---
title: "The New Trend: Why Automatic Vending Machines?"
description: "Automatic vending machines are not new, dating back to ancient Greece and evolving through the 20th century. In Japan, there are 5.5 million vending machines, one for every 23 people, while in the US the ratio is 35. Now, with the rise of IoT, mobile payments, and capital support, vending machines are becoming a new investment hotspot, driven by the unbundling of functions and traffic."
author: "悦人悦吟"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2017-04-05"
language: "en"
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---

# The New Trend: Why Automatic Vending Machines?

> Automatic vending machines are not new, dating back to ancient Greece and evolving through the 20th century. In Japan, there are 5.5 million vending machines, one for every 23 people, while in the US the ratio is 35. Now, with the rise of IoT, mobile payments, and capital support, vending machines are becoming a new investment hotspot, driven by the unbundling of functions and traffic.

Automatic vending machines are not new. They can be traced back to the 1st century AD when Greek engineer Hero devised a device to dispense holy water. In 1925, the US developed a cigarette vending machine, and later various modern vending machines for stamps and tickets appeared. In Japan, the country with the most advanced unattended retail devices, there are 5.5 million vending machines of various types (selling beverages, cigarettes, coffee, vegetables, dolls, beauty products, hot noodles, etc.), with one machine for every 23 people on average; in the US, the number is 35.

In China, when it comes to vending machines, many people first think of Ubox machines, which are ubiquitous in subway stations and office buildings. Founded in 2010, this company primarily sells beverages and snacks through vending machines. In the first half of 2016, with 30,000 directly-operated devices and 15,000 franchise devices, it recorded revenue of 877 million yuan with a gross margin of 40.49%, and was listed on the New Third Board.

At the end of 2016, a new batch of vending devices caught the attention of capital. These include automatic orange juice machines, automatic coffee machines, automatic snack machines, automatic mask machines, and even mini KTVs (Youchang, Mida) and mini gyms (Super Monkey) that sell services rather than products.

For this new generation of vending machines, the question to answer is not just "why," but "why now?" Three trends point to vending devices:

* Infrastructure scaling: The cost of IoT hardware has decreased, allowing all devices and inventory to be connected.
* Mobile payment penetration: It improves user experience compared to coin-operated methods, and payments themselves can accumulate user purchase data and device IDs/WeChat Open IDs, making offline hardware an operable device.
* Capital support: ofo and Mobike have educated investors that offline devices/hardware are not entirely uninvestable. If the hardware itself shows profitability and the numbers add up, it can be a viable investment target. Moreover, riding on the coattails of Focus Media, adding a screen or QR code entrance can tell a story of advertising monetization or traffic entry points.

Vending devices essentially replace the labor involved in delivering goods and services with machines. But it seems that being unattended is not the goal but the result. At least in China, annual labor costs are not yet several times the depreciation of a fully intelligent device with visual recognition, voice interaction, and data analysis (a set of NCR equipment costs 300,000 yuan in software and hardware, depreciated over 5 years) plus hidden costs like loss prevention.

The core of vending is the unbundling of functions and traffic.

Unbundling of Functions

There is a very interesting phenomenon in offline retail: rent usually increases linearly with area, but sales do not increase linearly with area. For example, a 160-square-meter Starbucks store typically does not sell twice as much as an 80-square-meter Starbucks in the same location. To improve profitability, it is essential to understand the drivers of revenue and the composition of costs, which requires breaking down the functions of a coffee shop. A Starbucks can be roughly divided into three functional areas: production, sales, and experience. Unlike coffee shops that focus on selling the experience (the place), Starbucks' design of disposable cups, high stools, and hard tables seems to discourage customers from lingering, encouraging them to buy and go (to go). A large proportion of Starbucks orders are likely to go. As for the sales segment, the store (or more accurately, the storefront) naturally serves to capture natural traffic in an environment for sales conversion. Sales is like a window; to capture traffic more effectively, you should lay out this "window" in as many scenarios as possible. Finally, there is the production segment, which also has room for simplification, such as centralized production (Zhou Hei Ya, Lai Yi Fen) or automated production (Angel Orange, Laibei Coffee).

