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Business of: School vending machines

Maximize profits with favorable contracts, new technology, and healthier products
Students at Valley Christian School in San Jose, Calif., buy healthy snacks like coconut water, unsalted nuts and fresh fruit, from a high-tech HUMAN Healthy Vending machine.
Students at Valley Christian School in San Jose, Calif., buy healthy snacks like coconut water, unsalted nuts and fresh fruit, from a high-tech HUMAN Healthy Vending machine.

As school leaders shift to selling healthier products in their vending machines, they can also take the opportunity to change their business model and consider investing in high-tech machines for a range of benefits.

The new U.S. Department of Agriculture (USDA) Smart Snacks in School standards state that by July 1, 2014, snacks and beverages sold during school hours must adhere to strict nutritional guidelines. This game changer has left district leaders looking to adapt their vending machines to become healthier yet stay profitable.

High-tech machines cost about $8,000, compared to $4,000 for a basic machine. These new machines have LCD screens that can display ads to help district maximize revenues, says Andre Bramwell, owner of Candyman Vending Service, a Houston-based company that serves 22 schools. Vending contractors can sell ads to local companies to display on the screens,” he says. “Schools will then get a cut of that ad revenue.”

The primary way schools make money off vending machines is through commission sales with a vending contractor. For example, for every $2 bottle of healthy V8 Splash a student purchases, the schools that work with Candyman make 20 cents, based on the company’s typical 10 percent commission rate.

Districts can earn more money by negotiating for contributions from vending companies. “Occasionally, we will offer a donation to a school to purchase textbooks or other supplies,” Bramwell says. “It’s an incentive to get a contract signed.”

Along with addressing changes in law and technology, district leaders must decide whether to buy or lease machines—and whether to stock those machines themselves or have a contractor do it—when considering the future of vending programs.

Local or national?

The high level of customer service is the biggest advantage a local, independent vending contractor has over a national company, Bramwell says. With a national vendor, food service directors typically have to call a customer service center to get help. “However, clients of a small company will typically work directly with the owner when there is a problem,” he says. “District leaders can be confident that someone at a high level is working to fix their issue.”

Independent contractors typically have more flexibility in product selection, as well. “Many of the national vendors have contracts with national food and beverage companies, such as PepsiCo, that determine the products they offer,” Bramwell says. “Smaller companies typically are not tied to such contracts, so school leaders can request specific items, regardless of brand.”

Because small companies have lower overhead costs, they are capable of offering lower prices than are many national vendors. Contract length and commission amounts are not fixed at most independent vendors, and can be negotiated with each district, Bramwell says.

But district leaders looking for big donations may prefer using a national company. “National companies have the resources to offer large gifts, such as a free high-tech vending machine or a scoreboard for your gym,” he says.

National companies also have a valuable level of expertise, says Sean Kelly, the CEO and co-founder of HUMAN Healthy Vending, a vending franchise that serves 1,000 schools. “All franchisees in our company have to go through rigorous training. Schools get the benefit of working with a single, local point of contact who is backed by a national system of service and technical standards.”

National vendors can often offer higher commission rates, as well. Healthy Vending offers a rate of 10 to 20 percent of total sales, depending on machine volume. Machines with heavy traffic get a higher commission rate.

Healthy transitions

Switching to USDA-approved products can be a shaky process for schools, and may be easier with a national company, Kelley says.

“Healthy Vending guarantees vending machine sales will increase or stay the same after districts transition to offering only healthy foods,” he says. The company will make up the difference if, after 30 days, schools see less revenue from their Healthy Vending machines than they had from their previous machines.

“Knowing what students like best allows district leaders to stock the machines effectively and maximize sales, Kelley says.

“Bottled water tends to be the No. 1 seller in most schools,” he says. “Also popular are low-sodium chips, trail mixes, and organic and alternative milks.”

“Schools also can let students sample products at “nutrition education events,” Kelley says. “Kids will eat what is put in front of them, so if you give them a chance to try a new product, they will go back and purchase it later.”

Buying new machines is a must to increase sales when switching to healthier vending. “If the machines look the same, and if the user experience is the same, there will be less buy-in to this new healthy vending initiative,” Kelley says.

New machine technology includes credit and debit card readers, and LCD screens that display ads and product information. The newness of conveyor-belt and elevator-style dispensing found in some models also can peak student interest, Kelley says.

