As economic conditions change, refreshment service operators need to re-evaluate all aspects of their business, including the products they carry and the customers they sell to.
Historically, vending and OCS operators have adapted their offerings in a “reactive” manner, whereby customers ask for new products and services before operators provide them. An easy example is when an account asks a vending operator to provide OCS as a way to keep more employees on site during break period.
But given the cost pressures that vending and OCS operators are currently facing, many operators have decided they need to be “proactive” and seek out new products and services before customers get around to asking for them. One service that some operators are expanding into is wholesale delivery.
Wholesale delivery, which is sometimes called “provisioning,” refers to delivering products to accounts that are not vending or OCS accounts. Instead of providing a traditional vending service to these accounts, the operator simply delivers the products to the account and invoices the customer. The location assumes responsibility for the products once they are received.
Wholesale delivery is not new to refreshment service providers. Many vending and OCS operators evolved from candy and tobacco wholesalers that serviced stores, restaurants, bars and gas stations. Some vending and OCS operators even evolved from broadline foodservice distributors that initially focused more specifically on restaurants and institutions before moving into vending and OCS.
While some candy and tobacco wholesalers expanded into vending, certain vending operators, in turn, expanded into cooperative service vending (CSV), a hybrid between vending and wholesale distribution. CSV occurred when a vending operator delivered products to a location that managed the machine with its own employees. In some cases, operators sold the machines to these accounts while in others, they loaned them.
CSV experienced its most recent growth spurt in the mid and late 1990s during the “tech boom” when many fast growing, high-tech accounts asked for machines set on free vend as an employee benefit.
During this “free vend” proliferation in the 1990s, such arrangements usually came about in a “reactive” manner, whereby operators responded to customer requests.
While “free vend” subsided with the “tech boom implosion” at the start of the new millennium, vending and OCS operators can still leverage their delivery capabilities to expand beyond their traditional markets.
Many businesses are too small to have a vending service but still want to provide snacks and beverages to employees. Vending and OCS providers can oftentimes provide products more cost efficiently to these accounts than other sources, such as membership warehouse clubs or broadline foodservice distributors.
Vending and OCS operators have often observed that customers find it easier to consolidate purchases from one supplier versus dealing with different providers. This has become more important recently as suppliers have added fuel surcharges to their deliveries.
POSITIONING FOR GROWTH IN WHOLESALE DELIVERY
Positioning a vending or OCS business to serve wholesale customers requires investing in some non-traditional products, educating sales people about the new products, investing in additional marketing initiatives, and in some cases, adding more delivery vehicles.
In surveying vending and OCS operators who have expanded into wholesale delivery recently, Automatic Merchandiser uncovered various operating models. In most cases, vending and OCS operators are able to realize some synergies among the different product categories they offer. This includes dry goods, beverages, paper supplies and cleaning supplies.
BENEFITS TO THE OPERATOR
The key benefits to operators are higher volume purchases and increased route density. Operators also note that wholesale delivery yields lower profit margins than vending sales on a per-item basis, but there is no investment in vending machines and machine service.
One operator transitioned from a full service vending operation to wholesale delivery, focusing on school accounts. The vendor, who did not want to be identified, came across a broadline foodservice distributor looking to retire. The vendor reasoned that he could supply break room and cafeteria products to the same accounts he was servicing vending machines at.
The operator was able to warehouse all of the products, vending and wholesale, under one roof.
The profit margins on the snacks and beverages sold to wholesale accounts is less than on vending, but the elimination of service calls and no weekend deliveries more than made up for it. “From that aspect, you can have more of a life,” he said.
The expansion put the operator into competition with some broadline foodservice distributors who offer more products. However, he has been able to win his fair share of business since many schools do not require frozen and refrigerated products, which he doesn’t carry.
McKirnan Brothers Inc. in Celina, Ohio expanded from candy and tobacco wholesaling into vending in the 1950s. Since the company serves a rural market, the wholesale side remains fairly large, noted Frank McKirnan, co-owner. The wholesale customers currently include convenience stores, grocers and carry-out restaurants.
McKirnan said there are synergies between the two businesses. All products are warehoused in a 14,000-square-foot facility. There are currently six wholesale routes and four vending routes; the deliveries are not combined.
McKirnan said that while profit margins are lower on wholesale products, there is less resistance to price increases than from vending customers.
Sure Bet Services Inc., based in Charles Town, W. Va., expanded into wholesale delivery in recent years as a way to improve its route density for its vending routes. The wholesale deliveries are made by the same vehicles as the vending stops and now comprise 20 to 25 percent of the company’s sales.
Scott Bridgeforth, president Sure Bet Services, said the wholesale accounts include little leagues, recreation centers, delicatessens and golf courses. Many of these accounts get the same products as vending customers. That side of the business has actually grown faster than vending recently, he said.
The wholesale customers appreciate being able to get snacks, soda and candy from one supplier. Without Sure Bet Services, they would have to work with two or three suppliers.
