Investing in Health Food Machines

In late September, I told you about some of the big developments in “automated retail” — i.e. the next generation of vending machines, which use digital marketing, big data analytics, and miniaturization to improve sales and penetration.

Though I talked a lot about the technological aspects of the new crop of vending machines, there was a topic that I willfully omitted: consumption trends. Specifically, I avoided mentioning the current trend of healthier eating.

Why did I omit this?

Firstly, I avoided mentioning it because food crazes move in waves spurred by a mass of countervailing forces. The fecundity of a particular harvest will drive down the cost of one food commodity over another, and industry groups lobby for advantages and lean heavily on marketers, who subsequently pressure restaurant and grocery buyers to create the next hot item.

As much as I like to eat, I’m no expert in food markets. Technology is my thing.

That brings me to my second point: the technology in this area is still somewhat drab. Most of the instances of health food vending that I’ve found are simply using dumb “lockbox” style vending machines to sell merchandise.

Though they’ve got great ideas behind them, they’re not employing the new technologies that are being adopted by junk food companies and big box retailers.

But today, a small North American company announced that it greatly expanded its footprint of health food vending machines on the East Coast in October, and I feel it’s worth looking into.

The Tech

I’ve already mentioned the two important trends: the popularity of health food and the new capabilities of vending machines.

The company we’re looking at today, San Diego-based Fresh Healthy Vending (OTCBB: VEND), capitalizes on both of these trends and gets its profits by franchising out its brand and business model.

We’re first going to look at the tech of its machines, which it calls “Micro Markets.”

It shouldn’t take you more than a single glance to tell that these are the new style of vending machine. They’re bright, they have a lot of space for individual product visibility, and they have multiple sections for pantry-style foods and fresh refrigerated foods.

What you can’t see at first glance is all the intelligent tech under the hood.

These machines accept tons of cashless payment systems like Google Wallet, PayPal, and prepaid loyalty cards in addition to credit and debit cards, making them instantly more accessible.

They also include extensive transactional data tracking, including day metrics, merchandising strategy tracking, and business analytics.

These data systems even allow internal merchandising campaigns, product bundling, suggestive selling, and point-of-sale promotion. It’s all accessible through an Internet connection that processes payments and uploads transaction data to the franchisee.

Each one of these machines costs $10,000 per location to the franchisee and a $1,000 fee per unit, with a minimum investment of 10 machines. The franchisee then commits 10% of his gross sales to FHV plus an annual software licensing fee.

The latter is a classic software company revenue model and the one that still drives companies like Microsoft (NASDAQ: MSFT) to this day.

The Trend

A recent study commissioned by ConAgra Foods (NYSE: CAG) predicted that 2015 will see a shift further away from traditional supermarkets and more toward delivery and small-store retail, with a focus on informed, healthy consumption.

“Supermarkets are under pressure from rivals ranging from other grocery stores to dollar stores, farmers markets and restaurants. Shoppers want convenience but they also want to know more about what they’re buying,” a recent Chicago Tribune article said.

These machines are ideally suited to capitalize on these trends in locations where neither delivery nor specialty retail is available.

For example, mass transit hubs, where commuters make their way to and from work, have a greater likelihood of exposure to targeted consumers. The convenience they offer is the proverbial vegan icing on the health food cake.

The Company

In the most recent quarter, the company posted a net loss of $2.4 million attributed to a major jump in general sales and administrative expenses.

So far, Fresh Healthy Vending has 190 franchisees across the U.S., Canada, Puerto Rico, and the Bahamas, and it claims to have over 2,300 machines out in the wild. Many of these are in public schools and universities, hospitals, military bases, fitness and community centers, and libraries.

Part of the reason why this company looks compelling is its participation in the USDA’s Smart Snacks in Schools regulation.

The regulation seeks to curb the amount of junk food available in schools and applies only to food sold a la carte in school stores or in vending machines. It went into effect in the 2014-15 school year, which started in September.

In October, the company added 190 new franchise locations, most of them in schools.

Match a broad trend with institutionalized backing, and you get widespread adoption of solutions.

In the USA, there are just under 100,000 public schools. Even if Fresh Healthy Vending only secures placement in a fraction of these, it will massively improve its exposure and drive up its potential royalties.

Good Investing,

Tim Conneally

 @TimConneally on Twitter

For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.