with processors to manage any fees they have experienced.

Micro markets change the landscape

At an all-time high were operators reporting micro markets as the primary driver of their positive bottom lines. Yet, the percentage of operators that offer micro markets is less than 50 percent (see Micro Market Breakout). Roughly a third of micro market operators have 50 micro market locations, or less. The average is 13, although that number is misleading. Operators usually try a couple markets, and if the concept works for them, jump into the segment quickly, placing micro markets fast. This produces large gaps in the number of micro markets reported, which brought down the average.

There still remains 57.3 percent of operators who are holding out, not willing to take micro markets on as a new service segment. In an attempt to discover how much micro markets are affecting operators’ success, we compared operators who reported a decrease in revenue for 2015 compared to 2014 to those that reported an increase. Of those operators who reported decreased revenue in 2015, 85 percent of them did not offer micro markets. Of those that reported an increase in revenue, only 45 percent did not offer micro markets.

Product category review

Candy/snack/confections and cold beverage segments continue to make up the majority share of revenue for operators. Both saw increases in 2015 in revenue and unit sales (see chart 14). The large variety of cold beverages from bottled water to ready-to-drink teas and coffees has helped sales in this category remain strong, but energy drinks did the best of all the cold beverage categories.

Candy/snack/confections

According to sales data provided by Cantaloupe Systems and extrapolated for the entire industry, candy did well, accounting for nearly 28 percent in annual revenues (see chart 14). Bagged candy grew the most from 2014, pushing revenues up nearly 33 percent. Chocolate candy and non chocolate candy both saw increases as well, however, the non chocolate category brought in nearly twice the amount of revenue. The only candy category to decline in 2015 was gum and mints, which lost units, if not sales revenue.

For snacks, those categorized as nutritious showed the largest increase, 31.7 percent for revenue. This growth is unsurprising as consumers are moving towards certain types of healthier snacks and alternative options. Nuts and seeds also did well, as did food snacks, both growing more than 20 percent in revenue.

Despite the focus on healthy items, consumers still like indulgences, a fact supported by the revenue growth in pastry, 19.7 percent, as well as chips 13.9 percent. Bagged snacks grew the least, but still showed a positive movement of 2.3 percent for revenue.

Cold beverage

Energy drinks grew the most in both revenue and unit sales, according to Cantaloupe data. In both the smaller 12 ounce size as well as the larger 16 to 20 ounce size, the revenue growth was over 27 percent. The next strongest cold beverage category was large non-carbonated drinks. This would include ready-to-drink iced teas, coffees, water and flavored waters.

These are similar to trends seen in the U.S. Liquid Refreshment Report released by Beverage Marketing Corporation. Bottled water has had an especially notable year, with volume growing by 7.9 percent. Carbonated soft drinks remain on the decline across all retail segments according to the Beverage Marketing Corporation, but this is not the case in the vending industry, which saw that segment increase between 10 to 13 percent in revenues compared to the prior year.

Milk sales remain low in vending machines with 47.5 percent of operators reporting that in 2015 they didn’t even offer milk. Of those that did offer milk, nearly 12 percent of operators reported increasing milk sales in 2015, which was higher than the 8.8 percent that decreased milk sales. The rest, about 31.9 percent, reported no change.

Operators diversify

In 2015, operators continued their trend of offering additional services, beyond traditional workplace refreshment. More than 9 percent are utilizing their staff, product inventory, logistics or other business acumen to expand their businesses (11B). Operators report supplying repair services for vending equipment or coffee brewers, acting as a distributor for certain brands, catering, wholesaling and subsidized product delivery via free vend vending machines among the other services contributing to their annual revenues.

Challenges: preferences, hiring

A primary challenge for operators is the very individualized preferences of consumers. Operators report a lack of appreciation for the service they provide. Consumers today overlook convenience, traveling to competitors to get the exact flavor or type of product they want. Customer loyalty is low to service, but exceptionally high to the product.

Micro markets certainly alleviate some of these challenges, but it’s not a realistic option for many locations. Operators are trying to figure out how to provide the same level of product customization for vending customers using VMS data as well as better communicate with consumers. Operators are trying QR codes, mobile apps, video screens, social media and loyalty cards that work at a vending machine to engage the consumer in a more positive way.

Another difficulty operators are reporting is finding and retaining dedicated employees. Across the foodservice industry, especially restaurants, companies are feeling the squeeze of not having enough quality employees. Specifically in vending, micro market and OCS, operators talked about the difficulty in finding and keeping good route drivers as one of their top concerns. Hiring the correct employees to deal with new micro market business was a close second.

For most operators, vending is a core business that is relatively flat. Many revenue increases in vending have been a result of better cost control and eliminating unprofitable locations and products, all through technology. This has moved VMS and similar business management solutions from good-to-have to must-have. The strongest segment in 2015 was micro markets, which represented a record percent of revenue compared to other services offered. Micro markets are poised for continued growth for the foreseeable future, furthering the gap between operators that do offer it and those that don’t. As for new segments, operators are diversifying into many different areas, expanding offerings and the types of locations they service, all of which will continue into 2016.