What is a Vending Machine Business?

A vending machine business is a retail business that sells merchandise through vending machines that it services. It is classified under the NAICS as part of the non store retailers.

How Does a Vending Machine Business Work?

A vending machine business follows the same traditional retail business model of buying merchandise in bulk at wholesale price, and selling it in small quantities to the end consumer at retail price. The difference between the wholesale and retail price is the gross profit that then pays for the business & operational expenses; and then finally the owner receives the net profit.

Running a vending machine business involves the following regular tasks:

• Sourcing products: This could be from warehouse clubs, such as Costco or Sam’s Club, or from traditional wholesalers.
• Restocking the machines: A system should be established to track inventory on a regular basis, and perform replenishments when required.
• Servicing the machines: Sometimes the machines would need maintenance and repairs.
• Collecting Cash: the money received from sales in cash should be collected on a regular basis
• Admin & Management Tasks: Performing admin & managerial tasks, such as bookkeeping, budgeting, managing employees, and monitoring the business performance.

Vending Machine Business Profits

To be able to project the profits of a vending machine business, we first need to identify its gross margins, and the typical expenses of such a retail business.

Then the revenue of the business is projected, the gross profit is calculated, the expenses are factored in, and finally a net profit figure can be projected.

Each vending machine will have a revenue estimate, based on the location traffic, the customer profile, the stocked products, and the average order value. Then, together, the sales from all the machines will constitute the entire revenue of the business.

Most vending machine business operators target a gross margin of around 60% on the products they sell.

For example, if they buy an item at $4 in wholesale, they would want to sell it at $10.

Then come the expense lines for such a business, and these typically include:

• Rent: Vending machine location rents usually follow a type of turnover rent, where the operator pays a certain percentage of the revenue to the owner of the property. This percentage ranges from 5% to 20%, and 10% is typical.
• Employees: If the owner of the business is not restocking the machines himself, and hires someone for this task, this will come under employee costs.
• Admin Expenses: If there are any types of licenses or permits, or any admin expenses related to the business, they will be included here.
• Selling & Promotions Expenses: Any marketing expenses or credit card processing fees will come here.
• Depreciation: When you first buy the machine, you pay the entire cost upfront as an investment (CAPEX), and then you need to expense such cost from your P&L, over a number of years (e.g. 5 years). This is important to be factored, in order to know the real profitability of your business.
• Taxes: Besides the income taxes of the business, vending machines are also subject to sales taxes in most regions.
• Common Expenses: If you operate a big business and have a central management team or a central warehouse, this comes under common expenses that are allocated to each machine.

Then after all the business expenses have been factored in, the net profit figure is calculated. This is the final profit of the vending machine business, that goes to its owners and shareholders.

Learn the details of budgeting & planning for a multi-store retail business from our course on Retail Budgeting & Planing. You will learn how to forecast sales for multiple locations, how to factor in seasonality in the monthly budgets, and how to create a full P&L budget.

Tips For Success Of a Vending Machine Business

The following are tips that can help you succeed in running a vending machine business.

1. Study The Market

Before you start, try to identify which customer segments you want to serve. This step will help you later on, while deciding on the locations you will select, the revenue forecasting, and the product selection you will carry in your machines.

The best place to put a vending machine will depend on your target customer, and could be:

• Local Gyms
• Hair Salons
• Schools
• Hospitals
• Office Buildings
• Apartment Complexes
• Specialty Retail Stores

While deciding on your target customers, think about their shopping habits, their purchasing power, and how frequent they need and buy the products you are willing to sell them.

2. Create Tailored Product Assortments

Based on you target market study, decide on the right product assortment, that will appeal to your target market, but also will help you generate the right amount of sales, at the right profit margin.

For example, if you decided to specialize in fitness related food products, you will target gym locations in your area to place your machine, and will source fitness related products, such as protein bars and shakes. Stocking the machines with high-calorie beverages would not be a good fit for your target market in this case.

Don’t be afraid to get creative with your product assortment. Think about relevant products that you can carry, even if those products are not typically stocked at vending machines elsewhere.

3. Master Your Numbers

Learn about retail math and how the numbers work in a retail business. Retail is a numbers game, and the best merchants are the ones who master their numbers and know how to use this skill in generating the most profits, not sales, out of their business.

You can download our free retail math formulas cheat sheet from here, or take it further and enroll in our Retail Math Fundamentals Course.

4. Build a Competitive Edge

Vending machine businesses have a very low barrier to entry. Anyone can start this business with an investment of $5000 to buy the machines and stock them with initial inventory.

When this is the case for any business, it starts attracting a lot of competition, and the ones who survive are the ones who have built a competitive edge, that allowed them to stay profitable.

This could be done in the form of:

• Unique branding
• Unique Product Assortment

When you have a unique, recognizable brand, this will help you sign up more locations, as the property owners will want to have you on their property to serve their customers, who already know your brand and like it.

You can then take this further as you grow the business, by sourcing unique products that are not sold everywhere else, or are not present in the area where you operate.

You might even want to start building your own private label products, if your operation is large enough.

For example, if we stick to the fitness products example, you can start creating your own protein products brands, that will be sold through your own vending machines at local gyms. If your brands are good enough, and have built a following of loyal customers, gym owners will want to have you at their property. And because this is your own brand, and your margins are potentially higher, you can share a higher portion of revenue with the gym owners; making them even more happier with having you onboard, and making it harder for others to compete with you.

5. Scale

Because a vending machine is small in size, and stocks a limited quantity of inventory, compared to a small convenience store for example, a vending machine business that wants to succeed, will need to scale the business to as many locations as it can operate.

Scaling a business requires a different set of skills from the owner.

Now the owner needs to understand managing cash flow, managing employees, and, most importantly, knowing when to start letting go and trusting employees to do the work.

A major issue that happens when small, entrepreneurial ventures, start gaining traction and prove their model, is that the owner becomes a bottleneck in the face of business growth. This is because a lot of small business owners are used to doing everything themselves, and they don’t trust their employees to do things the way they do.

It’s true, that no one will care about your business the way you do. But if you have the right leadership skills, the right recruitment and talent strategy, and the right incentives for your people, you can achieve much more through your team than you can ever achieve on your own.

6. Leverage Technology

It might be tempting to buy the most affordable vending machines on the market, but the more you can invest in and leverage technology, the more you can save on operating expenses down the line.

For example, having a machine equipped with a credit card reader, or even exclusively accepting card payments will eliminate the need for frequent cash collection visits and reduce the risk of vandalism. It might also be more convenient to customers, as people are moving more and more towards cashless payments.

Also, having a system that reports sales and inventory levels through the internet will be more efficient for restocking and avoiding lost sales opportunities due to stock outs.

Leveraging technology in this way will be helpful while scaling your business in the future.

More Resources

Thank you for reading this article on vending machine businesses. We believe you might also be interested in the following free resources:

• Starting a Retail Business
• Retail Business Plan
• P&L Management