CHAPTER 10. SHIPMENTS ANALYSIS

TABLE OF CONTENTS

10.1 INTRODUCTION ............................................................................................................ 10-1 10.2 MARKET SEGMENTS.................................................................................................... 10-1 10.3 SHIPMENTS ANALYSIS M ODEL EQUATIONS ........................................................ 10-3 10.3.1 Mathematical Formulation of the Shipments Model ......................................... 10-4 10.3.2 Stock Events....................................................................................................... 10-5 10.4 DATA INPUTS ................................................................................................................ 10-5 10.4.1 Historical Shipments.......................................................................................... 10-5 10.4.2 Historical Shipped Units.................................................................................... 10-6 10.4.3 Equipment Price................................................................................................. 10-7 10.5 RESULTS ........................................................................................................................ . 10-7 REFERENCES ..................................................................................................................... ..... 10-9

LIST OF TABLES

Table 10.2.1 Market Segments for the U.S. BVM Market in the Years 2007 ........................ 10-2

Table 10.4.1 Estimated Historical Shipments (Units Shipped) and Stock (Units) of BVM Equipment

.......................................................................................................... 10-6

Table 10.5.1 Forecasted Shipments for BVM Equipment (Baseline Efficiency, Level 1) for Selected Years (thousands of units shipped) ................................................ 10-7

LIST OF FI GURES
Figure 10.2.1 Flow Chart Showing Inputs to the Shipments Analysis Model ......................... 10-3

10-iCHAPTER 10. SHIPMENTS ANALYSIS

10.1 INTRODUCTION

This chapter describes the U.S. Depart me nt of Energy’s (DOE)’s methodology for projecting annual shipments of beverage vend ing machine (BVM) equipment and presents results of the analysis. BVM equipment shipment estimates are a necessary input to the national energy savings (NES) and net present value (N PV) calculations and the manufacturer impacts analysis (MIA).

According to an analysis of the BVM market used at the ANOPR stage, there were about 3.67 million BVMs in the United States in 2005. 1 According to industry comments at the ANOPR stage, which indicated the original shipments estimate cont ained significant doublecounting, the total number in 2007 was about 2.4 million units. Allowing for double counting and estimated extra retirements over the last two years, DOE estimated the 2006 stock at 2.7 million units. About 15 percent of these units were estimated to be Class A machines intended for indoor use only, while 85 percent are Class B machines intended for either indoor or outdoor use. Annual shipments have decreased from about 338,000 in 2000 to under 100,000 in 2007 (DOE estimates that the to tal of 2006 shipments was about 122,000 units). The industry estimates that in the most recent years, about 55 percent of units shi pped were Class A units, while 45 percent of units sh ipped are Class B machines. 2 DOE considered the fact that there may be Class A machines intended for either indoor or outdoor use as well as some Class B machines that are intended for indoor use only; however, DOE was not able to locate any sales data for these two equipment application scenarios, so the sales are assumed to be zero. So, although some Class A machines may be used outdoors, for the purposes of the advance notice of proposed rulemaking (ANOPR) analysis, DOE assumes that all Class A machines are used indoors. Industry sources estimate that about 75 percent of Class B units are used indoors and 25 percent are used in outdoor locations.

10.2 MARKET SEGMENTS

BVMs come in a number of different sizes, bu t DOE was not able to locate any market data concerning shipments by size (unit vending capacity); therefore, the shipments analysis focused on three sizes believed to be typical, each of which is a ssumed to be about one-third of the market for Class A units (large [410 12-oz. cans], medium [350 cans] , and small [270 cans]) and for Class B units (large [800 cans], medium [650 cans], and small [450 cans]). BVMs are owned by a number of different business types and are used in many different kinds of business locations. Additionally, BVM units are divided into several market segments. Table 10.2.1 gives the business locations as well as the a pproximate size of market segments of the BVMs for 2002–2005.
Sales of BVM equipment decreased at the rate of about 24 percent per year from 2000 to 2005. Consistent with industry comments on the ANO PR, DOE assumed that all shipments after 2000 (about 580,000 units) were for replacement only. Even so, the stock of BVM units was estimated to have fallen from as many as 4.2 million units in 2000 (National Automatic Merchandising Association [NAMA] estimates, which may include some double counting) to about 2.5 million units in 2007 (e stimates in industry comments on the ANOPR). Market

10-1shrinkage is believed to be contin uing, and DOE assumes that future sales units will continue to be for replacement only. Future replacement sales of standard units at current rates (assumed to be about 90,000 units per year) are not sufficien t to maintain stock in itially, so the stock continues to shrink until about 2020, at which poi nt it stabilizes at a bout 945,000 units. This stock level is maintained until 2042.

