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Expanding Opportunities for Milk Vending The Multi-Channel Milk Vending Test October 2003 RESEARCH & CONSULTING FOR THE GLOBAL BEVERAGE INDUSTRY Contents Introduction/Background Multi-Channel Vend Test Overview Key Findings and Conclusions Test Results Financial Analysis

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expanding opportunities for milk vending

Expanding Opportunities for Milk Vending

The Multi-Channel Milk Vending Test

October 2003

RESEARCH & CONSULTING

FOR THE GLOBAL BEVERAGE INDUSTRY

slide2

Contents

  • Introduction/Background
  • Multi-Channel Vend Test Overview
  • Key Findings and Conclusions
  • Test Results
  • Financial Analysis
  • Milk’s Vending Opportunity
slide3

Beverage Immediate Consumption Growth

Introduction/Background

  • Immediate consumption of beverages has grown at a rate more than 3X take-home in recent years
    • Consumers are on-the-go more than ever, and beverage brands are responding by being more widely available and in convenience packaging

Growth of Immediate Consumption Beverages(1)

1997- 2002

5-Year CAGR

Total Industry Volume(2)

Per Capita Consumption

CAGR = Compound Annual Growth Rate; (1) Non-alcoholic; (2) Millions of gallons

Source: Beverage Marketing Corp.; IRI

slide4

Introduction/Background

Milk’s Availability Disadvantage

  • Milk, however is significantly underrepresented in the immediate consumption channels (convenience, vending, down-the-street)
    • Lack of availability in these channels puts milk at a significant competitive disadvantage

Estimated Retail Channel Shares

2002

Fruit Juice

PET Water

  • Reasons Why
  • Milk’s perishability
  • Limited single-serve packaging
  • Limited product variety and lack of strong brands
  • Milk outspent by competitors – marketing, distribution, equipment

Retail Channel

Milk

CSDs

Take-Home 86% 45% 47% 70%

Immediate

Consumption 6% 30% 48% 17%

Foodservice 8%25%5%13%

Total 100% 100% 100% 100%

(1)

(1)

(1) Includes fountain

slide5

Competitive Vending Presence

Introduction/Background

  • Milk’s presence in vending, a key and rapidly growing immediate consumption channel, remains virtually non-existent
    • For competitive beverages, on the other hand, 3% to 12% of volume is sold through venders

Vending’s Estimated Share of Volume

% Volume Sold Thru Vending

Growth Trend

Soft Drinks 12% +

Bottled Water 5% +++

Ready-To-Drink Tea 4% +

Sports Drinks 4% ++

Fruit Beverages 3% +++

Milk <1% -

Source: Beverage Marketing Corp.; Vending Times

slide6

Introduction/Background

Foundation for Milk Vending

  • Recently, however, dairy industry innovations have provided the foundation for substantial vended milk opportunity
  • Consumers are increasingly on-the-go and eating more meals away from home; they expect products to be available wherever they are and whenever they want them
  • The dairy industry has recently been very innovative in terms of developing single-serve packaging and a broadened array of milk products that fit the vending channel (e.g. flavors, 16-ounce plastic)
  • Strong branding initiatives by processors, as well as national brand owners, have broadened the appeal of milk as a contemporary, competitive beverage

Key Drivers of Vended Milk Opportunity

slide7

Introduction/Background

Recent Milk Vending Initiatives

  • Recognizing vending’s potential, the milk industry set out to objectively test and understand the opportunity through a number of initiatives

Milk Vending Tests/Initiatives

  • Upstate New York Secondary School Single-Serve Test
  • School Milk Vending Test
  • Local/Regional Dairy Council Initiatives
  • Multi-Channel Vend Test
slide8

