The Case For Vending, Part 2: The case that has yet to be made.

The vending industry has commoditized itself. It has little understanding of what products customers want, and has made little effort to learn this. It has failed to use state-of-the-art equipment to make the purchase process user friendly. It has accepted the lowest possible prices in exchange for its products and sold its services for the lowest financial return, in the interest of maintaining survival profitability.

The price for its failing has been great. Many operators’ lives have been made miserable by facing the need to cut costs.

But the future offers new possibilities.

Last month, this series examined how consumers view vending in comparison to other channels, especially in light of the current recession. This month, the series examines what changes the industry must make in order to once again become relevant to consumers.

IN THE BEGINNING

Merchandise vending became an industry when equipment manufacturers introduced machines that could dispense consumable products at the work site. Delivery systems allowed machines to provide products in a cost efficient manner. Everybody won: the operator, the product manufacturer, the location manager and the end user. Remember those days?

In the years that followed, other retail formats emerged that competed for the consumer’s purchases.

The economy grew, and as it grew, more diverse lifestyles emerged. As consumer lifestyles changed, their tastes changed, resulting in more diverse products. Other retail formats were able to adapt to these changing tastes more effectively than vending.

While the world changed, vending equipment, product and technology manufacturers didn’t sleep. They developed new equipment, technologies and products to allow vending operators to compete against the convenience store, fast food restaurants, specialty stores and warehouse clubs.

Unfortunately, the vending industry failed to use many of these innovations. As a result, both the customer experience and operational efficiency have suffered. Had this not been the case, the vending industry would have been better able to withstand periodic economic downturns.

As the economy became less manufacturing dominated in the 1980s, profitability declined on a per location basis. But in the ensuing years, the economy experienced its ups and downs, there was enough growth for operators to ignore shortcomings in the value they provided.

INDUSTRY IDENTIFIES ITS CHALLENGES

In 1996, Frito Lay uncovered some fundamental problems in how customers perceived vending with its consumer survey, “The Winds of Change.” It reported 54 percent of consumers did not believe vending was a good value for the money and 63 percent believed convenience store prices were lower than vending prices.

The Frito Lay survey called on the industry to improve its value perception, capitalize on its convenience and improve the industry’s image.

Ten years later, the National Automatic Merchandising Association commissioned Harris Interactive to conduct another consumer survey, which confirmed the earlier study and identified serious perception issues among non users.

Automatic Merchandiser surveyed more than 1,200 worksite consumers nationwide this past fall and found that nearly a third (28 percent) do not buy from the vending machine. (See chart 1).

This past November, Automatic Merchandiser commissioned Leo J. Shapiro & Associates Inc. to survey consumers on vending purchases and purchases in other foodservice outlets. The Shapiro survey found that consumers are spending less in all foodservice outlets, not just vending.

Recession or no recession, consumers hold a distorted view of vending prices, and this affects their overall perception of the channel’s value.

The sensitivity increases when prices rise in the machine, which has happened in the last two years. In a vending machine, consumers see the price tags on every item, unlike in most retail stores.

One of the key benefits that new technology offers vending is the chance to reduce price awareness from the vend purchase.

Not all operators are in a position to install cashless readers, but most can address the issue simply by removing individual spiral price tags and have the price appear on the display screen when the selection button is pressed.

Limited field research in the past year has shown that sales increase when spiral price tags are removed.

But there is an even bigger challenge. If operators want to make a case for vending with the consumer, they need to have the products the customers want. Evidence to date indicates there is work to be done in this area.

EXISTING SOFTWARE CAN IDENTIFY CONSUMER NEEDS

While technology offers new opportunities for understanding customer needs, operators can ascertain their needs with more traditional methods.

This is an area that operators who are using industry specific software can address. Most industry specific software packages include category management tools that help operators identify the best selling items in each product category. By understanding location needs, operators can maximize sales.

Operators who are focused on minimizing product cost are not managing categories based on consumer preference.

Given the operators’ long-standing focus on product cost, the consumer’s perception of vending has suffered in comparison to other retail channels.

This is evident by comparing top selling vending items with those in other channels. One category where vending specific data is available for comparison to other channels is candy/snacks and confections.

CASE IN POINT: CANDY SALES

It’s no secret that candy has lost market share in vending machines. This was driven by manufacturer price increases in the last two years.

Pittsburgh, Pa.-based Management Science Associates (MSA) Inc., which reports machine level data from several route automation software providers, found that total confection sales in vending fell from 34.83 percent in November 2007 to 33.25 percent in November 2008. Unit sales fell from 33.68 percent to 31.9 percent. This continued a trend from 2006.

By contrast, the National Confectioners Association reported that candy sales have increased consistently every year for the past five years. Candy in convenience stores, which are considered vending’s closest competitor, rose 6.2 percent in 2007 over 2006.

During the recent NAMA Expo in St. Louis, Mo., Gary Terrell of Bachtelle & Associates noted that confection sales at retail have posted steady increases during recessions. He further noted that confection sales rose 4 percentage points in the last three years.

