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Automated Vending Machines: Thinking Outside the Retail Box

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Think of vending machines these days, and sodas and snacks immediately come to mind. In the 1880s, this technology dispensed just postcards and gum, but has evolved greatly since its modest roots. Modern automated vending devices can now offer a wide range of products that would have seemed unfathomable to its original creators. Within this great story of human ingenuity and technological evolution, lies a clear trend of increasing corporate interest, of which investors will most certainly want to take note.

Automated retail technology has come a long way since the world’s very first self-service vending operation. In the first century C.E., Greek inventor, Heron Alexandrinus, developed the precursor technology to facilitate the sale of holy water. This device prevented people from dispensing more holy water than they actually paid for. Fast forward two millennia, and this core retail function has remained pretty much the same.

That said, modern vending machines benefit from added features like refrigeration and climate control, which has enabled the vending of drinks, and processed foods. Some particularly enterprising farmers have even tried to sell eggs and milk directly to consumers. These days, it is not uncommon to see offerings of ice cream, microwavable meals, and even hot sandwiches.

Corporations in the food and beverage industry, like Coca-Cola (KO – Free Coca-Cola Stock Report), PepsiCo(PEP), and Hershey (HSY) have capitalized on the pervasive “on-the-run” mentality governing the typical modern lifestyle. In almost any lobby or public space, one expects to find vending machines humming away. The ubiquity of these dispensers, however, also means that additional growth in this particular segment will remain relatively limited for developed markets. Having said that, automated-retail sales do contribute significantly to corporate top lines within the food and beverage industry.

With rising labor costs across the globe, corporations from other sectors have taken notice of this alternative way of doing business. Indeed, many already have started to delve into automated retail, with hopes of realizing cost advantages and a potential top-line boost.

Electronics giant, Best Buy (BBY), added its name to the fray in 2008 with a pilot program that vended consumer electronics products at eight airports. Named Best Buy Express, the business has since then expanded to well over 200 locations, and can also now be found in hotels, casinos, malls, and colleges. With limited experience in dealing with automated retail, Best Buy partnered up with Zoom Systems, a company that specializes in operating similar self-service retail shops for other well-known brands like: Apple (AAPL), Macy’s (M), Proactiv Solution, Procter & Gamble (PG – Free P&G Stock Report), Max Wellness, and Straight Talk (AMX).

These symbiotic relationships show how established corporations see automated retail as a new frontier where they can eke out additional profits. In the majority of these cases, however, vending revenues comprise only a minuscule portion of overall revenues. Some companies, nonetheless, see vending operations as a major pillar of their long-term strategic goals.

One notable example of this is construction supply manufacturer, Fastenal (FAST). In the 1960s, Bob Kierlin founded the company with the vision of selling construction products through vending machines. Unfortunately, the technology of the time was not up to the task, and he had to settle instead for traditional stores manned by salespeople. In 2008, Fastenal finally realized this dream, by providing its industry-leading SmartStore vending program at a price point that made it profitable even with its lower-volume and smaller customer base.

As an early adopter of the technology, Fastenal has already begun to see some encouraging returns from this burgeoning business. Vending solutions currently account for over 27% of overall sales, and all indicators point towards more advances to come. Even as its traditional brick and mortar business continues to weaken, automated vending has continued to fuel the company’s continued growth.

In addition to providing customers with the convenience of on-site product offerings, Fastenal’s vending solutions offer an unprecedented level of accountability, as the system allows customers to track purchases and monitor actual usage levels much more closely. This minimization of waste and unnecessary purchases results in substantial cost savings for customers, albeit at the expense of somewhat decreased sales for Fastenal.

Despite this drawback, companies within the construction materials business have high hopes for this technology, because it allows them to attain a bigger share of their customer’s overall spending. Indeed, Fastenal’s competitors like W.W. Grainger, Inc. (GWW) and MSC Industrial Direct Co Inc (MSM), and Stanley Black & Decker (SWK) have followed suit with their own vending solutions. By monitoring purchasing patterns and stock levels, these companies can increase operating efficiencies while providing expanded product selections that are customized to the anticipated needs of their customers.

As vending technology continues to improve, this business model should pick up steam over the long term. Some of the stranger offerings like lobster, fresh meat, and plants may take a while, if ever, to catch on, but investors would be wise to keep an eye out for the next big thing. Redbox, a subsidiary of Coinstar (CSTR), redefined the traditional DVD rental business with the application of automated vending technology to DVDs. As we discussed earlier, an equally important market shift is likely occurring in the construction materials sector. Equipped with machine vision capabilities and interactive touch screen interfaces, these next-generation vending solutions can provide an unprecedented level of customer interaction. With companies thinking up creative new ways to utilize these highly customized vending technologies, savvy investors will certainly want to consider riding any new waves of growth that come along.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.

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