Automatic Vending Machines

It is estimated by state and federal officials that well over $100 million a year is being lost to swindles promising quick and easy money in vending machines and other similar business opportunity scams.

You see them almost everywhere you go: coin­operated machines dispensing food, beverages, newspapers, cigarettes, laundry products, personal care items, postage stamps, candy, even contraceptive devices.

“What an easy way to make money,” you might think.. “Just get a few vending machines, keep them stocked, and haul the coins away to the bank.” Many people have, indeed, achieved financial success by owning vending machines. Most of the industry today consists of small, independent local firms where initiative and hard work can yield both a comfortable income and the pride of accomplishment. Mergers of some independent local operators have produced multimillion­dollar vending corporations.

But the hard truth is that many inexperienced people who try to establish vending machine businesses are doomed to failure. This booklet is an attempt to assist investors by describing the pitfalls a potential vending machine operator must sidestep.

Don't Believe In "Business Opportunity" Miracles

$2,000 to $3,000 WEEKLY POSSIBLE -- New Automatic Merchandising Machines. No selling. To qualify, applicant must have car and references. Devoting 8 to 10 hours per week may net from $500 to $1,000 monthly with an excellent opportunity for taking over full­time. Liberal financial assistance. For interview, write giving full particulars, name, address, age and phone number. Minimum investment of $5,000.

Similar offers have appeared in classified and display advertisements in local newspapers and on radio and television throughout the country. They are part of a scheme which has left in its wake a trail of disillusioned and defrauded investors. The plain fact is that the scheme's true purpose is to sell equipment and merchandise to people who answer each advertisement. By such "Business Opportunity" advertising, unscrupulous vending machine promoters mislead prospective purchasers into believing that some sort of employment is being offered. Sometimes, headlines such as "Route Manager Wanted" convey the impression that the advertiser is offering a job.

Many advertisements fail to disclose that vending machines are even involved in the offer. They mention vague generalizations about an "opening" or a "money making opportunity" rather than disclose that the proposition consists of the outright sale of machines for which the purchaser assumes full responsibility. Reputable vending machine manufacturers seldom advertise to recruit new entrants. Therefore, all advertisements should be checked closely for the identity of the advertiser and the specific claims being made.

So­called "requirements" that the "applicant" have a car and furnish references could serve merely to conceal the fact that the promoter is interested only in whether the prospective investor has the money to buy some vending machines. Promises that the applicant's investment is "secured by inventory" are meaningless. How much "security" is there in a machine and a few cases of bubblegum?

People responding to such advertisements usually receive, by mail or telephone, invitations to meet a representative of the company, usually at a hotel or motel. There a salesperson paints a glowing picture of the profits that the buyer of vending machines and merchandise will receive from this investment. Typically, he or she applies pressure for a quick decision to prevent a careful study of the offer.

Specific Tactics to Watch Out For:

Inflated profit projections: Elaborate charts showing the profit possible with a certain number of sales per day often have no basis in fact, even when based on average industry statistics.

Location services: The salesperson may say that the company employs an expert locator to find prime locations for its machines. Actually, the company's assistance usually ends once it finds an establishment willing to have a vending machine on its premises. An operator who starts with poor locations cannot hope to compete with professional vending companies to capture good locations. Poor locations are not only unprofitable for sales but also invite vandalism.

Many times the so­called expert locator has no experience with local vending conditions, and even an experienced vending operator would have difficulty finding profitable vending locations quickly in a city other than his own. Legitimate vending machine manufacturers usually do not offer to locate machines for the purchaser. Such offers from manufacturers or distributors often are a tip­off that the promotion is fraudulent or that the previous operator of the equipment has defaulted.

Training programs: Experienced industry sources say that sales work is a good 50 percent of any operator's job and that no one can be a successful vending machine operator unless he or she can solicit accounts for his or her equipment. Promised training programs are generally either superficial or nonexistent. Even though many present vending company owners started their businesses originally with just a few machines, it is impossible to be trained as a successful vending operator in one or two weeks by a salesperson from out of town.