Remote monitoring technology helps district leaders manage the machines. “Both the vending provider and district leader can monitor what products sell best and when high-selling periods are,” says Kelley. For example, this helps administrators ensure that vending machines will not be sold out of water or popular snacks before big events like basketball games, Kelley says. So there is no arbitrary product delivery schedule and the vending provider can fill the machines when certain products are almost sold out.

Serving all student populations

Appropriately stocked vending machines can solve the problem of trying to serve lunch quickly to many students. Companies such as Star Food Healthy Express sell temperature-controlled machines that can serve USDA reimbursable lunch meals in about 20 seconds. A full, reimbursable meal, for example, can include low-fat milk, a whole-grain sandwich, and fruit or vegetables.

A child simply needs to enter validation information into the machine and then can make their choice of USDA-approved options, says Bob Gottlieb, director of Star Food Healthy Express. This quick, cashless system, which integrates with most schools’ point-of-service meal accounts, allows more students to be served more quickly.

Participation in free- and reduced-lunch programs has huge potential to increase with these machines, Gottlieb says.

“Typically, only 50 to 60 percent of high school students signed up for free and reduced lunch actually use the program,” he says. “However, since only the machine knows which students partake in the program, there is a higher level of privacy.”

And the more students that participate in the free- and reduced-price lunch program, the more funds districts get from the USDA, Gottlieb says.

Rethinking traditional practices

Instead of partnering with a vending contractor, five percent of districts operate their vending machines themselves, according to industry experts. Stocking vending machines in-house can be more profitable than partnering with a vendor, says Jim Dillingham, CEO of Vend-ucation, a vending information company.

“A vending contractor will sell a school a prepackaged cookie for 48 cents, lets say,” Dillingham says. “A cafeteria staff can make that same cookie, probably healthier, for 22 cents. When that cookie sells for 75 cents, the profit is much higher when the product is made in-house.”

Self-operated machines in schools typically see $15,000 to $20,000 in gross sales per year, and $6,000 to $10,000 in revenue after product and maintenance costs, Dillingham says. “Schools that have switched from a vending contract to self-operation can see a 500 percent increase in revenue,” he says.

Students also can get more involved in the vending process when the district owns the machines. For instance, vocational and special education students can learn valuable job skills. “About one-third of the schools that do self-operation use special education students to stock the machines,” Dillingham says. Vocational students can also be trained in cleaning filters and motor repair.

To reduce the chance of theft, access to money can be restricted to administrators, and at the same time, all keys can be traceable. In high tech machines, who opens a machine and at what time is all recorded, says Dillingham.

Successfully self-operating

Cashless point-of-sale machines that are linked to students’ lunch accounts can help maximize profit when the districts own the machines, says Vickie Coffey, food services director for Richland-Bean Blossom Community Schools in Indiana.

“Our sales literally doubled when we switched from a cash-only to a POS machine,” she says. “Students do not need to have cash to purchase snacks.”

Coffey’s three vending machines—two in the high school, and one in the middle school—have grossed $90,000 in sales since September 2011, with a 32 percent profit rate. The high profit has come, in part, from students being able to access at least one of the machines after school. “Our best-selling product is chocolate milk, which is purchased mostly by athletes after they finish games or practices,” Coffey says.

Albany USD in California also saw higher profits when the district bought its own machines, says Clell Hoffman, director of food services. Sales increased from $7,500 to $40,000, and revenue increased from $2,500 to $22,000.

A benefit of self-operation is being able to purchase different goods from many different providers, which keeps costs lower. If a provider has a low price on water but a high price on healthy juice, the juice can be bought elsewhere, Hoffman says.

As far as pricing, Hoffman says it is all about what the market will bear. “You need to be aware of prices in stores near the school,” he says. “Students will pay three dollars for a Naked juice because they know that is how much it would cost them to purchase it at a local deli. However, we charge only 75 cents for bottled water, because there are lots of place to purchase water cheaply.”

Students are the ones who benefit from these increased profits, Hoffman says. Food services keeps all proceeds and Hoffman says he has used funds to provide free fruit at the middle and high schools. “With these profits, we can invest in products like a more efficient dishwasher that give our staff more time to spend making healthy food from scratch,” he says. “It all goes back to serving the students better.”

Kylie Lacey is special projects editor.