Vending Machines proposal

BY NATHALIA FISHER

Executive Summary 3

Introduction 4

Product 4

Mission Statement 5

Objectives 5

Beauty and Personal Care Industry 6

The Main Competitors 8

Consumers 8

Product Strategy 9

Price Strategy 10

Place Strategy 10

Promotion Strategy 10

Operational Plan 11

Financial Plan 13

Conclusion 15

References 16

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The business consists on vending machines that will sell beauty and personal care products in specific locations across London. The locations are 15 major train, underground, and coach stations, 5 airports, and 5 major London nightclubs. Now a day, consumers are requiring more products on-the-go due to the fast-pace lifestyle (Mintel, 2013). The vending machines fulfil consumer needs of convenience, accessibility, and it is an easy and quick way to purchase goods (Euromonitor International, 2009).

The beauty and personal care industry is a growing sector, and by Boots being the UK leading beauty retailer gives a competitive advantages over potential competitors (Mintel, 2013). The beauty and personal care vending machines have the smallest percentage in the market of vending with only 1% of the global value sales (Euromonitor International, 2009). It gives Boots the opportunity of being the market leader in this sector in the UK. The potential competitors for the vending machine sector are convenience stores, and stores with long opening hours.

The main target group for the vending machines are women, and secondarily men between 25 and 45 years old who will potentially buy beauty and personal care products on their way to work, or a business trip. The vending machines in nightclubs will primarily target men and women between 18 and 35 years old who frequent the club.

The promotion strategy for the new Boots vending machines will focus on social media advertising. The objective is to create awareness of the locations of the vending machines. An advertising agency will be hired to carry out the promotion through Twitter and Facebook. Boots will give away beauty and personal care related prizes that will be hidden behind the products sold in the vending machines.

The vending machines will use already exiting Boots operational system. The products will come from the warehouse; will be delivered by exiting Boots staff to the locations of the vending machines, and it will be refilled once or twice a week. The supply chain will work as shown below:

Staff will be properly trained to refill the vending machines. Boots will use existing customer services to deal with any customers’ issues. Staff will be trained to carry out proper solution for the customers. To deal with maintenance of the vending machines, Boots will use the engineers from the company where the vending machines will be bought to maintain and fix the vending.

The beauty and personal care vending machines are very profitable and are expected to reach the break-even point in the first year. The overall profit is predicted to increase significantly from

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Warehouse Distribution Vending

Machines Consumer

£118,865.60 (first year) to £176,372.00 (second year), due to the decrease of costs and increase of sales. Further profit increase is expected for the third year of £182,091.25.

Due to urbanization people are living in a fast-pace lifestyle, which opens to new business opportunities to offer these potential costumers products on-the-go (Euromonitor International, 2009). The personal care and beauty sector is the smallest sector in the vending machines market, which gives the opportunity to Boots to explore this market and potentially gain a great market share.

The Boots beauty and vending machines fulfil the consumers’ need of having products efficiently, and with great accessibility. In countries such as France and Italy the concept of beauty vending machines has been in use for a few years and has been proved successful (Euromonitor International, 2009). There is great opportunity to use prime locations such as train, coach, and underground stations, airports, and nightclubs to reach the final consumer (Euromonitor International, 2009).

The new product proposal designed for Boots UK Limited is an environmentally friendly vending machine consisting of a range of beauty products for men and women. The aim is to have the machines’ strategically placed within the main train stations in London, the main airports and also a selection of central London nightclubs. The product will not just be aesthetically pleasing; it will incorporate Green technology in order to keep up with growing environmental consciousness. The demand for Green products continues to expand (Green Business Bureau, 2013) so by tapping into this market the company is able to create positive public relations and benefit from cost savings.

This idea is not necessarily due to a complete gap in the market as there are similar products that have been released. For Example, “BeautyMart” UK Limited designed a vending machine which this year (2013) has become available to use in Harvey Nichols London, however this particular reinvention of the traditional vending machine includes products of a high expense and is consequently aimed at a high class target market, compared to the psychographic segmentation that Boots market towards (Young, 2013). Therefore, there is a gap for the same product that reaches a differentiated demographic segment of consumers. In order to do this the machine will include products that are currently part of Boots product portfolio within the stores, the average price of the products to be included in the machines is £2.64 (see finance section).