The shipments analysis results are driven pr imarily by historical shipments data for the two equipment classes of BVM equipment. The flow chart presented in Figure 10.2.1 outlines the comp lete structure of the shipments anal ysis model, with new shipments driven by population growth, and distributions across equipment classes, size categories, applications, and ownership matching recent history. Replacements were initially assumed to be driven by the need to replace retiring stock. However, commen ts provided by industry stakeholders at the ANOPR stage indicated that virtually all shipments in the future are expected to be replacements for (some of the) existing units, that sales woul d be constant at approx imately the 2007 level of sales (estimated at approximately 90,000 units per year, which results in a declining stock of equipment since not all retirements are replaced at this rate of sales), and that there will be no new sales in the foreseeable future. The shipments model was operated according to this guidance. The parts of the overall model actually us ed in the current analysis are indicated by the double-lined boxes in Figure 10.2.1

. Table 10.2.1 Market Segments for the U.S. BVM Market in 2002-2005

Business Location Percent of Units Ownership Percent of Units Manufacturing 36.2% Bottlers and Vendors 95.0% Offices 19.5% Business-Owned 5.0% Retail 8.0% Manufacturing 1.5% Schools/Colleges 13.0% Offices and Health Care 1.4% Health Care 6.2% Retail/Restaurants/Bars/Clubs 0.8%

Hotels/Motels 3.6% Schools, Colleges, and Public Facilities (including correctional) 0.8% Restaurants/Bars/Clubs 0.7% Military Bases 0.4% Correctional Facilities 2.1% Other (including hotels/motels) 0.1% Military Bases 3.0% Subtotal, Site Owned 5.0% Other 7.8% Total 100.0% Total 100.0% Sources: Business Locations--State of the Vending Industry (2007). 1 Ownership—Industry comment on advanced notice of proposed rulemaking.

10-2Population Forecast

Industry Estimate of Shipments (2002-2005)

Initial Replacement Shipments Initial Shipments to New Locations

Initial BVM Stock

Estimated Lifetime

of BVM Stock Shipments to New Locations

Replacement Shipments Total Shipments By

Equipment Class and Size % Shipments by Equipment Class (2002- 2005)

BVM Stock by Equipment Class and Size Population Forecast

Industry Estimate of Shipments (2002-2005)

Initial Replacement Shipments Initial Shipments to New Locations

Initial BVM Stock

Estimated Lifetime

of BVM Stock Shipments to New Locations

Replacement Shipments Total Shipments By

Equipment Class and Size % Shipments by Equipment Class (2002- 2005)

BVM Stock by Equipment Class and Size
Figure 10.2.1 Flow Chart Showing Inputs to the Shipments Analysis Model

The analysis model assumes that in each y ear, the existing BVM equipment stock either ages by one year or breaks. As broken equipm ent would be replaced, new equipment can be shipped into new commercial floor space, and ol d equipment can be removed (not shown in the diagram).

The balance of this chapter explains the sh ipments analysis in more detail. Section 10.3 presents the mathe matical formulation of the model, section 10.4 describes the data inputs to the model, and section 10.5 presents the results for different efficiency level scenarios.

Shipments forecas ts were determined for all of the candidate standa rd levels for which NES and NPV are required. DOE is considering up to eight candidate standard levels for each of the two classes and three size categories of each class.

10.3 SHIPMENTS ANALYSIS MODEL EQUATIONS

The shipme nts analysis model is a descri ption of BVM equipment stock flows as a function of year and age. Wh ile there are two equipment cl asses, no coupling is assumed between them, so the equations describe each type of equipment independently. The shipments analysis is conducted using a Mi crosoft Excel (NES) spreadsheet accessible on the Internet at http://www1.eere.energy.gov/build ings/appliance_standards/comm ercial/beverage_machines.ht ml . Chapter 11 of this TSD and appendix G disc uss how to access the spreadsheet and other related spreadsheets and provides basi c instructions for using them.

10-3Section 10.3.2 defines the different BVM equipmen t stock categories. DOE for mulated the equations as updates of the distribution of stock in year t as a function of age a to year t+1

. DOE presented the different purchase decisions a nd provided a description of the data sources (section 10.3.2 ). DOE used this calculation of exis ting stock and the average age of the equipment as a basis for calcu lating replacement sales (section 10.3.2.1 ). In section 10.3.2.2
, DOE subtracted replacement sales from historical total sales statistics to calculate the new sales of new BVM equipment. DOE forecasted new sa les as a function of population, which is assumed to result in new business locations for BVMs. Sales of new and replacement equipment are recorded by the year sold, and each annual vi ntage is depreciated ove r the estimated life of the equipment (averaging approximately 10 years, with a 15-year maximum). Sales in each year are allocated to the two equipment classes in pro portion to their relative historical sales.

10.3.1 Mathematical Formulation of the Shipments Model
DOE uses two BVM equipment stock categories. The category U 0 (t,a) is the stock of existing units. Available information suggests that all units have had normal repairs that do not affect the lifetime of the equipment.