Introduction/Background

Key Learnings from Vending Initiatives

  • The highly successful School Milk Vending Test, along with anecdotal evidence from milk processors who have initiated school milk vending programs, showed that:
    • School milk Vending represents a profitable business opportunity for processors, vend operators and schools
    • Vending adds a new incremental sales channel for selling single-serve milk products
    • Vending satisfies consumer demand for milk in non-traditional settings/occasions
    • Vending serves as a low-cost marketing vehicle for milk brands
vending location demographics
Vending Location Demographics
  • Location Type
  • Location Count
  • Location Share
  • Volume Share
  • Volume Index2
  • Offices
  • 500,000
  • 35.2%
  • 26.3%
  • 75
  • Public Locations
  • 475,000
  • 33.5%
  • 30.2%
  • 90
  • Plants, Factories
  • 160,000
  • 11.3%
  • 11.7%
  • 104
  • Hospitals/Healthcare
  • 48,000
  • 3.4%
  • 7.3%
  • 216
  • Colleges/Universities
  • 34,000
  • 2.4%
  • 10.7%
  • 447
  • Schools
  • 20,000
  • 1.4%
  • 2.4%
  • 172
  • Government/Military
  • 13,000
  • 0.9%
  • 4.1%
  • 451
  • Other Locations
  • 170,000
  • 12.0%
  • 7.3%
  • 60
  • Total
  • 1,420,000
  • 100.0%
  • 100.0%
  • 100

Introduction/Background

  • However, schools may represent only a very small portion of the total milk vending opportunity
    • There are over a million vending locations representing a significant cross-section of consumer segments

Vending Industry Location Demographic Summary1

  • [1]Vending Times, 2002 Census of the Industry
  • [2] Bachtelle and Associates’ location volume index calculations comparing location volume share versus location count share
slide10

Introduction/Background

Adding to Our Fact Base

  • The Multi-Channel Milk Vending Test took the prior school vending analysis a few important steps further to determine:
    • Which locations, besides schools, are high-opportunity for milk vending?
    • What is the optimal product set for a milk vender?
    • What are the benefits of different types of milk venders?

Ultimately, we can model an optimized total vending opportunity for milk processors

slide11

Introduction/Background

Vending Locations Considerations

  • Due to the differences in the consumers and the location dynamics, we would not expect milk vending in other channels to look exactly like school milk vending

School Milk Vending

Milk Vending in Other Channels

  • Kids are the heaviest milk drinkers
  • Per capita milk consumption for adults is roughly half that of kids in traditional channels

Consumer Realities

  • Often fewer beverage choices in schools
  • Students are “captive audience” 8 hours per day
  • Schools are densely populated: 700-3,000 students in our test schools
  • Heavy beverage vending available, plus options outside the locations
  • For Public and C&U variable and transient “population” (foot traffic)
  • Populations tended to be lower at B&I test locations vs. test schools

Location Dynamics

slide12

Contents

  • Introduction/Background
  • Multi-Channel Vend Test Overview
  • Key Findings and Conclusions
  • Test Results
  • Financial Analysis
  • Milk’s Vending Opportunity
slide13

Test Objectives

Multi-Channel Vend Test Overview

  • The primary objective of the Multi-Channel Vend Test was to evaluate the opportunity and viability of milk vending in key, non-school channels
    • Building on and supplementing learnings from the school vending test
    • Developing detailed understanding of sales velocities, traffic requirements, demographic influences, etc.
  • Additional objectives were to understand and quantify the volume and economic potential for a processor’s total milk vending business
slide14

Vending Test Design

Multi-Channel Vend Test Overview

  • 150 venders
  • Four markets – 2 in Southwest, Midwest, Southeast
  • Three channels
    • Business/Industry (Blue Collar/White Collar)
    • Colleges/University
    • Public (e.g. Retail, Neighborhood Centers, Clinics)
  • Selling milk only
  • 12-, 14- or 16-ounce plastic packages
  • Processor-owned local/regional brands and national brands (NesQuik, Hershey’s)
  • Range of flavors
  • Alternative Vending machine types
slide15

Market Selection Criteria

Multi-Channel Vend Test Overview

  • The key criteria for market selection was the presence of large, “best-in-class” vend operator
    • Diverse, broad-market vending accounts/locations
    • Ability to sell in and physically place 50 milk venders
    • Good reputation, easy to work with, eager to participate
  • Additional market criteria included:
    • High market Product Develop Index (PDI) for flavored milk
    • Processor with broad line of plastic milk offerings
    • Geographic diversity
slide16

Other Variables

Multi-Channel Vend Test Overview

  • Three vender types were tested:
  • Full vs. Limited product line venders were compared to see the impact of variety
    • Full = 10-15 varieties
    • Limited = 5-6 varieties

