The industrial vending market is booming. It is expected to grow to $1.4 billion by 2025, according to recent analysis by Grand View Research. Reports like these, and the vending initiatives of high-profile distributors like Fastenal, have generated excitement among other industrial distributors who want to enter the fray. They have also generated fear, as some distributors have learned the hard way that their customers will move forward with vending with or without their help.
Anticipated ROI, though, should be the impetus for any new business initiative. Even a vending giant like Fastenal can tell you that the profitability of vending initiatives isn't guaranteed. The company reported double-digit growth in vending sales in 2017, but its margin narrowed. Fastenal’s gross profit, as a percent of sales, was down 97 basis points (from 49.8 percent to 48.8 percent) in the fourth quarter from the prior-year period. While that’s due to more than just vending, in the third quarter, Fastenal reported that its margin slippage was partly because of the "faster growth of lower-margin national accounts and a lower proportion of higher margin fasteners" in vending machines' product mix.
Fastenal's experience illustrates that while vending can be a powerful selling tool, you must safeguard your profitability by calculating potential ROI first and designing an effective program. Here are some costs and expected returns on your investment to consider before diving into a vending program with your customers:
Cost: Vending hardware
Vending machine prices vary widely, from as little as $5,000 to as much as $20,000 or more. Before you start requesting pricing from vending machine providers, though, consider things like what types of products you'd like to vend; how your customers will connect the machine to the internet (Wi-Fi, cell network or Ethernet cable); and how employees will access the machine (via pin number, magnetic badge or RFID). Then talk with machine providers so they can provide you with a cost estimate and payment plan based on your machine's unique configuration.
Return: Increased customer spend
When you approach vending as a value-added service and selling tool, you may be surprised by how much new business your customers are willing to commit to in exchange for access to a vending machine and VMI capabilities. Once you've introduced your customer to all the benefits vending can provide them, find out how much additional spend they might be willing to move over to you, through the machine or elsewhere. With the most affordable vending programs, an increase of around $250 in monthly customer profit can justify the cost of placing a machine, but that threshold will be higher with more expensive machines.
Cost: Vendor-managed inventory software
Is the software that will power the machine included with your purchase? Will it need to be housed on your own servers, and if so, what will that responsibility be in terms of hardware and labor costs of your IT team? If the software is cloud-based, what will your machine supplier charge you for hosting and updates, upfront and moving forward?
Return: Labor cost reduction
Users aren't the only ones who will enjoy cost savings after a vending machine is placed; distributors will also reap cost reductions, especially if the machines use cloud-based software. The most sophisticated vending machines available today can trigger a purchase order when item counts hit a designated minimum, precluding the need for in-person inventory counts and quote generation. How much can you expect to save on labor – and earn from your reps' improved focus on actual selling activities – as a result?
Cost: Installation, service and training
The simplest machines are so easy to install that an on-site technician isn't required. More complicated machines will necessitate an in-person visit from your supplier, which may or may not be included in the machine's price. If the machine breaks down or needs a replacement part, is the design simple enough that you can do the work yourself? Or will you need to fork out $1,000 or more to have the machine manufacturer visit the facility? Is the cost of training included in your machine investment, or is that extra? Some suppliers conduct no-cost online trainings with the purchase of a machine. At the other end of the spectrum, some machine suppliers require buyers to pay to attend in-person, multiple-day training events. Find out from your supplier what kind of training is required and what it will cost you in advance, so there are no surprises.
Return: customer stickiness
Offering vending to customers is a great way to proactively protect your business from competitors. What is your customer churn rate? How many times have customers asked you about vending (or placed competitor machines without telling you)? It will be hard to put a dollar amount to this benefit, but you should keep it in mind as you consider adding vending.
Once you've estimated the costs and benefits as outlined above, you'll know how soon you can expect to see a return on your investment and whether your program will be viable from a cash flow perspective. Only then should you jump in.
Read more about the latest distribution forecasts in MDM-Baird Distribution Survey: Distribution Gains Momentum.
Mark Hill is the owner of I M C Supply Co., Memphis, TN, a distributor of industrial metalworking supplies, and the founder of vending machine supply company 1sourcevend. Reach him at [email protected].