1990S: ‘TECH’ BOOM FUELED WHOLESALE BUSINESS
Accent Food Services in Austin, Texas expanded into wholesale delivery during the 1990s “tech” boom.
The wholesale business, which the company refers to as “provisioning,” consisted of three dedicated routes at its peak, noted Tom Hawkins, co-owner. This has fallen to one route, but Hawkins doesn’t expect it to disappear. “It’s still a nice piece of our business,” he said.
Don Howard, who was a salesman for Accent Food Services at the time, said the company came across the opportunity to stock break rooms while soliciting vending and OCS accounts. At first, some of the customers took vending machines and placed them on free vend. This evolved to delivering frozen and refrigerated items to coolers and freezers in employee break rooms.
One of the major benefits to this business is that there was little price resistance, said Howard, who is now a consultant with Tustin, Calif.-based Bachtelle & Associates.
One wholesale customer was ordering $1 million worth of products per year, he said.
Karsay Coffee in Somerset, N.J. began as a foodservice distributor and developed a focus on foodservice coffee and OCS. The company combines its bulk food and OCS deliveries on the same vehicles.
Rich Karsay, president, said OCS has been the fastest growing segment in recent years, and remains more profitable. But because the market they serve is largely rural, he expects they will maintain the foodservice business.
SOME OPERATORS FIND SEPARATE DELIVERIES HELPFUL
One Midwest company that began as a candy and tobacco wholesaler in the 1930s expanded into vending in the 1970s and continues to operate both businesses. This operator, who did not want to be named, said he finds it advantageous to offer both services due to the synergies. These include the warehouse and some of the purchasing.
But because the customers are different, this operator finds it makes sense to have separate delivery routes. Most of the wholesale customers are bars and small restaurants.
He also noted that the selling function is different. “Selling vending accounts is a whole lot different than
selling bar supplies,” he said.
This operator maintains that the two businesses are equally competitive.
OPERATORS EXPAND INTO OFFICE AND CLEANING SUPPLIES
Over the years, some vending and OCS operators have expanded into office supplies, hoping to increase per account billings. While synergies exist between the different product categories, office supplies require more education on the part of the sales and service staff.
More recently, some have expanded into janitorial and sanitation products, also known as “jan/san.”
One Source Office Refreshment in Pottstown, Pa. has expanded from vending and OCS to jan/san, noted Stacy Ludy, sales and operations manager. “It just makes sense to offer more to the customers we have,” she said.
Ludy said the company seeks customers who will purchase a minimum $125 per month.
For small orders, Ludy uses United Parcel Service.
Ludy said most of the vending and OCS products are sourced from vending/OCS distributors. Many of the jan/san products are bought from Paradigm Group, a company that specializes in this type of merchandise.
One Source Office Refreshment separates its deliveries according to temperature requirements; there are vehicles dedicated to ambient, refrigerated and frozen products.
Ludy said there are three full-time sales people who cover all product lines, in addition to direct mail and the company Website.
Corporate Essentials, based in Fairfield, N.J., has expanded from OCS to jan/san and also attempted to add office supplies, noted owner Judson Kleinman. He said categories such as jan/san and office supplies have lower margins, but require less service. Kleinman said that having more categories gives a company a stronger competitive position.
Kleinman said the office products initiative didn’t work because he couldn’t get competitive pricing based on his volume. One customer was paying less for office products than Judson was getting.
Matt Plocki, co-owner of Star Services in Tarentum, Pa. began as a vending operation and expanded into wholesale delivery five years ago and recently opted to exit vending completely.
Plocki sourced most of his wholesale products – which include cutlery, cups, cleaners, dry foods and dry beverage mixes – from foodservice distributors such as Dot Foods while his vending and OCS products came from companies like Vistar Corp.
Plocki found about 30 percent crossover between the wholesale and vending/OCS businesses. He agreed that the wholesale business is less competitive today than vending/OCS.
Plocki goes as far as saying that because of the intricacies involved in a service intensive business like vending and OCS, the profits aren’t any better. “At the end of the day, (wholesale) distribution is just as profitable,” he said.
TALKING POINTS
* Vendors can often provide products more efficiently than foodservice distributors or warehouse clubs.
* Vendors can warehouse and deliver these products with minimal additional overhead.
* Wholesale delivery is less profitable on a per item basis, but there are no machines or service calls.
* Expanding into “provisioning” can allow a vendor to increase route density and profitability.
Candy and tobacco wholesalers: Has consolidation left an opportunity to vendors?
Has the consolidation of candy and tobacco wholesalers created an opportunity for new players? There is no easy answer to this question. While there is always room for a strong new player, existing players would argue that the level of competition is higher than ever. Consolidation has reduced the number of candy and tobacco wholesalers, according to Robert Pignato, vice president of membership, marketing and industry relations for the American Wholesale Marketers Association, based in Fairfax, Va. The association has about a third the number of members as it did 10 years ago due to this consolidation. He said association members primarily service convenience stores. Secondary customers include small grocery stores, drug stores and gas stations.