Royal

Live-Display

Royal

Closed-Front

Dixie-Narco

Glass Front

test location cell structure
Test Location Cell Structure

Multi-Channel Vend Test Overview

  • The 150 test machines included:
    • 90 glass front venders (identical to school test equipment)
    • 30 each of closed-front and live-display machine configurations
cell data utilization
Cell Data Utilization

Multi-Channel Vend Test Overview

  • The machine cell allocations allowed a variety of rather complex cell comparisons:

Machine Type Comparison

B&I Demographic Comparison (Blue vs. White Collar)

Product Set Comparison (Full vs. Limited)

Base Channel Comparison (B&I, C/U, Public)

slide19

Test Extension Methodology

Multi-Channel Vend Test Overview

  • After the milk vending test was concluded, an additional smaller test was conducted to indicate the relative impact of including non-milk beverages in milk venders
    • The sample for the test extension was limited to a relatively small number of machines in only one market
  • Test Extension Structure:
  • One market – Columbus, Ohio
  • 18 machines, divided between three (3) cells –
    • Cell A: Milk Only (local processor brand and national brand products)
    • Cell B: Milk products plus expanded local processor items, including juice drinks, etc.
    • Cell C: Milk products plus variety of alternative beverages, i.e., juices, Gatorade, etc.
  • All glass front machines
  • 12 weeks, reported in four-week segments
  • All locations selected from Multi-Channel Milk Vending Test sites
slide20

Test Extension – Products

Multi-Channel Vend Test Overview

  • Non-milk products included processor-manufactured juices and fruit drinks, as well as national brand juices/drinks, water and Gatorade
slide21

Test Extension – Qualifications

Multi-Channel Vend Test Overview

  • There were a number of factors inherent in the test extension that limit the findings to use directionally, rather than quantitatively:
    • One market and small sample size
    • “Forced” vender placement in non-optimal locations
    • Location-specific variables/dynamics – e.g. operator ran promotion on other venders
    • Reported test data that did not match machine revenue amounts
  • In a larger test, these factors would be ‘smoothed’ out across the sample
  • Three valid ‘adjustments’ were made to the data to address the issues, giving enough confidence in the data to identify directional findings
    • “Seasonality adjustment”
    • Comparison with snack vender volume changes
    • Internal adjustment to match data to actual vender revenues
slide22

Project Timeline

Multi-Channel Vend Test Overview

  • The comprehensive test was planned, executed and analyzed over a year-long period

Multi-Channel Vending Test Timeline

March 02

July 02

January 03

July 03

Test Planning and Set Up

Test Execution

Analysis and Reporting

Test Extension

Venders Installed

slide23

Contents

  • Introduction/Background
  • Multi-Channel Vend Test Overview
  • Key Findings and Conclusions
  • Test Results
  • Financial Analysis
  • Milk’s Vending Opportunity
slide24

Key Findings and Conclusions

  • Demand exists for vended milk in all the channels tested
    • Business and Industry – blue and white collar
    • Public locations
    • Colleges and Universities
  • Milk vending can be a profitable business for both processors and independent vend operators across all channels tested
  • Within each channel, there are good and bad locations for venders
    • Success is largely driven by foot traffic/population at the location
  • Channel-specific milk vending profitability varies, based on different levels of foot traffic, seasonality (e.g. C/U may have reduced summer activity), availability of competitive products (e.g. B&I with or without an employee cafeteria) , product pricing and commission structure
    • However, venders in each channel can be profitable, and an efficient business model would likely include placing venders in appropriate locations across all the channels
slide25

Key Findings and Conclusions (cont’d)

  • B&I locations generally produced the highest per vender sales
    • Per capita consumption in B&I locations was even higher than in the school test – a surprising finding
    • This finding confirms that availability of single-serve product can be a driver of increased milk consumption for adults as well as kids
  • Per capita vended sales decline when other foodservice exists, however, total sales are often higher due to the larger location populations
    • Within B&I, higher per caps were realized in locations without employee cafeterias
  • Having a variety of brands and flavors drives increased sales
    • The test proved the importance of broad product variety, which may include a combination of more flavors, fat-levels and strong brands
  • The best total volume and profit opportunity is in mixed venders with milk and other beverages
    • In fact, including non-milk beverages may make vending locations viable where milk-dedicated vending would be unsupportable
slide26

Key Findings and Conclusions (cont’d)

