Android Controller for Vending Machines

VendScreen, developed at his Northeast Portland operations base a half-mile from his alma mater, is an Android-based platform that connects vending machines to 3G technology. The touch-screen device accepts payments, displays ads and manages inventory, connecting manufacturers to consumers at the point of sale and giving operators a direct, cloud-based connection to their machines. 

But, perhaps most important, it also displays nutritional information, a pending requirement under the Affordable Care Act of 2010. The new rules stand to cost operators hundreds of thousands of dollars to update the estimated 7 million vending machines across the United States, and gives VendScreen the perfect cue to enter the market.

"Someone is going to win big doing what they're going to do," said Gerry Langeler, a managing director of venture capital firm OVP Venture Partners. "The only question is -- is it them?"

Other digital products dot the vending landscape. But industry experts say VendScreen is the first platform that tracks inventory, processes credit cards and discloses nutritional facts, all while fitting on existing machines. And because it's based in the cloud, VendScreen can be updated wirelessly, adding new applications as competitors introduce new options. Eventually, the device will be able to accept payments via smartphone.

In turn, VendScreen plans to charge operators 2.75 percent of all sales that go through the machine. Patel and his business partner Glenn Butler, another industry vet, plan to target such brands as Coca-Cola and Pepsi as the devices are added to more and more machines. The technology already has attracted $12 million in venture capital ahead of its targeted April launch at an industry trade show.

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"To me, that's the best kind of venture deal," Langeler said. "You come in at the end of the meeting, you slap your head, and you say, 'Wow.'"

Patel and Butler handpicked VendScreen's first customers and say they've signed two deals worth $5 million in sales. They're beta-testing 500 devices now to prepare for its launch this spring.

"We want to make sure we're disrupting the marketplace in a way that succeeds," Patel said. "We want to make sure we can deliver."

Technological solutions

The path to VendScreen started three years ago at a Gresham Baskin-Robbins, when Patel looked closely at the menu. There, printed next to the ice cream options, were their calorie counts. "They're going to start making us do that too," he recalled thinking.

His small vending operation had served as an applied learning lab while he worked his way through Portland State University and graduate school at the University of Washington. Then, in 1999, it became his full-time job.

He doubled the business year after year, eventually buying out seven area operators. By 2005, he had built Courtesy Vending into an 1,800-machine operation. "I've watched Paresh's brand of entrepreneurship for a few years," said Angela Jackson, who co-manages the Portland Seed Fund, a local startup incubator. "He owns that space, going back to high school."

Portland's largest vending operator goes high-tech Portland's largest vending operator goes high-tech VendScreen CEO and founder Paresh Patel describes how his new device will bring vending machines into the high-tech playing field. Watch video
Technology, meanwhile, had always fascinated him. At 16, he launched his first business, a desktop publishing service that created business cards. Years later, as his vending operation grew, he started tracking its inventory, down to the chocolate bar, and managed the massive database electronically. The move increased the company's efficiency and boosted its sales. Drivers knew which machines to prioritize and which to skip. "I didn't invest in technology for technology's sake," he said. "I was ultimately looking to solve our problems."

Calorie counts presented a big problem. Vending machine lineups rotate often as operators swap out less popular options with new ones. The only way to account for all the possible snack combinations, Patel thought after that trip to Baskin-Robbins, was a digital platform.

Meanwhile, Butler, who served as chief technology officer for vending-machine-maker Crane Merchandising Systems, was working on the same problem in Boston. The pair met last year and decided in June to move forward as a team.

Months later, and just hours before they interviewed for one of eight spots with the Portland Incubator Experiment, they powered on the prototype. They hoped it would work.

It did. As part of Wieden+Kennedy's startup lab, they built the business from the ground up. They met with investors, refined the prototype and pitched to customers.

"We weren't sitting at the computers," Patel said. "We were making deals."

In January, Patel stood before a packed crowd at the Bagdad Theater in Southeast Portland, where hundreds were waiting to hear presentations from the startup incubator's first class.

After making his pitch, he started to leave the stage, then paused. "I have a very exciting announcement to make as well," he said. "Last Friday (Jan. 13), I signed a term sheet that will commit an investment into VendScreen for $12 million."

He tried to go on, but had to stop until the cheering subsided.

Patel and Butler have declined to disclose any details about the investors, citing Securities and Exchange Commission regulations as the deal closes, though Patel did say the funding is largely local.

Portland investor Nitin Khanna said he is leading the investment round. His MergerTech firm helps broker deals in the tech sector.

"I looked at the technology ... I immediately said yes," he said. "It's probably the most disruptive technology that I've seen for any industry. In my mind, the single biggest reason is to display nutrition information."

The cost of compliance

When President Barack Obama signed the Affordable Care Act in March 2010, a small section in the landmark legislation stood to wallop the vending industry. It required access to nutritional information before purchase.

For many vendors, compliance would mean adopting stickers or posters to display calorie counts. The Food and Drug Administration estimated that that task alone could cost vending machine operators 14.1 million hours a year to update such information on millions of U.S. vending machines.

It's a costly proposition for an industry already functioning on thin margins. Operators' pretax profits averaged 2.4 percent in 2010, according to the National Automatic Merchandising Association.

The recession hurt vendors as their corporate clients downsized, leaving fewer workers to buy from machines. Experts pegged the industry's value at $23.2 billion in 2007. By 2010, it had fallen to $19.3 billion, a 17 percent drop.

Last summer, comments from frustrated vendors poured into the FDA, the agency tasked with implementing the new regulations. A handful said it would push them out of business. Others urged the agency to require manufacturers to print calorie counts on the front of packages that would be visible through machines' glass windows. Some of the nation's biggest brands also weighed in on the conversation, from Starbucks to Kraft Foods, which both make products sold in vending machines.

The FDA has yet to issue final guidelines on when the changes will take effect. Still, manufacturers already are scrambling to figure out how to comply with the rules.

Mark Stein, whose Mark Vend Co. operates 2,000 machines in the Chicago market, said his company plans to switch to a digital product for convenience and aesthetics.

In comments to the FDA, Stein endorsed a separate nutritional information system known as the Make Informed Nutritional Decisions (MIND) touch screen. Unlike VendScreen, the system isn't connected wirelessly to operators. Instead, every machine is updated with memory cards.

Regardless of the system, a digital solution is the only one that makes sense, said Mike Kasavana, a Michigan State University professor who studies the technologies that drive self-service vending machines. He serves as the endowed professor of the industry's trade group, the National Automatic Merchandisers Association.

"You're not really sure if the item that's in A-1 this month is going to be the same item in A-1 next month," Kasavana said. "It's got to be digital."

The college students Kasavana teaches view vending machines as passive, aging devices, he said. Most expect to make their purchases with a debit card, an option that 96 percent of today's vending machines don't afford.

Devices like VendScreen could change those perceptions, making sales that machines wouldn't have otherwise.

"Once you put digital media on the machine, you've changed the whole interface," Kasavana said.

--Molly Young; @PDXSmlBizNews 
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This page contains a single entry by Staff published on March 3, 2012 11:47 AM.

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