Expanding Opportunities for Milk Vending

1
Expanding Opportunities for Milk Vending

• The Multi-Channel Milk Vending Test

October 2003
RESEARCH CONSULTING FOR THE GLOBAL BEVERAGE
INDUSTRY
2
Contents

• Introduction/Background
• Multi-Channel Vend Test Overview
• Key Findings and Conclusions
• Test Results
• Financial Analysis
• Milks Vending Opportunity

3
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
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Introduction/Background
Milks 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
• Milks perishability
• Limited single-serve packaging
• Limited product variety and lack of strong
  brands
• Milk outspent by competitors marketing,
  distribution, equipment

Retail Channel
CSDs
Milk
Take-Home 86 45 47 70 Immediate
Consumption 6 30 48 17 Foodservice 8 25 5 1
3 Total 100 100 100 100
(1)
(1)
(1) Includes fountain
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Competitive Vending Presence
Introduction/Background

• Milks 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

Vendings Estimated Share of Volume
Volume Sold Thru Vending
Growth Trend
Soft Drinks 12 Bottled Water 5 Ready-To-Dr
ink Tea 4 Sports Drinks 4 Fruit
Beverages 3 Milk lt1 -
Source Beverage Marketing Corp. Vending Times
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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
7
Introduction/Background
Recent Milk Vending Initiatives

• Recognizing vendings 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

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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

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Vending Location Demographics
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

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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
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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 CU variable and transient
  population (foot traffic)
• Populations tended to be lower at BI test
  locations vs. test schools

Location Dynamics
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Contents

• Introduction/Background
• Multi-Channel Vend Test Overview
• Key Findings and Conclusions
• Test Results
• Financial Analysis
• Milks Vending Opportunity

13
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
  processors total milk vending business

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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, Hersheys)
• Range of flavors
• Alternative Vending machine types

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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

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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

Dixie-Narco Glass Front
Royal Closed-Front
Royal Live-Display
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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

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Cell Data Utilization
Multi-Channel Vend Test Overview

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

Machine Type Comparison
BI Demographic Comparison (Blue vs. White Collar)
Product Set Comparison (Full vs. Limited)
Base Channel Comparison (BI, C/U, Public)
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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

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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

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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

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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
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Contents

• Introduction/Background
• Multi-Channel Vend Test Overview
• Key Findings and Conclusions
• Test Results
• Financial Analysis
• Milks Vending Opportunity

24
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. BI 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

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Key Findings and Conclusions (contd)

• BI locations generally produced the highest per
  vender sales
• Per capita consumption in BI 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 BI, 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

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Key Findings and Conclusions (contd)

• 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

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Contents

• Introduction/Background
• Multi-Channel Vend Test Overview
• Key Findings and Conclusions
• Test Results
• Financial Analysis
• Milks Vending Opportunity

28
Average Weekly Volume Over Time
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
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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
30
Alternative Channel Volumes
Test Results

• Vender unit sales were highest at Business
  Industry locations 96 units across all weeks
• CU 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
31
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
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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 CU, 14 of 22 BI) Glass front venders
only
33
Full-Line Milk Product Offerings
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)
BI Glass front venders only
34
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
35
Brand Variety Analysis
Test Results

• Among the full product set venders,
  local/regional processor brands outsold national
  brands by slightly more than 2 to 1
• In BI, 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
36
Alternative Vender Type Analysis
Test Results

• Glass front venders significantly outsold both
  closed front and live display equipment at BI
  locations

Relative Sales Volume by Vender Type Average
Units Per Week Per Vender
Performance Relative to Glass Front
-33 -33 ---
Baseline weeks 5-12 BI locations only
37
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 BI locations only
38
BI Channel Analysis
Test Results

• Within the BI 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

BI 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
39
BI Per Capita Consumption
Test Results

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

BI Per Capita Consumption
Units Per Employee Per Week
Per Capita Consumption in School Test
0.20 0.25 0.18
Glass front venders only
40
Blue Collar vs. White Collar BI
Test Results

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

BI Per Capita Consumption Blue Collar vs. White
Collar
Units Per Employee Per Week
Glass front venders only Baseline Weeks 5-12 only
41
BI Location Analysis
Test Results

• In larger BI 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

BI Baseline Period Vender Sales Cafeteria vs.
Non-Cafeteria Locations
Weekly Sales Per Vender
All machine types All weeks
42
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
43
Mixed Beverage Venders Retention Rates
Test Results

• Milks 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
44
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

45
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

46
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.
• BI 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
47
Contents

• Introduction/Background
• Multi-Channel Vend Test Overview
• Key Findings and Conclusions
• Test Results
• Financial Analysis
• Milks Vending Opportunity

48
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
49
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
50
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 processors and each operators costs will
  differ, perhaps significantly, depending on its
  capabilities/ competencies, product portfolio,
  local market dynamics, competitive circumstances,
  accounting practices, etc.

51
Financial Analysis
Important Qualifications (contd)

• 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

52
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)
53
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
54
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
55
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
56
Contents

• Introduction/Background
• Multi-Channel Vend Test Overview
• Key Findings and Conclusions
• Test Results
• Financial Analysis
• Milks Vending Opportunity

57
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
Annual Sales/Vender (units)
Incremental Sales/Year
Channel
of Venders
(mil units)
(mil gallons)
BI Blue Collar(1) 45,500 6,536 271.3 33.9
White Collar(2) 23,500 6,536 153.6 19.2 Colleges/U
niversities 16,000 3,762 60.2 7.5 Public(4) 45,000
6,063 272.8 34.1 Secondary Schools(5) 16,500 7,92
0 130.7 16.3 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.
58
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.
59
Key Considerations for Implementation
Milk Vending 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

60
Key Considerations for Implementation (contd)
Milk Vending 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
Milk Vending 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,
  BI, C/U and public locations, to optimize value

The Milk Vending Opportunity for Processors