  • Glass front venders, which clearly display and merchandise the milk products, deliver higher location and per capita sales volumes
    • However, alternative business approaches will make sense when equipment requirements and potential profitability are considered (e.g. glass front venders may not be appropriate for outdoor placements and are often more costly)
  • Working with independent vend operators to enter the milk vending business will be the more attractive option for most dairy processors, at least initially
    • Independent operators have existing required infrastructure as well as experience, if not with milk vending, with fresh food and other beverages
    • Independent operators will already have relationships and/or contracts with the most viable vending locations, whereas it may be difficult for a processor to secure milk vending locations
    • Additionally, independent operators are generally servicing multiple vending machines per stop/location; thus, unlike processors, who may require additional drive-time and higher costs for new milk vending accounts, servicing one additional vender for an independent operator adds negligible cost
slide27

Contents

  • Introduction/Background
  • Multi-Channel Vend Test Overview
  • Key Findings and Conclusions
  • Test Results
  • Financial Analysis
  • Milk’s Vending Opportunity
slide28

Average Weekly Volume Over Time

Wks 1-4

Wks 5-8

Wks 8-12

Test Results

  • Across all venders and locations, weekly sales averaged 78 units per vender
    • As expected, sales volumes were highest just following vender installation and declined over time

Average Weekly Sales Per Vender

By Period

Average All Weeks = 77.6

Unit/Dollars Per Vender

All machine types; all weeks

Decline

from weeks 1-4 -- -19% -23%

slide29

Comparative Volume Retention Levels

Test Results

  • However, post-installation sales retention levels were relatively high – nearly 80% across all venders
    • In the School Milk Vending Test by comparison, base line period sales were 64% of installation period sales, also better than the estimated industry average of 50% to 60%

Share of Installation Period Sales Retained

Multi-Channel vs. School Test

All machine types; all weeks

slide30

Alternative Channel Volumes

Test Results

  • Vender unit sales were highest at Business & Industry locations – 96 units across all weeks
    • C&U and Public locations sold 10% and 20% less, respectively

Average Weekly Unit Sales Per Location/Machine

By Channel

Units Per Week Per Vender

Glass front venders only; All weeks

slide31

Range of Vender Sales

Test Results

  • As with any test design that “forces” location distribution, some locations performed at significantly below-average levels, while others delivered very high unit sales volumes

Range of Weekly Sales Per Vender

By Channel

Highest

Median

Lowest

Glass front venders only; All weeks

slide32

Volume Less Poor Performers

Test Results

  • Based on operator estimated sales requirements for retaining a vender location, when poor performing venders are eliminated from the mix (as would occur in “real life” situation) sales are significantly more robust

Average Weekly Sales Per Vender

Excluding Poor Performing Venders(1)

All Venders

Units Per Week Per Vender

Excluding Poor Performing Venders

(1) Venders with sales lower than the estimated requirement for profitability (14 of 22 public, 10 of 29 C&U, 14 of 22 B&I)

Glass front venders only

slide33

Full-Line Milk Product Offerings

All-Week Avg

Baseline

Test Results

  • Venders that carried broader product offerings significantly outsold those that offered only limited milk products

Average Weekly Unit Sales and Per Caps

Full vs. Limited Product Lines

Units Per Week Per Vender

Weekly Per Capita Sales

(7+ varieties)

(4 varieties)

(7+ varieties)

(4 varieties)

B&I; Glass front venders only

slide34

Flavor Variety Analysis

Test Results

  • Flavored milk accounted for 73% of unit sales across channels
    • Chocolate was the most popular flavor, with 47% of sales volume
    • The significant 11% from “other” comprised just 4 flavors

Flavor Unit Sales(1) Shares

Flavor Totals

White: 27%

Chocolate: 47%

Strawberry: 15%

Other: 11%

Total 100%

Significantly higher than 9% in school test

(1) All Locations; all markets

(2) Other flavors included Cookies ‘n’ Cream, Vanilla, Banana, Mocha

slide35

Brand Variety Analysis

National Brands

Processor-Owned Brands

Test Results

  • Among the full product set venders, local/regional processor brands outsold national brands by slightly more than 2 to 1
    • In B&I, the ratio was closer to 3 to 1

Processor vs. National Brand Unit Sales Shares

By Location

Share of Vender Sales

Glass front venders only; All weeks

slide36

Alternative Vender Type Analysis

Test Results

  • Glass front venders significantly outsold both closed front and live display equipment at B&I locations