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Mission - Our mission is to become the world’s leading pharmacy-led health and beauty group. We seek to develop our core businesses of pharmacy-led health and beauty retailing and pharmaceutical wholesaling across the world and become a significant player in many major international markets

Purpose - Our purpose is to deliver products and services that help people look and feel their best.

Values - We believe in making a difference and are proud of the contribution we make to the wellbeing of the communities we serve.

(Alliance Boots, 2010)

The product reflects the changing demands of consumers for a more time effective, convenient shopping experience, therefore by launching a product that meets these demands Boots can comply with Boots ‘Mission’ of becoming a ‘significant player’ within markets. Boots purpose is to ‘deliver products and services that help people look their best’. By creating a product that is available 24/7 it allows this purpose to be enforced within a longer time scale. Usually the products are only available during store opening hours and when ordered online there is a delivery waiting period. The products in the vending are therefore able to target people who are traveling at any time and people in nightclubs which on average stay open until 3 am when. Not only will the machines benefit this customer, they will also contribute towards the marketing of Boots.

Since the recession there has been a major cutback in consumer spending due to a lack of confidence in the market and lack of disposable income people can generate (Euromonitor International, 2012). However people still purchase ‘essentials’ but are just more wary of price. Also, the fact that the professional service segment within the Beauty market has declined, this has resulted in more people purchasing beauty products to use at home (Monk, 2013). With regards to this, the idea of having a vending machine holding a number of essential, beauty and personal care products, is perfect for the current market. This “fast track shopping” approach allows for adaptation of the constant change in demand of consumer shopping behaviour. The machine also offers a convenience factor as there is the option to pay by card and notes instead of traditionally having to use change.

Business Objective:

• To install sustainable vending machines in specific locations such as train, underground, and coach stations, airports, and night clubs.

• To achieve the profit forecast for the next 3 years, 10% +/-• To focus on the idea of creating a convenient, reliable product in order to meet the changing

demands of consumers

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Operational Objective:

• To maintain the physical appearance of the vending machine and to make sure stock is refilled on regular basis

• To monitor sales in order to identify which products are selling best or worst to help to increase sales.

Marketing Objective:

• Increase vending machine location awareness• Increase sales of the vending machine products through the marketing campaign

Over the years the beauty industry has developed rapidly and today it worth almost 15 billion in the UK in 2012 (Mintel, 2013) . As men are purchasing more beauty and personal care products, beauty industry is expected to grow by 8.5 % by the end of 2014 (Mintel, 2013). .

Boots is one of the biggest beauty and health retailer in the UK and owns its own labels such as N7, Botanics, 17 and Naturals (Euromonitor International, 2012). These products have had a fast growth and have reached overseas markets (Mintel, 2013) . Boots has two different visions, to concentrate on beauty and personal care as well as on pharmaceutical side, such as pharmacies and hospitals (Boots, 2013)

In the past two years sales of beauty and personal care has risen and it is estimated that it will continue to rise in upcoming years (see Figure 1) (Euromonitor International, 2012). Despite the recession, the premium beauty segment is still growing (Mintel, 2013). Consumers prefer to buy their personal care products in discount stores and supermarkets, due to the availability of buying in bulks and promotional sales (Euromonitor International, 2012).

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FIGURE 1UK: Consumer spending on beauty and personal care products through retail channels (incl. VAT) 2007-11

Below are the UK leading beauty retailers market share. As seen below, Boots is the UK leading Retail.

UK: Leading 15 beauty retailers’ share of total consumer spending on personal care goods, 2011.

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The main competitors in the Beauty Retail market are A.S. Watson UK (Superdrug, Perfume Shop, Savers), Lush Retail Ltd, Space NK Ltd, and The body Shop (Mintel, 2013).

Boots is facing strong competition from general merchandisers and supermarkets that are getting bigger shares in the market (Euromonitor International, 2012). Superdrug is still the main competitor in the beauty retailing sector which is the second largest beauty retailer in the UK (Mintel, 2013). In the vending machine sector the potential competitors are convenience stores, and stores with long opening hours (Euromonitor International, 2009).

The beauty and personal care vending machines have the smallest percentage in the market of vending with only 1% of the global value sales (Euromonitor International, 2009). Due to lack of competition in this specific vending sector, Boots have a great opportunity to grow in this market.

