Soft Drink Dispensing Equipment- Getting The Equation Right
Equipment options have evolved. And they have evolved in more ways than you might think. How do you know what system is right for you and which financial solution is best?
Is equipment really free? What are your options? Should you use the new touch screen type equipment? We are going to ask and answer all of these questions in the next few paragraphs.
Fountain dispensing technology did not significantly change for 30 years between 1980 and 2010. It was either ice cooled or mechanically refrigerated and was basically a metal box with valves mounted to it. Incremental changes in valve accuracy and syrup packaging (like Bag in Box) came along, but the basic dispensing systems were not really much different. For the most part, the refrigerated fountain systems were phased out and iced cooled machines became the dominant systems.
These ice-cooled systems are simple, easy to use, easy to repair, and very reliable. And almost every restaurant that serves fountain drinks has one.
The legacy iced-cooled dispensers are so basic that refurbished dispensers can be indistinguishable from newly manufactured equipment. So much so that the equipment you think is new in your restaurants is quite likely remanufactured without your knowledge. Remanufactured equipment costs the soft drink suppliers a fraction of the cost of new equipment, and it is represented in your deal as new equipment, whether it is remanufactured or not. We’ll examine this more deeply later.
Recently one of the soft drink companies developed their touch screen system, which represented an entirely new way to dispense fountain drinks. With concentrated flavor cartridges and micro-dosing technology borrowed from the medical device industry, the machines cost three times as much as the legacy equipment (often five times as much, depending on which machines you are comparing it to), and it promised to increase consumption by giving consumers more choices. The touchscreen equipment represented the first real departure from the legacy technology that had dominated the last 35 years of dispensers. It is a much more complicated and expensive system.
We will get very in depth on the touchscreen system later in this article, but for now, let’s go back to the legacy equipment economics. That’s the system most restaurant operators are now using.
There are basically two types of legacy equipment, crew-serve and self-serve. Crew-serve equipment tends to have an ice bin, but no ice dispenser. Self-serve equipment has an ice dispenser attached, to allow consumers to pour ice into their drink. Both are ice-cooled and are easily remanufactured to look and perform as new over and over again.
The soft drink companies depreciate the equipment they buy and charge themselves the depreciation amount when analyzing how much they are spending on your deal. One company depreciates equipment over 100 months (8.33 years) while the other uses ten years. A new self-serve unit with all of the ancillary parts and installation labor costs around $6800 fully installed. The soft drink company will charge itself $68 per month to put that machine in your restaurant, or about $816 per year per machine. Over a five-year deal, the machine will represent $4080 of expense for them. It will be less for the other soft drink company, because they use 10 years to depreciate it.
Remember, if you use a self-serve machine, and you let your soft drink supplier loan it to you at no charge, you are foregoing about $4000 per restaurant in cash just to have the equipment over a five year deal.
What that means is: the more equipment you take from your supplier, the less cash they have to spend on your “deal”.
But what if you change the equation, and you decide to own the equipment rather than have your soft drink supplier provide the capital? Is that a good idea?
The answer is, without any doubt, yes. There are three benefits to doing this.
Benefits of Ownership
Elimination of Unbundling charges
Unbundling charges are the scourge of the soft drink business. Because the soft drink companies are loaning you the equipment, they can make you pay exorbitant fees to stop doing business with them. The “unbundling” clause will say you have to pay the unamortized portion of certain pieces of equipment, the cost of removal of the equipment, the cost of refurbishing the equipment so they can reuse it in someone else’s restaurant, the original installation labor cost, and so on. The fees could be millions, even if your contract is expired. If you own the equipment, they have no basis for charging you anything, and you have all the flexibility in the world.
Cost Savings and Freeing Up Cash
You can play the same remanufacturing game that soft drink supplier does. You can buy remanufactured equipment from the manufacturers for a fraction of the cost of new equipment. The cost can be a third or a quarter of the price of new, but the useful life will be the same as new. In fact, you won’t know the difference. If you do that, you can free up cash in the deal that the soft drink supplier would normally spend on equipment. You make money on the equipment transaction, because you collect “new equipment cash” in your soft drink deal and pay out remanufactured equipment expense. That $816 per year of equipment expense that your supplier is charging the deal could cost you as little as $240 per year if you buy remanufactured equipment like the supplier does. And the difference can go in your pocket if you negotiate it well.
Tax Benefits of Depreciation
If you own the equipment, you can depreciate it, and along with that comes tax benefits. Consult your CFO or accountant.
When is it appropriate to accept loaned equipment from a soft drink supplier? Almost never. Find a way to finance the dispensing equipment as part of the equipment package for the restaurant. You will always come out ahead. And you will have full leverage at the end of the term to negotiate a better program.
Touch Screen Equipment – Is It Worth It?
Almost every operator I talk with who has adopted touch screen equipment wants to get out of it. But the fees charged by the supplier to remove it prevent them from accomplishing that goal. Check your soft drink agreement. You will see those fees listed in the fine print.
The touch screen equipment promised to raise beverage sales by giving consumers more choice. When it first appeared, it did drive some incremental sales. When it was a novelty, it drove people to the fountain. But choice was not the driver of the increased sales, the novelty was. Eighty percent of consumers’ fountain drink preferences are still satisfied by the top three flavors. Since most legacy machines have at least six valves, most consumers are completely satisfied with legacy machines. If they aren’t, your supplemental bottle or can line up will do it.
Because their investment in touch screen equipment was massive, in the early days of the equipment’s introduction, the supplier all but forced their salespeople to push the new technology into restaurants that were really not suited for it. And now that its novelty has worn off, operators realize that this technology usually does not drive actual sales in most restaurants, just increased syrup usage and increased fees and product cost – all of which benefit only the supplier. The touch screen equipment also created other headaches.
Data shows that touch screen equipment service calls tend to happen at a higher rate than legacy machines. We have seen as much as six times higher a rate of service calls. That means your soft drink machine will be down or inoperative a lot longer than it is if you have a legacy machine. That depresses sales, costs money, and frustrates your crews.
Data also shows that the new touch screen equipment tends to cause a slower line at busy times, as people fumble to make choices and work their way through a confusing number of menus and screens to get the drink they want. Some high-volume restaurants have had to install two machines to alleviate the problem, which drives their costs much higher.
That costs a lot of money. Each touch screen machine comes with a lease of $300 per month. That’s $3600 per year per machine just to have it sitting in the restaurant. Compare that to the $860 per year for a legacy machine. And if it doesn’t deliver incremental sales, why should you incur the extra cost? You shouldn’t. And most smart operators realize that now.
But there’s another problem. Once you have made the decision to put the touch screen machine into your restaurant, getting it out is a huge headache. You have to redo the floor plans and have carpentry work done. The standard agreement will require you to pay thousands of dollars in fees to remove it if it is not fully depreciated. Before you take the leap of faith on touch screen equipment, you should carefully evaluate the real story.
For most foodservice customers, owning remanufactured legacy equipment is the right path. It keeps you from owing money to your supplier. It makes your fountain contract more lucrative, and it gives you flexibility to do what you need to do with beverages.
As always, if you need help figuring out the equipment equation, help with your negotiations, or if you’d like a free benchmarking, get in touch with BevTrust Associates. We are at Bevtrust.com on the web.