Relative Sales Volume by Vender Type

Average Units Per Week Per Vender

Performance Relative

to Glass Front -33% -33% ---

Baseline weeks 5-12; B&I locations only

slide37

Alternative Vender Type Analysis

Test Results

  • Removing any volume variability associated with location population levels, glass front venders still outperformed the other test venders

Relative Per Capita Volume(1) by Vender Type

Average Units Per Week Per Vender

Performance Relative

to Glass Front -22% -24% ---

Baseline weeks 5-12; B&I locations only

slide38

B&I Channel Analysis

Average All Markets = 73.9

Test Results

  • Within the B&I channel (69 reporting blue collar and white collar locations) there were some variations in performance by market
    • The same trend occurred with per capita consumption per vender

B&I Weekly Unit Sales Per Vender

By Market

Units Per Week Per Vender

Per Capita

Consumption 0.32 0.19 0.26

All machine types; all weeks

slide39

B&I Per Capita Consumption

Test Results

  • Baseline per capita consumption at B&I locations was a healthy 0.25 units/week
    • Significantly higher than per caps realized in the school milk vending test

B&I Per Capita Consumption

Units Per Employee Per Week

Per Capita

Consumption in School Test 0.20 0.25 0.18

Glass front venders only

slide40

Blue Collar vs. White Collar B&I

Test Results

  • Per capita vended milk consumption was slightly higher in blue collar vs. white collar locations

B&I Per Capita Consumption

Blue Collar vs. White Collar

Units Per Employee Per Week

Glass front venders only; Baseline Weeks 5-12 only

slide41

B&I Location Analysis

Average Population 374 584 294

Average Location Per Capita Consumption 0.24 0.15 0.26

Test Results

  • In larger B&I locations with employee cafeterias, per capita vended milk sales were substantially lower than at locations without cafeterias
    • The larger populations at locations with cafeterias, however, drove higher total vended milk sales

B&I Baseline Period Vender Sales

Cafeteria vs. Non-Cafeteria Locations

Weekly Sales Per Vender

All machine types; All weeks

slide42

Mixed Beverage Venders – Sales

Test Results

  • In the extended mixed-vender test, test venders with both milk and non-milk beverages outsold milk dedicated venders by 40%
    • Milk sales did decline, but much less than the reduced share of facings for milk (-33%)

Mixed Beverage Vender Sales

Change in Revenues with Addition of Non-Milk Products

+40%

Change in $ Sales with Non-Milk Addition

-14%

-21%

-27%

Note: Small sample size; results are directional only

slide43

Mixed Beverage Venders – Retention Rates

Test Results

  • Milk’s retention rate in mixed venders was high – in fact milk sales recovered over time
    • This finding validates the notion that milk demand is resident, not just a reaction to new product availability

Share of Installation Period Sales Retained

Mixed Vender Test

105%

45%-50%

slide44

Vend Operators Response to Test

Test Results

  • The participating vend operators, interviewed post-test, were quite positive
    • All of the vend operators were eager to evaluate this new vending opportunity; they expected to have mixed results between the various test channels
    • Each believes that milk is a viable product in the vend industry and will likely become a profitable component of their vending business at selected locations
    • In general, machine profitability is expected to increase by adding other non-milk products to the machines
slide45

Vend Operator Sell-In Issues

Test Results

  • The vend operators cited some issues/hurdles related to selling-in milk vending in the various channels
    • Business/Industry
      • Availability of electrical outlets/adequate space
      • Moderate response by management to dedicated milk venders
    • College/University
      • Multiple levels of approvals required
      • Commissions expected
      • Exclusive soft drink company contracts in some locations
    • Public Locations
      • Security of equipment
      • Electrical outlets/adequate space availability
best practices
Best Practices

Test Results

  • Full variety of milk product offerings
  • Placed next to snack and/or food machine(s)
  • No competitive milk nearby in same package (e.g. in cafeteria)
  • Prefer glass front vender (but site economics will dictate)
  • Milk and non-milk products, if possible

Operator Perspective

on “Best Practices”

  • Public locations with extended hours of access/ operation
    • e.g. retail, transportation, healthcare, etc.
  • B&I with 300+ population
    • Combination blue and white collar
    • Prefer location with limited access to lunch alternative within the immediate area
  • C/U locations with heavy foot traffic

