A booming economy towards a passive income

On the unglamorous (but surprisingly huge) vending machine economy. Underdogs welcome.

It was watching a YouTube video in September 2020 that first hooked Donald Luxama, 20, on the idea of a vending machine business. ‘There was a guy talking about this way to make money while you sleep, and it just got me,’ says Donald, who sold homemade hand sanitisers during lockdown and has since expanded his DSK Products range to include fragrances, hoodies, durags and more.

Soon, he was scouring Craigslist and Facebook Marketplace for vending machines and hunting for the right location around his home borough of Totowa in New Jersey, half an hour west of the Bronx. But everywhere he saw potential customers, he also saw vending machines, quickly realising that they were more ubiquitous than he’d thought. One day on Craigslist he found two machines in a local office block for $3,000. They’d been neglected by the owner, especially during Covid lockdowns, but Donald saw the potential of their location by the building’s entrance, leading to a dance studio and more than 10 offices upstairs.

Having done more research on YouTube, Donald went to Costco and BJ’s Wholesale Club to stock up on Sun Chips, Lay’s, Starburst, Diet Cokes and Monster energy drinks. Aiming to have a markup of at least 50% on each product, at BJ’s he paid $11.79 for 36 bottles of soda, to sell for $1 each. He thinks he’ll be able to make around $200 a week from his two cash-only machines, judging from the footfall currently flowing into the office building. And whenever the world returns to some kind of normality, potentially a lot more.

On 21 November, he posted a selfie on the Vending Nation Facebook group beside his two new fully stocked machines. The group – which has grown from 6,000 members in January 2020 to more than 18,000 today, many of them with black, Asian and minority backgrounds – quickly weighed in with messages of congratulations and handy tips (‘Get a card reader’; ‘Just stay hustlin man’).

By the numbers

There are tens of thousands of similar stories across the US. It is an incorrect assumption that the nation’s roughly 5m vending machines – bringing in $7.4bn in annual revenue, according to the industry market research firm IBISWorld – are mostly corporate affairs. In fact, more than 67% of the market is made up of small independent operators, who mostly sell snacks and sweets on slim margins. For many operators, like Donald, it is a side hustle rather than a primary way to make a living. And, while Covid has limited customers’ access to machines, it has also meant a booming interest in ways to make an extra passive income.

These small operators aren’t the only slice of a global industry that was worth $134bn in 2019 – and is predicted to grow to $146bn by 2027, according to a July 2020 report published by Research and Markets. Many of the biggest businesses in the space are machine manufacturers, from divisions of Mars and Coca-Cola to industrial companies like Crane, Diebold and Würth, which also manufacture everything from ATMs to airplane components and automotive hardware. But only a few companies – like Canteen in the US, or The Vending People in the UK – both supply and operate machines, and even then many use local partners.

For the most part, vending machines are operated by small regional businesses – which isn’t to say that they can’t grow. In 1989, San Diego high-school teacher Barry Strickland bought five machines as a way to make some extra money and avoid teaching summer school. By the time he and his wife Lory sold their ‘routes’ – the term for a cluster of machine locations – they had more than 250 vending machines in the San Diego area and gross sales of more than $500,000 per year.

Now they renovate old vending machines and teach would-be entrepreneurs through their Vending Mentors business, which saw the number of students double in 2020. ‘It’s not an obvious time to start a sales business,’ says Lory. ‘But so many people are looking for little ways to make extra income, and vending machines are recession-proof.’

Their lessons are hard-won and practical – starting with how to buy the right machines at the right price. Barry paid over the odds for his first five wall-hung units, and advises new owners to buy refurbished machines from trusted suppliers like him, who can fix them if things go wrong. These are often half the price of new machines, which can cost up to $7,000 for something decent. Anything costing less than $1,000 and you’re likely to be ‘inheriting someone else’s headache’, he says. Towards the higher end of the scale, vending machines with 50-inch touchscreens and conveyor belts cost from $10,000 to $15,000 (or $200 to $300 a month to lease).

‘So many people are looking for little ways to make extra income, and vending machines are recession-proof.’

When it comes to the business itself, Barry says that a typical ‘bread-and-butter’ vending machine might make gross sales of $4,000 to $6,000 a year, with roughly 40% of that being profit. ‘But some can do much better,’ he says. ‘And if you build up routes that you can service efficiently, you can grow a successful business.’

Barry and Lory say a lot of people get their first locations wrong, often opting for white-collar offices (where potential customers are too likely to eat elsewhere) or auto-repair spots (not enough footfall). Instead, they recommend blue-collar businesses of around 100 people, where workers do physical labour and need quick pick-me-ups. They have also had success in places where people have time to kill – like nursing homes and schools, including the Horizon Christian Academy, a now-closed private boys’ school where just three machines had revenues of $60,000 a year. With hotels and motels, they found that the less lavish locations do better because people are more likely to skip meals to save.

The classic approach to stock is to buy in bulk at wholesale stores (Sam’s Club is a favourite) and sell for double in machines. But the trick is getting the stock right based on the exact needs of the clientele. For example, Barry says that under-30s tend to buy more energy drinks, whereas older customers prefer classic sodas. At the Viejas outlet mall in San Diego, Barry and Lory noticed that the mostly Latino customers tended to prefer spicy chips and snacks to those with plain flavours. That learning helped their 14 machines in restroom hallways reach revenues of $60,000 a year.

This universal rule of matching product to customer is especially acute with vending machines. At Oakland International Airport, for example, the Uniqlo vending machine makes around $10,000 a month from its down vests alone, which sell for $50 and instantly allow buyers to fit in with Silicon Valley startup culture.

