High tech comes to vending machines

My office sits in Nathaniel Leverone Hall. I never gave any thought to who Mr. Leverone was until on a visit to my parents in upstate New Hampshire I drove past Dartmouth’s Leverone Field House. That got me wondering who the guy was. It turns out that Mr. Leverone was from New Hampshire and went to Dartmouth but made his fortune in Chicago. He was a vending machine magnate.

I got to thinking about Mr. Leverone again because of a Wall Street Journal article on the technological evolution of vending machines (Restocking the Snack Machine, Aug 3). Companies who sell through vending machines, like almost everyone else, has been under pressure of late. Margins are thin and a number of typical sales points (factories and offices) have closed.

The response, at least among those that own a large number of machines, has been to go high tech. Imagine, essentially, an Internet enabled Coke machine that tells its owner what has been selling.

“It’s only natural that, when times get tough, people search for new and better ways to do things and take risks on doing things they might not have done when times were going well,” says John Mitchell Jr., an owner of Treat America Ltd. of Merriam, Kan., which has about 12,000 vending machines in the Midwest.

Treat America’s drivers used to stock machines with the most popular foods in their regions, based on sales tracked manually by category rather than individual items. It was difficult to know how different products were selling in particular machines.

Since January, Mr. Mitchell has outfitted about 40% of his machines with systems that record and transmit real-time sales data in each of a machine’s 45 slots. Mr. Mitchell says he now knows that about 40% of the slots are what he calls “dead spirals,” dispensing less than one item per week.

While packs of Cheez-It crackers sell the most of any item in a vending machine in a Kansas City, Mo., call center, they don’t even reach the top 10 in a hospital three miles away.

“You’re catering to a population that might be as small as 30 or 40 people,” Mr. Mitchell says. “The unique preferences of that population can drive sales significantly.”

This is an interesting inventory problem. On the one hand, the total dollars that might go through a machine are relatively limited. You can only sell so many bags of chips. On the other hand, the limited storage space really puts a premium on getting the mix right. I would guess that the percentage change in sales from shifting 40% of your space from stuff of no interest to the clientele to stuff they want is huge. Having sales tracking then could pay off big and it might pay for itself relatively quickly. The article reports that wireless features add about 10% to the cost of a $3,000 machine. Even if the wireless capability only results in an additional $10 of profit per week, that is not a bad return. In addition, the technology can allow for more efficient dispatching of drivers to restock machines.

This will also benefit from consumers by assuring a greater availability of what they really want. Other changes may not be so good for customers. Vending machine operators are also testing machines that take credit cards or return dollar bills as change. While this might offer greater convenience to consumers, it also allows for higher prices. It is the latter point that operators are focused on.