The Case For Vending, Part 3: Product Manufacturers Value Vending, but Face Challenges

While the vending industry struggles to improve its image, product manufacturers view the channel in a mostly positive light, although many believe it could benefit from a higher level of professionalism.

Consumer product manufacturers see the vending channel as a means of getting products in front of consumers where they work. Being a more fragmented industry than other channels, the vending channel offers both advantages and disadvantages to manufacturers.

Historically speaking, the relatively low cost of entry to get products into the vending channel has allowed some small manufacturers to gain national exposure through vending. Some well known brands, such as Gardetto’s, Veryfine and Act II Microwave Popcorn, were able to use the vending channel to become established retail brands.

However, the fragmentation comes with a price. Many manufacturers complain that field execution in the vending channel is much less reliable than other retail channels, and that consumer sales data is practically nonexistent. Manufacturers find such data important in developing their marketing programs.

VENDING IS EASY FOR SOME MANUFACTURERS

Because the vending channel consists of a large number of small companies, some manufacturers find it an easier channel to work in.

Mark Van Wyk, owner of Van Wyk Confections LLC, knows vending operators will do business if what’s being offered is a good product that is packaged properly and provides a good profit margin.

“If you have a product that fits their need, they’re interested in doing business with you,” said Van Wyk. The 9-year-old company does 20 percent of its sales through vending. Van Wyk has seen the 1-dollar price point become widespread and enjoys interacting with vending operators. He notes that calls from operators that start out about product can lead to a conversation about the state of the industry and economy. He said, “That just doesn’t happen with a big retail account.”

Tom Reynolds, vice president, sales, PepsiCo Foodservice, said one of the best aspects of the vending channel is the numerous customers who wear multiple hats. “It is not unusual for owners to have multiple roles in the company — operations, human resources, finance, etc. As a result, our sales teams work directly with decision makers and can quickly provide solutions when there are challenges and help provide volume-driving ideas,” said Reynolds.

White Castle Food Products LLC uses vending to reach the millions of people who don’t have access to its more than 400 restaurants. “We want to make our products available to as many people as possible,” said Vicki Reilly, director of sales and marketing of the frozen food division.

OWNER-DRIVEN BUSINESS IS A PLUS

Reilly has sold White Castle products to vending for more than 15 years, and she said it’s being able to talk with business owners and operators that really sets the channel apart. “The people have been great to work with. We really enjoy calling on owners/vendors. In retail, you deal with so many big stores that you don’t pick up a rapport like you do in vending,” she said.

Big retail organizations usually have a buyer deal with manufacturers, but in vending, the operator wears so many hats, it allows manufacturers to better understand the location of the machine and what the operator is trying to do. “That information isn’t always passed down from buyers (in other channels),” Reilly explained. “There’s a lot more personal contact with a vendor/owner, which is very nice.”

“Vending allows exposure to products whether you’re a national brand or a small one like Buddy’s,” said Steve Carvel, national sales manager for Buddy’s Kitchen Inc. Without a dedicated marketing department, Carvel counts on the fact that each vending machine acts as a store where Buddy’s Kitchen products are available to the public.

Since Buddy’s Kitchen doesn’t sell to supermarkets, vending is an important way to build the business.

BECOMING NATIONALLY KNOWN

The vending channel enabled Kar’s Nuts to establish national presence, noted Nick Nicolay, company president. “It opened the doors for us in other retail channels,” he said.

For Nicolay, there are many positive aspects of doing business with the vending channel. It consists of a large number of smaller buying units compared to other channels, which Nicolay does not consider negative. The distributor network, being more centralized than the operator customer base, is a real advantage because it gives the manufacturer a way to reach the operators efficiently. The vend broker network is also a big help to manufacturers, especially for manufacturers that don’t have a large presence to begin with, explained Nicolay.

Deli Express, though well established in the convenience store market, added vending to its distribution for incremental sales growth. Dale Dearstyne, sales manager, said the ability to use most of the same products in the vending class of trade with very few alterations made vending attractive, and it’s worked well. “For us, vending sales over the last few years have been up,” said Dearstyne.

The comparatively small buying volume in vending, however, does inhibit the creation of new products for some manufacturers. “If we develop a new product, it has to be something that we can use in other channels as well,” said Dearstyne. “The volume in vending doesn’t warrant special raw materials.”

SINGLE-SERVE PACKAGES ARE MORE PROFITABLE

Manufacturers gave different views about the profitability of the vending channel compared to other channels.

Single-serve products are usually more profitable on a percentage basis than other types of packages. Since vending is entirely a single-serve channel, it is one of the more profitable channels on a percentage basis.

However, the channel does have more layers of distribution.

Price sensitivity is another issue. Because vending consumers are more price sensitive than consumers in other channels, there is less price elasticity in vending, which limits profitability.

“So many hands are involved with the flow of the product by the time it gets to the machines,” noted Eric Russell, national sales manager for foodservice and vending at Clif Bar & Co.

Russell further noted that while the vending channel gives a manufacturer a good way to reach more customers conveniently, point-of-sale merchandising options are more limited than in other venues. He noted that in traditional stores, there is a chance to communicate not only on the package, but the box. Furthermore, the package and box can be picked up before deciding to purchase the product.

COMMISSIONS ADD TO COST

One product manufacturer executive who has worked for several product manufacturers said the vending channel costs more for a product manufacturer to sell to. Furthermore, operators pay commissions to locations, which adds costs in vending. The executive, who did not want to be identified in print, said the price structure is such that many popular products can’t be sold in vending. In fact, in recent years, the number of candy stock keeping units (SKUs) has drastically declined in vending; not so in other channels. “It doesn’t reflect the consumer demand, it reflects the cost,” he said.