"Good deals" on machines: The typical salespersons are usually independent agents who buy vending machines from manufacturers and then resell them to inexperienced people who hope to find an easy way to earn extra income.

A few machine manufacturers sell vending machines to promoters under private labels, taking no responsibility for the machines. When the traveling distributor who may pose as a manufacturer's representative disappears or goes out of business, the purchaser is stuck with no way even to trace the real manufacturer to purchase repair parts. Better Business Bureaus have received complaints that machines purchased under these circumstances jam, break down, or otherwise give unsatisfactory service.

Furthermore, victims often find that they have bought machines at two or three times their actual value measured by the price of comparable equipment. It is virtually impossible for such victims to retrieve more than a small fraction of what they paid for the machines - if, indeed, they are fortunate enough to dispose of them at any price.

"Discounts" on merchandise: In addition to selling equipment, many promoters offer "bargains" on the merchandise to be vended. Buyers tend to find that such merchandise cannot compete in quality or price with merchandise sold by experienced vending machine operators or in over­the­counter retailing. Overloading inexperienced investors with perishable merchandise or stock which they cannot sell at all is another common complaint.

Repurchase plans: Offers by vending promoters to buy back inventory from investors who no longer want to sell the products involved are seldom, if ever, workable. Usually the promoter is long gone on a vanished trail by the time an investor tries to exercise this option.

Restricted territories: Sometimes the salesperson promises to give an investor an exclusive territory free of competition. In other instances he or she convinces the buyer to pay a premium price for a restricted territory. In either case, purchasers later find that the promoters have allowed other buyers to invade their reserved areas. Established vending machine manufacturers usually do not assign territorial franchises or rights. In certain circumstances territorial restrictions may be a violation of the antitrust laws. And in your community there will generally be no such thing as a protected territory free from competition with other local companies.

Leaseback arrangements: Occasionally deals are made in which a purchaser leases the machines and then hires the seller to service them including collecting the money. Instances have been known where the cost of servicing has been much greater than the money turned in by the servicing company.

Guarantees: Both written and oral guarantees are a stock­in­trade of the unscrupulous vending machine promoter. Often, they are worthless because the sales agency cannot be located and the manufacturer will not honor them.

Legitimate manufacturers who produce machines under their own names take responsibility for the equipment they manufacture. However, the manufacturer who sells to promoters, or whose salespersons are completely independent of the factory, may take the position that it is not responsible for what the person who sold the equipment promises, since the latter is not an employee of the manufacturer but an independent agent who buys at wholesale and sells at retail.

Packaging limitations: Some vending machine offers are for machines which can accommodate only merchandise which is packaged in a special way. This might mean that a special insert or holder is required for the product so that it can be purchased only from the promoter. This may be misrepresented as a competitive advantage, whereas in reality it limits the purchaser from using other supplies or varying the product offering.

Promises of success: The profit from vending is in pennies or fractions of pennies per dollar in sales and volume. Out of the money that is collected from machines, the operator often pays a commission to the location owner on whose property the machine is placed.

The operator must also meet such expenses as rent, licenses, insurance, machine maintenance and parts, taxes, telephone, legal fees, electricity, truck repair, gasoline, tires, depreciation of machines and equipment and all other normal business costs. These hard business facts are glossed over by the promoter interested only in a quick profit on the sale of machines rather than building a permanent business.


Do Your Homework

In view of the persistent problems of deception and outright fraud in vending promotion schemes, the Council of Better Business Bureaus suggests you apply the following checklist to any offer of vending equipment or routes:

  1. If the advertisement indicates any connection with a distributing company or manufacturer, have you seen satisfactory evidence, in writing, from the distributing company or manufacturer authorizing and backing up the advertisement?

    No         Yes

  2. If the advertisement refers to specific earnings from vending machines, is there proof that these earnings are factual?