To better understand the competition and the advantages of the vending machines a SWOT analyses was created:

Source: (Euromonitor International, 2009)

Vending machines fulfil consumer needs of convenience, accessibility, and it is an easy and quick way to purchase goods (Euromonitor International, 2009). Consumers are requiring more products on-the-

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Strenght- Fast-paced lifestyle where consumer

requires products on-the-go- Convineint locations for consumers, such

as airport, stations, and nightclubs

Weakeness- Consumer perception of products sold in the vending machines as being expensive- Vandalism can limit sites for the vending

machines

Opportunities- With raise in technology vending machines

are becoming more secure, consume less energy, and accept wide range of payments,

as cards, notes, and coins

Threats- Competition from convenience stores, and

stores with long opening hours.- Environmental and recycling laws creates

higher costs and challenges for vending machines owners

SWOT

go due to the fast-pace lifestyle (Mintel, 2013). The urbanization has led to busier consumers, especially in big cities such as London, Tokyo and New York (Euromonitor International, 2009). It has been evaluated that Japan has the biggest amount of vending machines per capita in the world (Ashcraft, 2013). It's not a surprise, as major cities have limited space, busy people, relatively high cost of labour, and accommodating environment for vending machines.

The Boots vending machines will fit in the big city environment of London and fulfil the consumers’ needs of products on-the-go. The main target audience are women, and secondarily men between 25 and 45 years old who will potentially buy beauty and personal care products on their way to work, or a business trip. The vending machines in nightclubs will primarily target men and women between 18 and 35 years old who frequent the club.

Vending Machines have a negative consumer perspective of being expensive, sell low-quality products, have technical problem, and do not accept cards (Euromonitor International, 2009). With raise on technology many of these problems do not exist anymore. Boots vending machines will be positioned itself in the market as environment friendly vending machines, with convenience of location and products, easy to use, and as extension of standard and quality of the stores.

Boots will be the first pharmacy to offer products on-the-go in vending machines. According to MINTEL Report “Beauty Retailing” (2013) there is a need in the market for beauty and personal care products on-the-go. Consumers are looking for accessibility and convenience (MINTEL, 2013), and Boots can meet these needs by providing essential beauty and personal care products in appropriate locations to help consumers to save time.

To meet the environmental law standards, the vending machines are environment friendly, meaning that they are 26% more energy efficient than a regular vending machine. It will also be recycled by the Electronic Waste Company when it reaches its end of the life cycle.

The product sold will be careful selected according to location of the vending machines. Vending Machines in clubs will have a product differentiation of male product (hair gel, deodorant, perfumes etc.) in the men toilet and female products (make-up, hair spray, perfumes, body lotion, tampons etc.) in the women toilet. In station location, such as coach, train and underground, and airports will include products the people may need on-the go and before going to a trip (make-up, tooth paste, wipes, plasters, hand sanitizers etc.). Having different kind of products in the vending machines will help to reach a wider target audience in the market (Smith, 1990).

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The price strategy for the vending machines will differentiate according to the location of it. Boots vending machines located in underground, train and coach stations, and airports will follow the same price than Boots stores in Central London, which are 5 to 10 pence higher than prices in other Boots (Euromonitor International, 2012). It will give a fair price to customers that will be able to rely on having Boots on-the-go and paying reasonable price for the goods.

The vending machines located in clubs will sells the product in a premium price at 20 to 30 pence more expense than Boots store located outside Central London. Because of the lack of competition, fast and accessible service, and convenient location a premium price is the most appropriate for the vending machines in the clubs (Barrow, Barrow, & Robert, 2008).

The vending machines will be allocated in 15 major stations around London, including train, coach, and underground. It will also be in 5 major night clubs in London, and in 5 airports, that are Heathrow, Luton, Gatwick, Stansted, and City Airports.

The locations were chosen according to buyer behaviour (Jobber, 2010). Now a day, people are always in a hurry, and they expect services to be fast and accessible (MINTEL, 2013). According to MINTEL (2013) report, 67 % of British women apply their make-up in the public transport on their way to work. Looking at this trend, the vending machines will use this opportunity to reach these women with on-the-go beauty and personal care products in stations and airports.

The night club location will be a great opportunity to fulfil the need of beauty and personal care products when people are out in nightclubs. The vending machines would substitute the use of staff in the toilets selling beauty products. Using the products from the vending machines will also guarantee a high standard of hygiene.

