China's economy is currently in a special "transition period," and the high costs of traditional FMCG models are putting immense pressure on FMCG companies. Leveraging relatively low-cost self-service vending models for retail is undoubtedly one of the best ways to control terminal channels and reduce costs.

Wahaha has been paying attention to vending machines for years. As early as March 2015, Wahaha attempted to partner with Ubox to explore smart vending machine deployment and sales channel construction. Unfortunately, a year later, the two seemed to have drifted apart.

It wasn't until May 2016 that Wahaha announced the establishment of Zongsheng Intelligent Technology Co., Ltd. (hereinafter "Zongsheng Technology"), investing 2 billion yuan to enter the vending machine market, with Zong Qinghou's second brother, Zong Zehou, personally in charge.

After nearly two years of development, how is Wahaha's vending machine business performing? Zong Zehou recently shared his insights on operating vending machines with the media:

After entering the market in 2016, Zongsheng Technology first focused on Wahaha's existing distributors. They have employees, warehouses, vehicles, and products, giving them a far better operational foundation than others. However, most of them are from the 1950s, 1960s, and 1970s generations. Through our interactions, we found that these distributors have strong fixed mindsets. After discussions with Zongsheng Technology, they either are unwilling to accept new things or only want to develop profitable points in existing channels. If the investment cost is high and the profit risk is significant, the resistance to cooperation increases.

To alleviate distributors' concerns, Zongsheng Technology spreads the cost of each machine, approximately 450 yuan per month. If a vending machine's monthly sales fall below 1,500 yuan, we also subsidize distributors 200 yuan per month. Because if monthly sales are below 1,500 yuan, distributors will lose money. Zong Zehou told the media. Additionally, Zongsheng Technology provides training for distributors, including backend usage, equipment maintenance, and site selection. To build an open platform and encourage more beverage brands to participate in the vending machine industry, Zongsheng Technology also introduced a policy: a company or distributor can provide 20 free beverage items to offset one month's equipment rental. Currently, vending machine usage costs are relatively high; through virtual currency transactions, we can alleviate the pressure on partners.

To date, Zongsheng Technology has deployed over 16,000 vending machines nationwide, mostly in economically developed regions and first- and second-tier cities. However, as consumer demand continues to rise, I believe the business will soon expand to third- and fourth-tier cities.

In addition to cooperation with distributors, Zong Zehou revealed another piece of information during a media interview: "Zongsheng Technology maintains an open mindset and hopes to jointly build a new retail platform with other beverage brands."

For example, a vending machine has four product lanes. If four beverage companies share the rental cost of one machine, the monthly rent is only a little over 100 yuan. Zongsheng Technology promises to open backend data to all partners. This is also Zongsheng Technology's core philosophy: each does its best and takes what it needs. For non-Wahaha distributors, Zongsheng Technology charges a 3,000 yuan deposit. If Zongsheng Technology successfully goes public, this deposit will be converted into original shares, and partners can cash out based on the market value after listing. This year, Zongsheng Technology will continue to strengthen its layout, striving to reach a total of 50,000 machines nationwide.

So, what is the logic behind Wahaha's "open and shared" vending machine strategy?

1 Cost is the core issue According to industry standards: the equipment cost of a vending machine is about 30,000 yuan, the gross profit margin on product sales is about 40%, and monthly sales are about 3,000 yuan (varies by location).

A single vending machine takes about 2 years to break even, not including comprehensive operating costs such as site rental, electricity and communication fees, and personnel maintenance. In fact, the payback period for a vending machine is very long.

According to Ubox's public data, in 2016, Ubox had an average of about 31,000 self-operated vending machines, with product sales revenue of 1.15 billion yuan, and average monthly sales per machine of about 3,100 yuan. Based on that year's 37.27% gross profit margin on product sales, the average monthly gross profit per machine was about 1,155 yuan. After accounting for sales expenses including marketing, site rental, operations personnel, depreciation and amortization, and business expenses totaling 470 million yuan, the average monthly cost per machine was about 1,263 yuan.

Therefore, even without considering management expenses, product sales performance is slightly loss-making, and vending machines cannot profit from selling goods alone. It is understood that Ubox's main profit comes from advertising revenue.

In contrast, Wahaha's vending machines, due to their brand manufacturer role, cannot generate additional advertising revenue. Even with higher product sales gross margins, it is difficult to truly balance revenue and expenditure.

2 Consumer experience is key The characteristic of vending machines is convenience, but consumer experience must also be considered. When faced with very limited SKUs, brand power or product power is the key factor in whether consumers make a purchase.

Wahaha's products, including purified water, Qili, Future Cola, and Rock Sugar Pear (except for the dairy drink Nutri-Express), have relatively fewer SKUs in their overall product line compared to companies like Nongfu Spring, Uni-President, Master Kong, and Coca-Cola.

If only Wahaha products are placed in a single vending machine, it will affect the consumer experience. Taking drinking water as an example, Wahaha purified water has low consumer recognition in first- and second-tier cities. As a single brand manufacturer with non-dominant products, it clearly cannot meet the diverse needs of consumers.

Facing cost and experience issues, it is not difficult to understand why Wahaha's vending machines need to be open and shared. The participation of other beverage manufacturers both shares costs and enhances the experience.

In the past two years, new retail models have flourished, but only vending machines have withstood the test of the market and time, and they better meet the needs of Chinese consumers. In 2018, the vending machine industry, at a peak, will see more entrants. Internationally, vending machine operators are mainly beverage manufacturers, while in the domestic market, the composition of entrants is relatively complex, with professional operators and beverage companies still in a chaotic battle. Zongsheng Technology hopes that beverage manufacturers can jointly build a value platform, reduce operating costs, and help accelerate industry development. For Zongsheng Technology itself, although it has been in the vending machine business for two years, there is still a long way to go, and the road ahead requires continuous exploration!

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