    No         Yes

  3. Does the advertisement clearly state that it is an offer to sell vending machines?

    No         Yes

  4. Does the contract you are asked to sign plainly state all terms or conditions?

    No         Yes

  5. If reference is made to locations or routes, have you seen proof that the locations have been secured by contract and are available for inspection?

    No         Yes

  6. If familiar brand names are used, have you seen proof that their manufacturers have given permission for the products to be mentioned?

    No         Yes

  7. If the promoter claims or implies sponsorship of civic, charitable, religious or fraternal organizations, have you seen proof of that sponsorship?

    No         Yes

A No on even one question above is a bad signal. Do not commit yourself in any way or sign anything unless you answered Yes every time. Even if the proofs suggested seem satisfactory to you, ask someone who knows both you and the businesses in your community to evaluate your chances for success.

Assess Your Chances For Success

Before spending your savings on a business opportunity in the vending industry, take these steps:

Look At Yourself:

  1. Are you really eager to be your own boss?

    No         Yes

  2. Are you willing to work long hours and be available at night and on weekends, if required?

    No         Yes

  3. Can you meet obstacles and setbacks as a challenge ­ without panic or discouragement

    No         Yes

  4. Are you thorough? Do you like to take care of details?

    No         Yes

  5. Can you organize your time and adhere to a schedule?

    No         Yes

  6. Are you well organized in money matters?

    No         Yes

  7. Do you have credit at your bank?

    No         Yes

  8. Do you have sufficient reserve capital beyond the contemplated investment?

    No         Yes

If you can say Yes to most of these questions, you at least have the potential to become a good vending operator. Most of the people in the vending business today had to ask themselves questions like these before they decided to go ahead.

Look At Your Market:

Because few communities today are without vending operators, it is important to take a good look at the companies already active in the vending business in your area.

  • How many are there?
  • How big are they?
  • What kind of accounts do they seem to serve?
  • Don't just take a quick look at some service stations; many of them have some vending. Look at companies with large offices, at factories, restaurants, airports, and other places where many people gather. Check with the location owners. Are they satisfied? Have sales in their machines been holding up?
  • Check also with local bankers. Many of them have vending companies as customers. They will know whether the potential exists for you to join the market and realize a profit.
  • Check local vending companies and any vending machine distributors listed in the Yellow Pages. This will give you some idea of the competition in your market as well as some sources to call to check on the value of the machines you are considering.

Get Professional Advice:

Fortunately, a number of people are ready to help you think your way through these questions and the many others that will come up before you put the first candy bar in your first vending machine.

  • Manufacturers. A reputable vending machine manufacturer is always glad to help the beginning operator. If you get past the first hurdles, you will be a grateful customer in the future. Also, having its equipment in the hands of well-qualified operators strengthens the manufacturer's reputation. Some will have a service representative work with you for a few days and then check back from time to time. Some have special schools for operators and their personnel to make sure that you will be able to set the equipment up properly and make necessary repairs.
  • Suppliers. You can expect help from the many companies that sell products and supplies to vending operators. A coffee salesman, for instance, may know how to get the right water temperature and whether your local water needs softening or purifying. A gum company representative may pride himself on showing you how to arrange the gum column in candy machines for maximum sales.
  • Local distributors. Most large vending operators buy direct from manufacturers, but small operators often buy from local vending machine distributors who handle products and parts from many manufacturers. Since such a distributor depends on small firms like you for his livelihood, he is especially knowledgeable about your method of operation. Not only can he deliver in smaller quantities, but he may be able to put you in touch with other small operators who do business nearby but do not compete with you.
  • Trade Groups. The National Automatic Merchandising Association (NAMA) 20 N. Wacker Drive, Chicago, IL 60606, (312) 346­0370, has detailed information on the costs of operating established vending machine businesses. Reviewing this data, compiled from actual vending machine companies, will help you evaluate your situation. Also, nearly every state and many cities have organizations of vending operators. Some have full time offices and all have regular meetings to help members improve their vending operations. Call NAMA for information about associations in your area.