The promotion strategy for the new Boots vending machines will focus on social media advertising. The objective is to create awareness of the locations of the vending machines. The campaign will last one month. A social media advertising agency will be hired to carry out the campaign on Facebook and Twitter, and an agency will be hired to create a website for customers to claim the prizes, and learn more about the promotion and vending machines locations.

The campaign consist in voucher prizes that will be hidden behind the products that are sold in the vending machines. The voucher prizes will be related to beauty and personal care products. The

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prizes will be spa days, beauty treatments, gift cards to spend in store (varying from 20 to 100 pounds), and bags of beauty and personal care products.

The agency will be responsible for the promotion of the campaign in Twitter and Facebook, and to send clues about location and products that may have a prize hidden in it. The campaign will create a straight communication with the customers through social media and create awareness of locations of the vending machines.

Boots UK is a retail company, the term retailer meaning an individual or a company, of whom sells goods to the consumer (Wolinski & Coates, 2008). The term supply chain meaning network of entities; is it directly or indirectly interlinked and independent in serving the same customer. It involves vendors, of which supply raw material, as well as producers who convert these raw materials into products, stocking these products, being distributed to retailers and retailers of whom provide these goods to the end user. (Robert et al., 2010)

On that basis, this is how our supply chain for Boots UK will look, with our intended product proposal:

Describing the process, first of all, starting off with Boots warehouse, where the products will be stored. There are several warehouses, based on regions where Boots is situated throughout London. From the warehouse, the next stage is the distribution, where vehicles; vans will travel across branches in which the vending machine are situated to refill the machines, this procedure will be carried out by existing Boots staff, who will work part time and will be trained to be dealing with this vending machine concept, and will also need a driving license, as part of the criteria. The procedure after that, will be the vending machine itself, which will vend the products, in accordance to demand and seasonal trends of its location. The final stage is the consumer, the end user in which the products will reach out to, providing the convenience to buy from the vending, rather than queuing up in store.

When stocks of the vending are running low, a program will inform the supplier that it needs to be refilled. The vending will be refilled when stock is at 50% of capacity. Furthermore, the vending machines will also accept card payments, as well as notes and coins.

Below is a list of potential products to be sold in the vending machines:

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Warehouse Distribution Vending

Machines Consumer

Tampons Condoms Tights Body Lotion Hand Gel Nail Polish Deodorant (male and female) Hair Gel Hair Spray Lipstick Lip Balm

Antiseptic Cream Plasters Mascara Contact lens solution Disposable contact lens Mini perfume bottle Compact Umbrellas Sunscreen – Seasonal

As briefly mentioned, some of stock in which will be held are seasonal and based on demand where the machine is situated. For example vending machines in night clubs, will have products such as hair gels, and deodorants. . And the different types of products provided will be of the bestselling brand, due to limited spacing.

Some of the products will be Boots own brands, to maximize profit and increase Boots own brand sales and awareness. The vending machines will also sell premium brands such as L’Oreal to fulfill consumer demand.

Existing staff will need to carry out training, in order to fully understand and carry out their role in refilling stock of the vending machines. The training will take up to a week. The maintenance of the vending will be provided by the company where it will be bought. In addition, routine checks will be carried out, in order to verify if the machines are fully functioning, which should prevent issues. If issues are to arise, whereby the machine takes someone’s money, without giving a product in exchange, or issues with credit cards and so forth, we will use existing Boots customer service to deal with the issue. Further additional training of customer services staff will be carried out, in order to make staff well prepared in dealing with such matters. The number to the customer service, will be provided in the corner of the vending machines, in bold, so it cannot be missed. If it results to manually fixing the machines, due to the technical issues the consumer is dealing with, Boots will be in partnership with the company of who provides the vending machines, as discussed, in order to come down and fix it.

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Anticipates sales for the product in terms of units and sales

The top ranked products based on their value share at boots are colour cosmetics, sun care and skin care, with a value of 12.9%, 20.2% and 6.45% respectively (Euromonitor International, 2012). Based on this interpretation, a range of products was selected based on consumer demand which is shown in the table below. In addition, each product carries a different value, so an average price needs to be calculated. The average unit price in the vending machine is (£44.90/17) = £2.64

Product (Example) Price in £Lip Balm 1.99Nail Polish 1.89Tampons 1.29Condoms 2.99Tights 4.00Body Lotion 1.50Hand gel 1.30Mascara 2.99Plasters 2.05Antiseptic Cream 2.55Eye Drops 3.10Sun cream seasonal 3.99Umbrellas seasonal 4.99Total 44.90Average Price (44.90 / 17) = 2.64

Sales

Boots revenue has increased by 18% in the previous financial year and it is expected to see a further growth of 3% in the coming years (Boots Annual Report, 2012). There will be 40 machines allocated across public places in London. Each machine will have a capacity of 20 product lines with 10 products in each line. At full capacity there will be 200 products available in a vending machine. It is estimated that each vending machine will sell 600 units each month in the first year and it will be refilled once or twice a week. That means (600 x 12 x 40) = 288,000 units a year in the first year. This is risk anticipation, however the figures are generated based on the capacity of the vending machines.