Manufacturers had different views about the availability of operator sales data, but all agreed there is a big lack of consumer sales information.

“The syndicated data available doesn’t have the breath and depth of resources on the retail side,” said PepsiCo Foodservice’s Reynolds.

“Growth strategies that are successful in retail channels are difficult to apply to vending. Space constraints in the machine make product innovation more risky and difficult to sustain,” said Eric Prosperi, director single serve snacks for foodservice and vending at Kellogg’s Food Away From Home division. “The low margins that operators make also discourage investment in technology that could support consumer promotions.”

EXISTING SOFTWARE IS UNDERUTILIZED

The average vending operation does not utilize the available software to report this type of data. Jim English, president/CEO of Sprout, hopes to change that. Sprout is a strategic partnership to embed technology, improve operational efficiency and develop interactive consumer programs for unattended retail locations. As part of this process, the Vend Marketing Institute (VMI), a coalition of 17 independent vending operators, will deploy telemetry and cashless services across its network of approximately 60,000 vending machines. Cantaloupe Systems will support these deployments with its Seed® services platform, including the company’s new Seed® cashless service.

English became cognizant of the need to improve the level of retail professionalism in vending while serving as general manager of vending at Masterfoods USA. Prior to moving to the vending channel, he was global accounts director for c-stores and managed trade programs for all channels of trade.

CONSUMER DATA PROJECT UNDER WAY

The Sprout project is designed to transform an adversarial relationship between vending operators and product suppliers into a collaborative one. The vending trade lacks the same controls that other retail channels have that enable them to drive top line sales. English believes technology, particularly wireless telemetry, will provide vending the tools that will give them the same ability as other retail channels.

English said vendors need better data on their product sales, including velocity as well as profit margin. One reason that product manufacturers are able to offer more promotions in other channels is that the retailers are better able to measure the results.

Retailers have the data that allows them to manage product mixes on an individual store basis.

“Vending is the only place in the world where even the best operators only have a marginal view of what’s selling in the machines,” English said.

With the type of data that wireless telemetry will make available, English said vending operators will be able to adjust the product mix every time the machine is serviced.

Telemetry will also provide the foundation for cashless transactions and loyalty programs, which English said will bring more value.

CONSUMER INTERACTION

Better category management can increase excitement among customers, driving business. While operators do occasionally run point-of-sale programs at locations, they are not as prevalent as in other retail channels. End caps and special displays are planned months in advance for brick and mortar establishments. This gives an incentive to manufacturers to deal with these channels. On the other hand, vending operators can make a decision faster, so manufacturers can get exposure to the market faster.

A GOOD CHANNEL FOR TESTING NEW PRODUCTS

Frito-Lay considers the 50 million people who use a vending machine daily as a great sampling vehicle. Vending users can try the new product with minimal risk since the offering is in a single-serve size.

For a manufacturer, the hope is the consumer will enjoy the new product and look for it in other channels, such as the grocery store.

Paul Schlossberg, president of D/FW Consulting, was formerly director of marketing and national accounts at Frito Lay Inc. He said that vending does have some unique benefits for product suppliers. One is that the trade is not as dominated by high volume retailers.

The manufacturer has a stronger bargaining position since there are more buying units, each buying smaller volumes.

Decisions also get made faster with vending operators, Schlossberg noted. With retail organizations, getting a deal signed can take weeks and even months.

An even bigger advantage to vending in Schlossberg’s view is that vending, being a single-serve channel, is a great sampling opportunity for new products. He recalled that vending accounted for a large percentage of the pilot purchases for some of Frito-Lay’s most successful products.

Brad Bachtelle, president, Bachtelle & Associates, agrees vending is great for sampling. “The best thing about (vending) is its paid sampling. It’s a very effective means,” he said.

VENDING HAS POSITIVES AND NEGATIVES

A former vending operator, Bachtelle now consults with product manufacturers on their vending programs. He said vending offers advantages and disadvantages to product suppliers.

It is the only channel that reaches consumers where they work, which is very positive. “We take our equipment to where consumers are,” said Bachtelle.

Vending is also a more stable business than other retail channels, which is both positive and negative. In other channels, retailers more frequently change product offerings, locations, execution strategies and marketing models. “We don’t do that in vending. We don’t have the capability to do it,” said Bachtelle. This makes for a more stable channel.

On the minus side, a product supplier can do little to drive volume because the vending operator does not drive it. “In vending, you can’t do 2 for $2,” explained Bachtelle. In other channels there are opportunities to do this.

The fact that the vending operator base is more fragmented also has both pros and cons for manufacturers. On the pro side, it is fairly easy for a new manufacturer to get into the channel and, because there are a lot of small customers, the supplier has more leverage in the negotiating process.

At the same time, it’s hard for a manufacturer to get a significant presence in the channel quickly; the operators have to be sold one at a time.

The vending channel needs to become more professional in its operating practices and in the type of sales information it provides. When this happens, all parties stand to benefit.

For more information, contact:

Bachtelle & Associates, (714) 731-5830, www.bachtelle.com
Buddy’s Kitchen, (952)-894-2540, www.buddyskitchen.com
D/FW Consulting, (972) 877-2972, www.dfwconsulting.com
Deli Express, 800-328-8184, www.deliexpress.com
General Mills Inc., 800-248-7310, www.generalmills.com
Kar’s Nuts, 800-527-6887, www.karsnuts.com
PepsiCo Foodservice, 800-352-4477, www.fritolay.com
Sprout, (908) 927-1001 www.sproutretail.com
Van Wyk Confections LLC, 888-465-5141, www.onedollarbar.com
White Castle Food Products LLC, 800-843-2728, www.whitecastle.com