Smart, networked machines

Traditionally, vending machines have been simple analogue devices: put in a dollar, get a product. But that image is about to change because unattended retail is evolving and has reached a technology and sales tipping point as machines become smart, networked devices for the ongoing quest for more convenience and a better consumer experience.

Although the key sales principles of vending machine success haven’t changed since 1989, technology has. With 70% of machines now using digital technology, it’s become possible to follow inventory and track buying data in real time, whereas in the early days Barry had to fill a van with a huge range of stock because he didn’t know what would need refilling. New apps like VendSoft are designed to track inventory and optimise routes, while more machines have inbuilt AI.

The vending machine economy is growing in other ways, too, with more people realising that the machines can sell much more than fizzy drinks and snacks – from hairy crabs in Hangzhou, China, to books in Singapore. This isn’t news in Japan, where it’s possible to use a machine to buy everything from sake to rice, watches, cosplay costumes and salarymen- ready ties. The fact that there’s a vending machine for every 23 people in Japan is partly cultural – many people like to buy without the awkwardness of a human interaction. But, more crucially, their ubiquity is spurred by the fact that high real estate prices in dense Japanese cities mean stores often struggle to break even, whereas a vending machine has minimal overheads. They also work 24 hours a day, seven days a week.

These simple truths are major drivers for companies like Gold to Go, founded by German Thomas Geissler, which started in Abu Dhabi and now has ATMs selling gold bars and coins across Europe, the US and Peru, or British company Rockflower, which makes automated machines that sell bouquets of flowers at train stations, including in Zurich and at London’s Clapham Junction.

It also explains why bricks-and-mortar brands are using vending machines to maximise efficiencies and save on costs. Luckin Coffee, which has overtaken Starbucks as China’s biggest coffee chain just three years after opening its first store, launched new barista-quality Luckin Coffee Express vending machines in January 2020. Bakery chain Sprinkles sells out of 22 ‘cupcake ATMs’ across the US.

A new kind of influencer

Vending machines can also help to build brands in the same way that stores do. In Philadelphia, 24-year-old crochet influencer Emani Outterbridge, aka Emani Milan, wanted a faster way to sell her patterned skeins of yarn, but also realised that a vending machine could be a good way to interact with her customers, who have included Cardi B and Megan Thee Stallion. In June, she crowdfunded $10,000 to order three bright-pink vending machines, the first of which she placed in her friend’s barbershop, Elements of Grooming, in North Central – selling more than 100 skeins in the first week.

But it’s more than just a sales product. Advertising herself as ‘the girl with the bright-pink machine’, she runs free crochet consultations every Friday with anyone who buys yarn. The buzz around her hasn’t just meant an uptick in business for her, but for the barbershop, too. ‘All of my business has grown,’ says Emani, who is already looking for new locations for her machines. ‘It’s given me a cool story, as well as a new way to sell my product.’

In Fort Worth, Texas, 19-year-old Jamie Ibanez has gone the other way. He has used a fledgling vending machine business to parlay into a career as a YouTube influencer. While he has 25 machines around Fort Worth, Texas, under his Vending Bites company, he is making more money (around $10,000 a month) on YouTube, where 377,000 subscribers watch him fill his garage with Sam’s Club stock, or inspect the crisp cash piles in his machines. One video of him counting $453.50 from three machines over a two-week period has had more than 2m views.

‘Retail-first’ machines

Companies are using vending machines in more sophisticated ways. London-based Social Vend builds and installs smart vending machines that can gather data as well as sell products. CEO Andrew Theodore founded the business in 2011 after working in experiential marketing, and wondering why he could only find machines that used the latest digital technology (Windows 97 was still standard). Soon, he was making bespoke machines for brands like Adidas and Barclaycard, which would be used everywhere from launches to music festivals, offering prizes and samples in return for data and social media shares.

‘All of my business has grown. It’s given me a cool story, as well as a new way to sell my product.’

But, over time, he says Social Vend has pivoted towards retail-first machines, with the data as an added bonus. ‘People are increasingly comfortable spending money in a fully automated system,’ says Andrew, whose five-strong team can build and install new machines in as little as two weeks (whereas the big manufacturers often take six months). Recent projects include a machine for the skincare brand Haeckels, which became the centrepiece of a mirrored, people-free store in the English seaside town of Margate during lockdown; and a machine in the & Other Stories concession at Paris’ Galeries Lafayette department store, selling hand creams, perfumes and soaps – the first of what will be a major roll-out in 2021.

Vending machines can also solve real-world retail problems. Social Vend has built an AI-powered vending machine called Buddy, designed for US cannabis stores, where shoppers have complained about queues (shopkeepers often spend a long time explaining products to customers). Customers get an ID card for the machines, which tracks their purchases and can better recommend new products and offers.

For Andrew, this is the future. ‘You’re helping customers avoid queues, but you’re also turning an offline experience into an online one, which means valuable data for brands,’ he says. ‘I can see a future where most of the big brands have a machine attached to the shop. You’ll be able to walk past a branch of H&M at midnight and there will be a range of products to buy.’

This race to digitised efficiency applies on the micro level, too. Donald Luxama wants to add card readers to his cash-only machines in Totowa. Once he has recouped his initial $3,000 investment, he has plans to expand to different locations and look at new things he can sell, from his hand sanitisers to ice cream. ‘The potential is limitless,’ he says.

This article was first published in Courier issue 39, February/March 2021. To purchase the issue or become a subscriber, head to our webshop.

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