Costs Involved

To launch the new product, fixed and variable costs are involved. Boots will require 40 vending machines which will be purchased at a cost of £2499.00 each. The total cost will be £99960.00 (intelligentvending.co.uk). The amount will be paid over a five years period with an APR of 12%. Annual repayments will be £2274.40, which includes 12% APR. Even though, it is a large sunk cost, the profits generated through the vending machine will cover the costs easily.

It will cost Boots averagely £1.60 per product to buy it from the manufacturer and the mark-up will be 65%, which will lead to the average selling price of £2.64. There will be an additional cost of £295

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a year for maintenance, which will be provided by the company from where the vending machines will be purchased.

In the first year it is planned an advertising campaign of cost of £50,000, which will increase the target market aware of the new vending machines. In the first year the advertising costs will be £60000, which is £50,000 for the campaign and £10,000 for the rest of the year. In year 2 and year 3 the advertising will be less, £10,000 respectively each year.

Some existing workers will be trained to re-fill the vending machines and they will get paid at a rate of £9 per hour. The shift and the amount of hours will depend on how empty the vending machines are. However, the estimated cost for wages will be around £2000, which means £24000 annually. In addition, the vending machines are eco-friendly and consume 26% less electricity. The expected bills for the electricity will be £70 a month for each vending machine, so (70 x 12 x 35) = £29,400 annually.

Break – Even Analysis

‘Breakeven analysis is used to determine when your business will be able to cover all its expenses and begin to make a profit’ (SBA.gov). The break-even point can be calculated in terms of units with the following formula.

Fixed cost £119214.40 = 126152 units

Contribution margin per unit (£2.64 - £1.695)

Boots will break even in the first operating year for this product. As the costs are relatively low, the company only needs to sell 126152 units to cover their fixed costs. As the estimated units sold will be 252000 in the first year, Boots will break-even in their first year.

Estimated Profit & Loss Account for Year 1, 2 and 3

As seen below, profit and loss accounts have been created for the next three years. Each year, the sales will increase by 3%. Variable cost is £1.695 per unit.

Year 1 Year 2 Year3Sales Revenue £665,280.00 £685,238.40 £705,795.55Variable costs Wages £24,000.00 £25,956.00 £26,734.70Cost to purchase £403,200.00 £413,696.00 £427,755.20Total Variable costs £427,200.00 £439,652.00 £454,489.90Contribution Margin £238,080.00 £245,586.40 £251,305.65Fixed costsMaintenance £3,540.00 £3,540.00 £3,540.00Advertising £60,000.00 £10,000.00 £10,000.00Finance payments for machines £2,274.40 £2,274.40 £2,274.40Electricity £29,400 £29,400 £29,400Rent £24,000.00 £24,000.00 £24,000.00Total Fixed Costs £119,214.40 £69,214.40 £69,214.40

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Profit £118,865.60 £176,372.00 £182,091.25

Year 1 Year 2 Year 3

units sold 252,000 259,560 267,347

The profit and loss account is shown for the following three years. As seen the overall profit will increase significantly in the second year, from £118,865.60 to £176,372.00. This is because the advertising costs have fallen and the sales have increased. Although, the variable costs have slightly increased, it is less in proportion than the sales and reduction of fixed costs. Furthermore, it is expected to see a further increase in profit in year 3.

The beauty vending machines are a great opportunity for Boots to expand their beauty and personal care products. It has a solid profitable margin as well as a low cost. Implementing this business plan will give Boots an advantage of being the first pharmacy in UK to provide beauty and personal products in a vending machine.

Due to the urbanization products on-the-go will be even more required to save consumers time. The vending machines are also environment sustainable and conform to the environmental laws, what offers low risk in the purchase of the machines. It is also low risk, as the break-even point is reached before the first year is completed.

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