A new concept has come to the staid vending machine. Fresh Healthy Vending International, Inc. (VEND.PK) — operators and franchisee developers of the equipment that has become an icon in American life — is a company about the promise of health, vigor, and living well wrapped up in the convenience of vending that has always meant fast, greasy food grabbed on the run.
A change in management and a company refocus last summer is resulting in rapid growth. In June of this year, 1,775 machines were in operation. Now there are 2,300 machines and a 29.5 percent increase in five months. In October, 74 new locations by franchisees were added and 38 machines sold. In November, Fresh Healthy Vending International’s first partnership was formed with a current franchisee for 60 healthy vending machines placed in corporations in Florida. Another milestone was reached in November — the sale of its 2,500 machine, bringing revenues cumulative from January 2010 to its current fiscal quarter ended September 30, 2013 to over $25 million.
Fresh Healthy Vending International has vending offerings that are unique and fit in perfectly with trends of wellness and the fight against obesity, now deemed a disease by the American Medical Association. Beyond granola bars, VEND sells esoteric items like coconut water (known to boost electrolytes). Its function is a detox with extract of prickly pear containing amino acids that boosts the liver’s ability to clear impurities, also in Zola Acai Smoothies. Meeting USDA standards and beyond, machines even carry gluten-free and kosher goods in an industry-rocking 6,000 choices.
The traditional vending trade comprised of Fritos, Snickers, and Coke is being rejected in hospitals and schools due to its junk food choices, yet still posted $43 billion in 2011, according to Vending Times 2012 Census of the Industry, a gain of almost 2 percent over the prior year. The USDA’s recent Smart Snacks in Schools guidelines call specifically for students to eat whole grain-rich products, fruits, vegetables, and dairy or protein foods. House Bill 3403 mandates that fatty foods should be banned from vending machines found in Oregon government buildings, citing that, “Vending machines are stocked with foods that contribute to the obesity epidemic.”
From my anecdotal evidence based on weeks of canvassing, medical centers are one of the fastest-growing areas to adopt the healthy vending concept. Just this evening, I spoke to a supply chain manager of the eight-facility McClaren hospital chain in greater Detroit that was on his way to a meeting to discuss providing their 1,800 staff members more nutritious vended foods to augment the cafeteria in its down hours. A look at Fresh Healthy Vending International’s large installed customer base reveals something startling — Fresh Healthy Vending machines are located in fitness facilities and dance studios, places that would not dream of stocking Lay’s potato chips, Oreos, and Mountain Dew.
The only innovation to recently reach vending is the arrival of the micro-market, small-scale convenience stores that are custom-fitted into a company’s break room with the benefit of workers being with provided fresh and healthy food easily bought without leaving the building (ultimately enhancing productivity). However, operators, in order to secure a good margin, require an employee size of over 125 people, shutting out smaller businesses. Fresh Healthy Vending International overcomes this limitation with its three sleekly-designed machines — Healthy Vending Combo for food, Healthy Vending Café for beverages, and its latest, Healthy Vending Touch that uses interactivity to involve and educate consumers.
Healthy, nutritious options similar to the micro-market can be installed in businesses of as small as 40 employees. Further, VEND incorporates the latest technology of cashless vending, guaranteed-vend to avoid losing money and remote product monitoring so items never run out, using high-level computer networking and communication.
Vending operators tend to be local in customer reach, severely limiting opportunities for substantial growth. Fresh Healthy Vending, by contrast, has shown a broader vision with machines placed not only across the country. In states like New York, Massachusetts, Pennsylvania, Maryland, Washington D.C., North and South Carolina, Georgia, Florida, Indiana, Texas, and California (many of these only in the last several months) but also in Canada, Puerto Rico and the Bahamas. As testament to its growth, an East Coast office to bookend its one on the West Coast was recently opened in Rockville, Maryland, to accommodate its rising number of franchisees, which number over 200.
Risks with this quick-growing innovator in a fiercely-competitive market are not insignificant. Fresh Healthy Vending depends on one manufacturer for its machines. Rising food prices could cut into profits. Government regulation of franchising can be daunting, potentially draining on a small company’s resources. However, its principals have a solid history of vending that should mitigate some of these concerns. Finally, detractors of this story cite a swinging operating loss as one of the reasons for negativity but a more careful analysis of VEND’s September 10-Q show only a slight dip in gross profit margin from machine revenue, a first-time gain in sales of company-owned machines, and an operating expense increase that is of course synonymous with growth.
The challenge to combat shrinking sales is the goal of traditional vending, a business dabbling in advanced technology and healthy options. The company is looming far above the rest with a concept beyond its competition. If the recent past is indicative of future trends, this company will ride the wave of battling obesity and bad eating habits with the same convenience vending products consumers have become accustomed to in their hurried world, and Fresh Healthy Vending International should rise back to its former valuation before the recent and unwarranted sell-off in late November, for a gain of 50 percent.
Matt Levy is a research analyst with Onyx Research Associates based out of Charlotte, North Carolina. Matt spends most of his time researching micro-cap and small-cap equities that are severely undervalued by the market. After a careful look at both fundamentals and industrial changes, Matt is able to uncover promising investment opportunities.
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