Operator Perspective

on Key Locations

slide47

Contents

  • Introduction/Background
  • Multi-Channel Vend Test Overview
  • Key Findings and Conclusions
  • Test Results
  • Financial Analysis
  • Milk’s Vending Opportunity
slide48

Financial Analysis

Vender Procurement Options

  • There are a number of options for procuring milk vending machines, including purchase, lease and subsidized use

Own

Lease

Subsidized Ownership

  • Owns and operates
  • From processor,brand owner, or machine manufacturer
  • Monthly payments to owner, or if processor-owned, lease cost can be amortized over COGS
  • Subsidized by brand owner
  • Subsidized by dairy industry association

Operator

  • Owns and self-operates
  • Leases to operator
  • Supplies vender to operator to use free of charge
  • From brand owner
  • From machine manufacturer
  • Long-term lease or lease-to-own
  • Subsidized by brand owner
  • Subsidized by dairy industry association

Processor

  • Leases to operator
  • Leases to processor to self-operate
  • Supplies vender to operator or processor to use free of charge
  • From machine manufacturer
  • Long-term lease or lease-to-own
  • n/a

Brand Owner

slide49

Financial Analysis

Hypothetical Milk Vending Economics

  • Hypothetical milk vending economics models have been derived for a number of possible milk vending scenarios, based on findings from the Multi-channel Milk Vending Test
    • The models also considered the type of vending machine (glass front vs. closed front), due to the differences in cost and sales velocity during the test

Method of Vender Procurement

Vender Operator

Processor Self-Op

Lease Vender

Independent Operator

Hypothetical Milk Vending Economics Models

Processor Self-Op

Purchase Vender

Independent Operator

slide50

Financial Analysis

Important Qualifications

  • Milk vending is emerging as a new channel for selling milk and is an additional means for milk to compete with other beverage types for away-from-home sales and consumption occasions
    • Because vending is not a traditional channel for milk, there are currently no well-established business models for the industry to follow or use to evaluate the vending opportunity
  • The hypothetical models presented here are derived from Multi-Channel Vend Test data and working with vend operators, processors and vending machine manufacturers to understand typical costs
    • Each processor’s and each operator’s costs will differ, perhaps significantly, depending on its capabilities/ competencies, product portfolio, local market dynamics, competitive circumstances, accounting practices, etc.
slide51

Financial Analysis

Important Qualifications (cont’d)

  • The financial analyses that follow consider only the incremental costs of operating a milk vender, and do not take into account overhead allocation or capital requirements, which may be significant (e.g. truck purchase, additional personnel, added routes, etc.)
    • Generally, incremental costs of operation for independent vend operators will be significantly less than for processor self-operation
slide52

Financial Analysis

Financial Analyses Defined

  • The various business models were analyzed for three different financial results – IRR, pay-back and break-even

Definition

Financial Analysis

  • The time it takes to recoup the purchase cost of the vender, based on gross profit

Pay-Back Period

Break-Even Requirement

  • The level of sales required to break-even at the operating profit level
  • Return on initial investment (vender purchase or lease) across 10 years of annual cash flow
    • Utilized for evaluating and ranking investment opportunities in capital strategy/planning

IRR (Internal Rate of Return)

slide53

Financial Analysis

Pay-Back Summary

  • Based on gross profits, the pay-back periods in all cases are shorter than or well within the range of the 1-1/2 to 2 years generally sought in the vending business – in many cases less than one year
    • Processor self-op scenarios have shorter pay-back periods for both vender purchase and lease, because combined manufacturing and operating profits are realized

Pay-back Periods for Milk Dedicated Vending Machines(1)

Based on Gross Profit

(in Years)

Vender Purchased by Operator

(1) Pay-back for purchase of vending machine only; does not include other potential capital costs

slide54

Financial Analysis

Break-Even Summary

  • Break-even requirements for operator-owned venders are relatively low, ranging from $40 to $52 per week for the first 7 years, with variances among the channels
    • Under the leasing scenarios, break-even requirements are significantly higher during the leasing period

Break-Even Sales Requirements for Milk Dedicated Vending Machines(1)

Based on Operating Profit Across all Channels

(Weekly Per Vender Sales)