You may wonder why you should consult all these people before you're even in business. But consider this example: Let's say you want to start off with just candy vending machines. There are more than half a dozen first­rate machine manufacturers and more than 100 companies making candy bars for vending operators.

  • Who has the best machine for your type of operation?
  • What bars should you offer your customers?
  • What about adding gum and crackers?

    To make an intelligent decision on even these limited questions you need to talk with several machine manufacturers to compare their equipment, their sales stories, their prices, and the help they can offer you.

    Likewise, listen to the advantage of several product suppliers and base your selection on your own comparison of their presentations. The advantages to this reasoned approach in comparison to a pressured meeting in a motel room with a traveling promoter should be obvious.

    Check Federal, State and Local Requirements

    The Federal Trade Commission and many states regulate the sale of franchises and business opportunities. Companies that deal in interstate commerce must comply with the federal regulations requiring disclosures regarding the business opportunity and the business history of the franchiser. Several state laws have similar requirements.

    It is wise to check with a local attorney and with state or federal authorities to determine whether these requirements apply to the situation you are considering. Specific details of the disclosure requirements are provided in the Better Business Bureau publication, "Do's And Don'ts In Advertising."

    Understand that if you decide to start a vending company you will need to check with appropriate state and local officials about what licenses, permits and applications will be necessary to do business within the area. State and local sales taxes, health and sanitation fees, and workmen's compensation costs are just a few of the operating expenses you will have to consider.

    Many state and local public health departments require licenses to operate a food service business (which a vending operation usually is) in their jurisdictions. If you are starting a new business, plans may have to be submitted for their review prior to starting any construction.

    Narrow Your Options Wisely

    Alertness and hustle can make the difference between a wasted investment and a successful business. Informed decisions should precede commitment. When you think you have reached a final choice, ask yourself still more questions about:

    The Company:

    • How long has the firm been in business?
    • What is its past record of accomplishment?
    • Are its principals well regarded and experienced?
    • What is the financial strength?
    • What are its plans for future development?
    • What is its record at your Better Business Bureau?
    • How selective is it in choosing potential operators?

    The Product to be Vended:

    • What is the product's quality?
    • Is it a staple, a fad, or a luxury item?
    • Is it seasonal?
    • How well is it selling now, and has it sold through vending machines in the past?
    • Would you yourself buy it on its merits?
    • Is it priced competitively?
    • Is it packaged attractively?

    The Machine:

    • Is this machine of the quality customarily purchased by experienced operators?
    • Is the cost in line with that of comparable machines?
    • Have you seen and operated the actual machine you plan to buy?
    • Is the machine large enough to handle the suggested or promised volume?
    • What is the machine's frequency­of­repair record?
    • What are the terms of the manufacturer's written guarantee on the machine?

    Location and Placement:

    • How much will the location owner get on each item sold through your machines?
    • Is the distributor obliged by the contract to find locations for you or do you have to find your own?
    • Is the territory well defined?
    • Is it exclusive?
    • Is it large enough to offer good sales potential?
    • What is the income level in the area?
    • What is the nature of your competition?
    • What is the experience of other vending operators in your area who have done business with this franchising organization?

    The Contract:

    • Does the contract cover all aspects of the agreement?
    • Can it be renewed, terminated, transferred, and if so, under what conditions?
    • Must a certain amount of merchandise be purchased? From whom?
    • Can you return merchandise for credit?
    • Under what conditions is the contract invalid?

Tips to Remember

  • Do not sign papers or put up money for any vending operation until you have discussed the entire offer with your lawyer, banker, and family.
  • Ask for accounting records to substantiate the profitability of the venture; then confirm from actual case histories or a direct check of a few vendors using the same type of machines and merchandise.
  • Evaluate your own capabilities and resources.
  • Investigating vending opportunities thoroughly takes time. But the money you will save and the headaches you will avoid will make it well worth your effort.