Unbundling of Traffic

Those who study restaurant chains or retail chains should especially feel this: often, the scaling of such projects is constrained by the speed of acquiring storefronts. Traditional offline business formats often require dozens to hundreds of square meters of space, hundreds of thousands of yuan in one-time renovation investment, plus the cycle of site selection negotiation and pre-opening recruitment and training, which is not easy. Even after the store opens, it is not easy; headquarters may use a term like "ping efficiency" (revenue per square meter, usually calculated as monthly store revenue divided by store area) to measure each store's performance. As in the coffee shop example above, if you break down revenue into each functional segment, you will find that the most efficient way is to "retain only the smallest unit of product or service delivery and use limited budget to lay out more touchpoints," paying tribute to Professor Qu's "unbundling the facilities." If I could open a 50-square-meter beverage store, I would rather open ten 5-square-meter mini beverage stores to reach more traffic. Moreover, finding a 50-square-meter store might be difficult, but a 5-square-meter store can be found anywhere—schools, office buildings, subway stations, community ground floors—lighter and closer to users. Wait, 5 square meters is about the size of a vending machine!

Convenience stores are a layer of unbundling from traditional supermarkets, and vending machines are another layer of unbundling from convenience stores. Moreover, this unbundling can create players that would not appear in traditional retail formats. For example, Coca-Cola might not open physical stores, but it has deployed 500,000 vending machines worldwide; domestic player Nongfu Spring has a number of vending machines comparable to Ubox, and Wahaha claims it will deploy tens of thousands of machines this year. A convenience store typically has 2,000-4,000 SKUs, while a brand can provide dozens to a hundred products, so brands have little incentive to independently support a specialty store, preferring to endure the layers of channel exploitation and accept the disconnect from real consumers. But vending machines seem to offer a good opportunity to help brands do brand display and direct sales at lower cost—closer to users and directly accumulating sales data. Whether it is 5 square meters or 20 square meters, whether it is a vertical cabinet or a walk-in small space, the form does not matter.

Vending machines seem like a good business, but what categories can make money with vending? The core logic of vending devices is to deploy the smallest unit of deliverable product or service into appropriate scenarios and users as much as possible, efficiently capturing natural/passive traffic. In other words, the essence of vending is supply-driven demand (to promote shared bikes, placing a bike in front of users is more effective than search ads or bus stop ads). This is why it requires rapid scaling of supply, which is where capital can help. Based on passive traffic, the best categories for vending are those that users see and want immediately, requiring no thought to decide, also known as impulse consumption (in contrast, unsuitable categories are planned consumption), such as food and beverages, entertainment magazines. The second dimension of category selection is the unit economic model, requiring high average order value and gross margin to cover machine depreciation, rent, and labor maintenance costs.

Below are some core metrics that VCs typically focus on for reference:

**1. Hardware Unit Cost**

If you are in charge of a consumer brand with annual sales of 100 million yuan, selling 1 million units at a unit price of 100 may be better than selling 100,000 units at a unit price of 1,000, because in a market, brand users interact with each other—the more users you penetrate, the more brand loyalty you gain. So mapping to vending devices, if a device's unit cost is as low as possible while being networked and operable, you can deploy more units with the same cost.

**2. Sales Profit (= Sales Revenue - Delivery Cost)**

Selling standard circulating goods (pre-packaged FMCG) provides convenience, but operators may not make much money. A bottle of drink costs 5 yuan; if daily sales per machine do not exceed 100 yuan, with a 30-35% gross margin, it barely covers the cost of labor for replenishment, and recovering the rent for the location requires effort. Choosing non-standard products like orange juice or coffee, or even service formats like mini KTV (where variable costs are negligible and prices can be dynamically adjusted based on peak and off-peak times), offers higher unit prices and richer gross margins, making them better targets.

**3. Operability**

The role of the internet and IoT lies here. On the merchant side, the use of IoT and simple ERP systems allows inventory to be networked, making replenishment easier; maintenance networking improves response speed for equipment repairs; and dynamic sales networking allows monitoring of each device's performance. On the user side, the cold coin-operated experience becomes an interactive screen with mobile payment, enabling more user operation strategies.

**4. Daily Order Volume, Number of Users Reached (Advertising Value)**

Congratulations, if the vending machine business itself is profitable, then we can think about the added advertising value built on natural traffic. A shared bike with a manufacturing cost of 200 yuan passes through 10 people's hands daily; a power bank costing about 100 yuan circulates twice a day; a beverage machine with a manufacturing cost of 20,000 yuan sells 50 cups a day, with each cup waiting time of 30 seconds. More attractive is that the deployment scenarios of hardware can somewhat precisely select the audience you want to reach.

Writing this, I suddenly feel that vending devices have another significance for people with social anxiety like me: reducing many meaningless pleasantries and interactions. I took a satisfied sip of the hot latte from the automatic coffee machine.

**Source: WeChat public account 悦人悦吟 (ID: yuerenec)**

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