Vender Leased by Operator

Vender Purchased by Operator

(1) In this hypothetical model, Venders are leased over 3 year period, with 15% interest rate; for purchased venders, depreciation is over 7 years

Note: For vender purchased by operator scenario, capital expense of the vending machines is considered as depreciation in operating expense

slide55

Financial Analysis

Return on Investment Summary

  • Return on investment levels, as measured by IRR, are attractive across all four scenarios and across all channels
    • Vender purchase yields a higher IRR, due to the relatively lower cost, which does not include any interest expense
    • Processor self-operation realizes the highest rates of return, but in these models the capital costs associated with setting up a vending business are not included

Return on Investment(1) for Milk Dedicated Vending Machines

Based on 10 Years of After Tax Cash Flow

Vender Leased by Operator(2)

Vender Purchased by Operator

(1) As measured by IRR; (2) In this hypothetical model, Venders are leased over 3 year period, with 15% interest rate

slide56

Contents

  • Introduction/Background
  • Multi-Channel Vend Test Overview
  • Key Findings and Conclusions
  • Test Results
  • Financial Analysis
  • Milk’s Vending Opportunity
slide57

Milk Vending Volumetric Opportunity

Milk Vending Opportunity

  • Based on fairly conservative assumptions, BMC believes that the opportunity for milk vending can approach 100 million gallons per year

Preliminary Estimated Vended Milk Opportunity

All Channels

Incremental Sales/Year

Annual Sales/Vender (units)

Channel

# of Venders

(mil units)

(mil gallons)

B&I

Blue Collar(1) 45,500 6,536 271.3 33.9

White Collar(2) 23,500 6,536 153.6 19.2

Colleges/Universities 16,000 3,762 60.2 7.5

Public(4) 45,000 6,063 272.8 34.1

Secondary Schools(5)16,500 7,920 130.716.3

Total 142,500 888.6 111.0

(3)

(1) 25% of plant/factory vending locations; (2) 5% of offices with venders; (3) 36 weeks – assume no operation during summer months/holidays; (4) 10% of public locations with vending; (5) From School Milk Vending Test analysis; 2001

Source: Beverage Marketing Corp.

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Industry Opportunity

Milk Vending Opportunity

  • Based on these preliminary estimates, vending alone could generate incremental sales to grow the total milk category volume by 1.7%

Preliminary Estimate of the Impact of Milk Vending

Total Milk Category

Millions of Gallons

Source: Beverage Marketing Corp.

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Key Considerations for Implementation

MilkVending Opportunity

Implementation Issues

Key Considerations

Capital Cost Requirements

  • Purchasing 142,000 milk venders will cost $400-$500 million
    • Could take the industry 10+ years to realize full potential
    • Vender prices will likely come down due to technology advances and increasing competition

Vend Operator Capabilities

  • Implementation will also be dependent on vend operators ability to secure and service significant number of accounts for milk, and place many new venders
    • Servicing accounts should not be a problem since operators already have significant fresh food business in these channels
    • A key focus should be educating vend operators as to the milk vending opportunity
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Key Considerations for Implementation (cont’d)

MilkVending Opportunity

Implementation Issues

Key Considerations

National Brand Owner Activities

  • The milk vending effort will likely be spurred by significant vending initiatives of key national brand owners (e.g. Nestlé)
    • These programs could speed milk vending to market, but may effect the opportunity for local/processor-owned brands to get best locations
    • Coke/Pepsi/Cadbury might enter the segment and commit significant resources to vending

Adoption of Aseptic/ ESL Milk

  • As aseptic plastic (shelf-stable) milk gains ground, could mean significantly lowered capital costs (less expensive venders) and lower operation costs (less frequent servicing, etc.)
    • If brand owners are waiting for broad scale aseptic adoption, may slow momentum behind vending in the short-term
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Summary – The Bottom Line

MilkVending Opportunity

  • The Multi-Channel milk vending test reinforces that milk vending is a profitable and attractive opportunity for processors
    • Increases single-serve milk sales
    • Puts milk in the hands of consumers away from home
    • Builds consumer brand awareness
  • A full complement of locations will maximize the milk vending opportunity
    • Schools are a very important channel
    • But processors and vend operators should consider a total milk vending program, including schools, B&I, C/U and public locations, to optimize value

The Milk Vending

Opportunity

for Processors