Any time you prepare to negotiate a beverage partnership, you should consider your equipment strategy. And any well-designed equipment strategy should include a thorough evaluation of equipment ownership. Does it make sense for your organization to own its beverage equipment?
For some industries, it’s almost taken for granted that the beverage company will supply equipment as a part of its proposal. For others, owning equipment outright is much more common. A careful analysis will determine which strategy is best to achieve your goals.
Pros of Owning Your Beverage Equipment
More Brand Flexibility
If the beverage company owns the equipment at your locations, they’ll tend to be stringent about what products you can serve in or through it. You might be able to arrange for a carve-out for Dr. Pepper products or another local brand, but it will always be a negotiation.
On the other hand, if you own your equipment, you can source the products you want. Do you want to serve both Coca-Cola and PepsiCo products on the same fountain unit? No problem. Do you want to offer local organic sodas in the same cooler as products from one of the global beverage brands? Go for it.
Shorter Contract Times
One of the reasons beverage contracts can span many years is because equipment is provided as a part of the deal. To justify the capital investment that beverage companies make in these deals, they require a certain amount of time in the contract. They do so in order to amortize the equipment over the agreement term.
If you own your equipment, however, you have the option to negotiate much shorter contract terms without sacrificing as much on the financials. This can provide you with the flexibility to pivot strategies more frequently. In today’s rapidly changing beverage environment, optionality can be a real benefit. You can treat your equipment as a retailer would treat shelf space. Products can be slotted in and out based on current trends and the most attractive financial proposals.
Eliminate Unbundling Fees
Perhaps the contract term that generates the most outrage from our clients is the “unbundling charges”. Typically nestled in the fine print at the back of a fountain beverage agreement, unbundling charges give the beverage company the right to charge you a fee (and sometimes, a very sizable fee) at the end of your contract term. The departing beverage company can charge these fees even if the term has come to natural completion and you have fulfilled your obligations.
These fees can include:
- the unamortized book value of the equipment
- the cost to repair and refurbish the equipment
- the cost of installation
- the cost of non-serialized parts, and more
Of course, these fees can make the cost of switching to a competitor very high.
One great advantage of owning your equipment is avoiding these unbundling charges. If you own the equipment, there’s no risk that you’ll be hit with these unexpected costs. More so, you are not at the mercy of the losing beverage company to provide the calculation of these costs.
Tax Depreciation
By owning your equipment, you’ll likely be able to depreciate the equipment on your books and reap the corresponding tax benefits. If you lease the agreement from the beverage company, the beverage company will receive this deduction instead of you.
Full disclosure: we’re not an accounting firm. It’s best to run this by the tax professionals before acting on any advice.
Customized Look & Feel
It would be very odd to walk into a restaurant chain and be greeted by an advertisement for that restaurant’s chicken supplier. Yet, it’s become standard practice to allow the beverage company to display their logo on top of the fountain dispenser or cooler at your drink stations.
What if, instead, you could feature the new limited-time-offer you recently introduced to the menu or the new roller coaster that opened in your theme park this year? When you own your equipment, you can. You can customize the design aesthetic to meet your brand standards and focus people’s attention on what matters most to you.
More Cash Over the Term
In economics 101, there’s no such thing as a free lunch, and in beverage deals, there’s no such thing as free equipment. The equipment provided as a part of the proposal has a cost and will be modeled accordingly in the beverage companies’ internal models. In fact, you may even see a “lease factor” or rental charge in your contract that represents the amount of revenue the beverage company is assigning to your deal for the lease rental. Some newer equipment even comes with an outright monthly technology fee.
When you own your equipment, the beverage companies don’t have to allocate any expense towards capital costs. In essence, this frees up more cash to allocate to your deal in the form of rebates, sponsorship funds, allowances, and other cash discounts.
Cons of Owning Your Beverage Equipment
More Expensive Up-Front
Of course, for many, the biggest disadvantage to owning your equipment is coming up with the cash up-front to procure the equipment. Depending on the size and scale of your beverage operations, it can cost a pretty penny.
There are ways to mitigate this expense in how you set up your next beverage negotiation, but it takes some planning and intentionality.
Must Develop an Equipment Procurement Strategy
The beverage companies have their own relationships with the primary equipment manufacturers. Indeed, the beverage manufacturers are some of their most important customers. When the beverage company provides equipment as a part of their agreement, they take on all of the logistical challenges of sourcing and installation.
If you decide to own your equipment, you must develop a procurement strategy. Are you going to contract directly with the equipment manufacturers? Are you going to purchase equipment through your beverage partner? Do you want new equipment, or will refurbished equipment suffice? Do you have the staff to dedicate to this project?
Must arrange for equipment service
Not only must you develop a procurement strategy, you must also have a plan for both preventative and reactive maintenance.. While it’s possible to engage your beverage partner to service equipment that they don’t own, you need to make sure it’s considered and accounted for when you perform your cost/benefit analysis.
More capital on the books
While the tax benefit of equipment depreciation can help lower your tax bill, owning your equipment will also increase your capital and asset structure. For organizations aiming to manage their return on capital ratios, it’s important to consider the ramifications of bringing equipment onto your books.
Final Thought
Before entering into any beverage negotiation, be sure to understand your full beverage strategy, including beverage equipment. Equipment is just one of many variables that make up a successful beverage program and which needs to be adequately considered and evaluated.
Of course, negotiating beverage contracts and managing beverage partnerships are all we do, every day. If we can offer any assistance, contact us today for a free consultation.
Additional Resources:
Do You Have an Equipment Strategy for Your Next Beverage Contract Negotiation?
Why You Should Re-Think Your Approach to Vending
Why Hire A Beverage Consultant?