The disparity between vending and other retail outlets is particularly severe in the gum category.

According to MSA Inc., gum declined in vending machines from 2.05 percent to 1.47 percent in dollar sales and from 2.36 percent to 1.74 percent in unit sales.

In convenience stores, gum represents the biggest candy subcategory, jumping from 26.7 percent to 27.9 percent in 2007, second only to chocolate bars, which rose 32.6 percent to 32.9 percent in the period.

This oversight is even more critical in light of a recent survey from a work place marketing firm that found gum to be the third most common at-work daily “pick me up” (28 percent), following soda (43 percent) and coffee (40 percent). The survey was conducted by WorkPlace Media in Mentor, Ohio. Following gum were salted snacks (25 percent), candy bars (19 percent).

WHAT ABOUT BEVERAGES?

Data is not available for vend beverage sales, but given the way in which operators market this category and the changes that have taken place in recent years, the problems are undoubtedly more severe than in the candy/snack category. This is a major challenge, seeing that cold beverages are far and away the biggest vend category.

Most operators rely on bottler loaned machines, which automatically limits their product choices.
Seeing that the beverage category has experienced an explosion of products in recent years and the once dominant carbonated beverages have lost share to noncarbs, market demand is more diverse than ever.

Given the limited facings of the traditional closed front beverage machines and the fact that operators are limited by bottlers in their product choices, the vending operator’s ability to meet consumer tastes remain limited.

Equipment manufacturers have responded with the glassfront beverage machine, which has been shown to boost sales by large margins. But the bottlers, facing their own set of challenges, have been slow to invest in these superior merchandisers.

Vending operators, given their current economic position, are in a poor position to invest in these machines.

The Automatic Merchandiser State of the Vending Industry Report reported a total 271,000 glassfront machines in 2007, compared to 2.4 million closed front machines.

The glassfront beverage machine offers the vending industry one of the most promising tools not only to improve sales, but to change consumer perception of vending once “critical mass” is achieved.

IS THERE ENOUGH VARIETY?

Providing sufficient variety is another challenge that is closely related to meeting customer preferences, but recognized as a separate customer need. Both the Frito Lay study in 1996 and the Harris Interactive study in 2006 identified this as a specific challenge for the vending industry.

Here again, category management software can help operators meet this challenge. By using machine planograms in conjunction with category management, operators can rotate products in machines that meet customer preferences. To meet customer preferences successfully, operators cannot be constrained by manufacturer rebate programs.

New innovations such as glassfront beverage machines and expanded capacity glassfront snack machines are designed to address this challenge.

ARE HEALTHY PRODUCTS AVAILABLE?

The increase in health awareness has emerged as one of the biggest challenges for all foodservice industries, and this is an area where vending can provide significant customer value. Again, the products exist, but the communication with the customer has been weak.

Account decision makers have become more concerned about offering “better for you” products in recent years. A vending program that addresses this need is a great benefit. Business managers realize a healthy work force is more productive.

Both the Frito Lay study in 1996 and the Harris Interactive study in 2006 identified this as a major consumer challenge for vending.

Here is where operators can change consumer perception by communicating the truth about their offerings. There has been a dramatic proliferation of “better for you” products in vending in recent years, and most operators are using them.

Operators can communicate this reality in newsletters and product literature. There are point-of-sale materials available as well, such as the NAMA “Fit Pick” program.

The Automatic Merchandiser worksite consumer survey found that more than three quarters of consumers look for “better for you” products in vending machines and most buy them from vending machines more than once in a while. (See chart 4.)

MULTIPLE PURCHASE CAPABILITY

The Automatic Merchandiser survey reported that most worksite consumers buy more than one product at a time from vending machines. As shown in chart 8, the most common scenario (47.7 percent) is one snack and one beverage.

Since most consumers make more than one purchase at a time, it would stand to reason that machines that make it easier to make multiple purchases would improve customer satisfaction.

Some of the new technology allows multiple purchases. Some of the more recent innovations are designed to use coupons and loyalty reward programs to entice multiple purchases.

Not all operators can afford the new hardware and software needed to provide these solutions, but again, most operators can offer multiple purchases with traditional equipment.

Satellite machines have long allowed two purchases from one host controller. While these are not widespread, it is fairly easy for operators to install satellite venders. The purchase process is much easier when the consumer wants to buy from more than one machine.

CONSUMERS VALUE VENDING

The Automatic Merchandiser survey overall demonstrates that vending machines do play an important role in the worksite for most consumers. Operators can use this information to make their case to account decision makers.

Making the case to the consumer is a big challenge that requires a stronger commitment than most operators are presently making. The first step is to recognize the full value that vending provides.

As operators invest in new innovations, they will improve the value and be able to charge more for it. In the meantime, they face a “Catch 22”: They need to provide what customers want to justify higher prices, but they must charge higher prices to meet customer needs.

To meet this challenge, operators must be committed to making the case for vending.