Thursday, September 20, 2007

Thursday Talking Points Memo

Talking Points Memo Sees Much Promise in Natural Vending
Natural and organic products vending machines offer manufacturers and marketers a retail distribution channel previously not in their arsenal. The channel allows for distribution right to consumers "point of activity." For example, at the office, school, shopping mall, golf course, gym--wherever people are engaged in day-to-day activities. In this lifestyle-sense it's the ultimate impulse channel for marketers who's natural and organic products fit the niche.

The vending machine channel of distribution in the U.S. has historically been primarily a market for what is called "junk food"--sugary sodas and candy bars, salty snacks, candy, cookies and related snack foods, which are tasty and satisfying but contain little or no nourishment.
The vending industry basically has two primary models of ownership and distribution in the U.S. The first is corporate-owned, such as the ubiquitous Coca Cola and Pepsi machines, and independently-owned. These independent owners and distributors are either large vending corporations or smaller, independent operators who can have thousands, hundreds or just a handful of machines and distribution points.

The U.S. vending machine distribution channel is huge. It's currently estimated at about $24 billion annually and growing. Convenience foods and beverages tend to be the most popular and largest segment of vending in the U.S. but numerous other categories and items also are sold via these automatic machines. These categories include cigarettes (a declining segment), toiletries, postage stamps, prepared foods and many others.
New categories also are being added to the vending channel of distribution. For example, a San Francisco, California-based company called ZoomSystems, Inc. has placed luxury vending machines in 20 supermarkets (including Safeway Stores' Vons stores in Southern, California) and a couple airports thus far in the U.S. These machines sell items such as the Apple ipods, digital camcorders and other high-end luxury items. Consumers can pay for the items using a credit card or ATM card.

In Japan consumers can buy a variety of goods in vending machines. Far left to right: A rice vending machine in Tokyo, a multi-variety beverage vending machine, and a vending machine offering Buddhist Amulets for sale.

In other countries such as Japan and parts of Europe the vending machine channel of distribution is ubiquitous, not only in terms of the number of machines but also in the number and types of categories and items sold via the machines. For example, there are vending units dedicated to selling rice in various packaged forms, ramon noodles, beer, wine and spirits, multi-assortments of condoms, electronic items and more. There even are vending machines that sell Buddhist amulets in Japan. Japan is the world's leader in automatic vending. We recently saw a ramon noodle vending machine in a Japantown in a large American city and expect to see more adoptions in the U.S. of Japanese vending methods.

This brief history of automatic vending and its current growth gets us to the focus of our piece, which is using the vending machine distribution channel for the sales of natural and organic products. To date the vending channel has been very minor for these categories not only in the U.S. but internationally. That's beginning to change however with a few recent major developments.

The first major development began about 5 years ago when smaller, independent vending machine distributors began offering selections of natural and organic beverages and snacks in some of their machines. Many did this because people in the places where their machines are located--gyms, offices and the like--began requesting healthier alternatives. Since these entrepreneurs are smaller and independent they could respond fast--and many did so adding some all-natural items to the selections.

We know of one such vending route owner who began doing this about four years ago on a limited scale and was amazed at the sales response. Today he stocks many of his machines, especially those in office buildings and gyms, with natural and organic beverages, snacks and related items. He tells us in many cases the natural items are outselling the more conventional ones.

The second major development towards what we see as just the beginnings of a potential major distribution channel in the making has been the marketing push by a couple of natural foods and beverage makers--yogurt-maker Stoneyfield Farms and White Wave, Inc., maker of Silk Soy Milk and other dairy products--to place all-natural and organic product vending machines in schools and other venues. Both companies began pilot programs about three years ago and continue today. A few others have followed their lead thus far.

Another development which we think holds much promise is the "Yo-Zone" all-natural snack and beverage vending machines recently introduced by San Diego, California-based YoNaturals. These attractive machines aggregate a variety of natural and organic beverages in them and offer consumers a large, varied selection merchandised in an eye catching point-of-purchase unit. It's a vending machine but we also think it looks like a mini retail natural foods store which is excellent merchandising.
The company currently offers over 150 natural and organic items in its inventory. Its selling the machines to individuals or companies in sort of a franchise arrangement in which YoNaturals acts as the marketer and supplier but the distributors are able to run their businesses independently.

In effect, the YoNaturals concept is one of a company acting as the developer, aggregator and marketer, while at the same time letting the actual distribution be done by independent operators. Its similar in many ways to a large, modern, full-service natural and specialty foods distributor who offers everything from mere product-order fullfillment to full-scale
merchandising and marketing programs to retailers.
It's also the historic and current primary model the vending machine industry operates on: Large, medium and small companies owning the vending machines and handling the distribution. Even in the case of Coca Cola and Pepsi the beverage vending machines are owned usually by local bottling companies (rather than the corporations themselves) who handle the product distribution and machine maintenance.

Putting on our industry futurist cap, NSFM's Talking Points Memo can see the natural and organic vending business growing in a number of ways and directions. First, we see consumer demand for natural and organic product vending growing. Consumers are buying natural and organic products in an increasingly voracious way. The industry has grown by about 25% each year for the past seven years. These consumers increasingly want healthy and organic alternatives not only at the grocery store but also at work and other business and leisure venues. Natural and organic food and beverage consumption is becoming part of their lifestyles and they want the products where they are, at the point of their given activity.

Second, we see companies like YoNaturals, who aggregate, market and supply, serving as the catalyst for the vending industry to increase its natural and organic products business and points of distribution. We also see entrepreneurs and existing vending companies partnering with YoNaturals resulting in new distribution.
Third, we see what we call "natural foods corporate partnering" as another way of growing the channel. For example, five or six (or more) natural foods manufacturing companies (a combination of beverage and snack firms for example) could partner together and create a vending machine mix (the machines can be bought) featuring their product lines. This would allow them to pool their resources and share related costs. They could create graphics for the outsides of the machines that not only sell the products inside but advertise their brands as well.

Finally, we see an opportunity for large. traditional natural foods distributors to get in on the vending distribution channel. Folks like United Natural Foods, Inc. and Tree of Life for example. These distribution companies already have the product selection and infrastructure to do so. They could either act as suppliers and marketers in a manner similar to the YoNaturals model (the likely scenario to us) or create their own natural vending divisions and either operate a full-blown natural and organic vending operation or some variant of that using independent distributors.

The primary market in the vending channel for natural and organic products is beverages and snacks, which when you add up all the beverage and snack types and varieties is huge. But we don't think it should (or has to be) limited to just those categories. Rather we see a huge opportunity for non-foods categories such as health & beauty care items, vitamins and supplements and related non-foods segments.

In the food category we also see opportunities for segments other than just snacks and beverages particularly in specific venues. For example, vending-machine size cereals, nut butters and jams and jellies for hotels, schools and offices. Various ready-to-eat items other than snacks also hold great potential in these particular venues and others. In fact as the market grows we see progressive companies even creating new items specifically for the vending channel as conventional food manufacturers currently do.

We like what we're currently seeing in the vending channel in terms of natural and organic products. However, its only the tip of the iceberg, and there are tens of thousands (or more) of venues in the U.S. where such vending machines would do well. Smart strategists, marketers, distributors and merchandisers who realize this growing, untapped market stand to profit from it, especially if they approach it correctly.

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