No Twinkies? Vending machines go organic

There's never been a better time to be a vending machine, as long as you're dispensing organic foods and snacks, that is.

As one of its final acts in a busy lame-duck session, Congress last month passed a law that requires officials to set nutritional standards for all foods sold in schools, including vending machines.

The Healthy, Hunger-Free Kids Act of 2010 could be a boon for the rapidly growing $26.5 billion organic food industry.

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"We're at the beginning of a major movement in vending," says Jolly Backer, founder of Fresh Healthy Vending, a San Diego startup that sells organic vending franchises. "It's out with the junk food and in with the healthy food."

Vending machines that dispense snacks such as organic yogurt and granola bars, gluten-free snacks and fresh fruit will be rolling into schools, fitness clubs and office buildings. Often they will be replacing machines that have been around since the 1970s dispensing sugary sodas and snacks stuffed with trans-fats, high-fructose corn syrup and hydrogenated oils.

“People are looking for chemical-free foods that don’t have artificial colors, flavors and preservatives,” says T. Hephner, founder of Healthy U Snacks, a McHenry, Ill., company that has put natural vending machines in 52 Chicago-area locations since the fall of 2009. “There is a huge demand.”

One-third of consumers now buy organic products monthly, according to the Organic Trade Association. This new organic and healthy vending sector is made up primarily of small, locally-owned businesses, and fresh out of the gate, their sales aren't yet tracked in the $30 billion vending industry. But Backer expects "exponential" growth, mirroring that of the natural foods and organic industry.

The new organic snacks sold at four suburban Chicago high schools have been a hit with students, outselling the previous candy-and-soda machines, says Jeff Carr, business manager for the district in Crystal Lake, Ill.

“It’s the direction a lot of kids want to go,” Carr says. “And it’s our job to provide them with healthy choices.”

Demand spurs startups
That demand has spawned startups like Hephner’s nationwide, with names like Triangle Healthy Vending, Ven Natural, BKind and Fresh Healthy Vending.

Beverage giants Coca-Cola and Pepsi-Co still dominate products in the school vending market, and for years had signed multiyear contracts that paid school districts millions of dollars to put its products in vending machines on campus.

Today even those big snack companies are changing their approach. Pepsi, for instance, voluntarily removed regular soft drinks from schools across the country and replaced them with lower-calorie, smaller-portion beverages.

The vending industry also launched its Fit Pick program — which uses stickers to indicate  snacks and drinks that are low in fat, saturated fat and sugar. Sales are also hot for newer vending machines that maintain specific temperatures for fresh fruits and snacks. For instance, bananas must be stored at 55 to 59 degrees to last one to two weeks.

All the buzz means business. Fresh Healthy Vending, based in San Diego, has generated $3.8 million just four months after its start by selling franchises. The company has sold 36 vending franchises to entrepreneurs who have put machines in 331 locations nationwide, including 32 schools. The company also purchased YoNaturals in 2010, another San Diego-based healthy vending company with 1,700 locations.

Natural foods companies, too, are starting to see an uptick in sales from vending—a distribution channel that historically overlooked them.

“It’s becoming bigger and bigger every day,” says Eric Berniker, vice president of marketing for Pirate Brands, which makes the puffed snack Pirate’s Booty. The Sea Cliff, N.Y., company’s sales have already doubled to $100 million since 2008 in part because Pirate’s Booty is allergy-friendly; it’s gluten-free and nut-free.

With the snacks in machines in New York, California, Illinois and San Diego, it looks like vending machines will soon make up a large portion of sales -- and help increase brand awareness. “And that’s great for us,” he says.