BVM equipment lifetimes range from one year to as many as 15 years. Based on discussions with industry, the aver age value is 10 years, and th e industry practi ce is that BVM equipment is withdrawn from service and renovate d at about 5 years with one renovation cycle. Most equipment is not renovated a second time (s ee chapter 8 for further details). Also, data obtained from multiple industry and government sour ces suggest that the in itial existing stock of equipment to have an average rate of decline of about 8 percent per year, based on the 10-year lifetime of a unit of equipment and a Weibull statis tical distribution of stock survival as well as the historical estimated annual replacements for the past 10 years. Replacements for stock breakage and retirements are track ed by vintage and in turn follo w the Weibull distribution. The total stock of age a in a given year t is represented by

U(t, a) = U 0 (t,a) - ∑ a P a (a) x U 0 (t,a) Eq. 10.1

the total stock of equipment is
∑ a ( U ( t,a)) Eq. 10.2

and the average age of the stock in year y is defined as

StockAge ( t ) = ∑ a U (t, a) x a / ∑ a ( U ( t,a)) Eq. 10.3

Where: U ( t,a ) = total stock of age a in a given year t , U 0 ( t,a ) = initial stock of existing units of age a , StockAge ( t ) = average age of stock in year t , P(a) = probability that stock of initial un its will break or retire in year a , a = age of stock in years, and
t = year.

10-4The shipments of new stock in a given year t are Uship(t) . By definition, the age of the equipment is zero in the year that it is shipped, so that Uship(t) = U 0 (t,0)

.
10.3.2 Stock Events
In the transition from yea r t to year t+1 , two things could happen to the stock of BVMs:

 existing equipment could break or be removed and be replaced, or

 the stock could simply age by one year.

In the model, early replacements (i.e., exis ting equipment replaced before the end of its useful life) are not considered, and not all broken and removed equipment is replaced. The following sections present the equations used to represent each possible event.

10.3.2.1 Replacing Equipment

DOE determined the pr obability that BVM equipment of age a from stock U 0 will break or will be replaced before the end of its useful lifetime using a known function P(a) (based on the age of BVM equipment a and Weibull statistical distri bution with location=1.0, shape=9.62, and scale=7.0). These probabilities do not depend on the model year t . All broken units are assumed to leave the inventory. Replacements are set independently based on the current level of sales and current distributions across equipment classes and si zes. Replacements may not be sufficient to replace all br oken and retired units.

10.3.2.2 New Equipment

As discussed in section 10.1 , BVM equipment will be purchased to replace BVM equipment as described above and to serve any increased numbers of custom ers at existing as well as new geographical locations, which result in new unit locations. Available information suggests that the purchase of new BVM equipmen t serving new customers in new locations is driven by net growth in locations.

DOE has no information on the variation in the market saturation of BVM equipment by building type or over time. However, based on i ndustry comments at the ANOPR stage, there are currently no net increases in locations for BVMs (any new locations are offset by losses in existing locations). Therefore, in the model, the net purchase of equipment for new locations is assumed to be zero, and any equipment purchas es are for replacement only. The replacement units are allocated to building t ype according to the current per centage shares, and each vintage of the retiring equipment is removed by vintage a ccording to the Weibull stock survival function.

10.4 DATA INPUTS

10.4.1 Historical Shipments

Historical shipm ents are critical to the de velopment of the shipments model because DOE used historical data to calibrate the model. DOE’s primary source of historical data for shipments of refrigeration equipment was data in an e-mail from NAMA and the State of the Vending Machine Industry (2006). NAMA provided DOE with shipments data (from 1998–2006, there

10-5was a reduction in shipments of 86.4 percent). 1 Later industry comments on the ANOPR indicate that Class A machines now approach 55 percent of shipments, and the trend is to increase this number as the number of beverages offered in c ontainers of all shapes, sizes, and material increases that allow DOE to a llocate sales of equipment to re furbished and new units and among the two equipment classes.

10.4.2 Historical Shipped Units

Historical shipped units depict the annual amount of BVM equipm ent capacity introduced into the marketplace. DOE converted sh ipped units to percent of shipped units for use in the shipments analysis model to establish the BVM market share attributed to each equipment class. The market share calculation and its use in forecasting shipments are explained in section 10.3.2.2

. Table 10.4.1 presents the historical shipme nts of BVM equipm ent by capacity ranges and the year of shipment. The shipments an alysis relies on the thr ee sizes each of the two equipment classes to represent the BVM equipm ent market. Shipments after 2006 are assumed to be 90,000 per year.

Table 10.4.1 Estimated Historical Shipments (Units Shipped) and Stock (Units) of BVM Equipment

1998 1999 2000 2001 2002 2003 2004 2005 2006
Estimated Shipments 372,000 477,000 338,000 150,000 150, 000 100,000 90,000 90,000 122,000

Assumed Replacements 250,000 250,000 250,000 150,000 150, 000 100,000 90,000 90,000 122,000

New Shipments 122,000 227,000 88,000 - - - - - - Estimated Stock 3,887,000 4,114,000 4,034,880 3,862,090 3,703,122 3,506,873 3,316,323 3,074,691 2,789,221

Table notes: Allocation of units to refurbished and new un its is based on industry estimates of total stock. Source: State of the Vending Industry (2006) and DOE assumptions based on industry comments on the ANOPR.

10.4.2.1 Market Shipments

DOE used the above shipme nts data to estimate the market shipments in year t of each BVM equipment class y ( MKTSHIP(t,y)) defined in terms of units shipped for both new and replacement markets. Because th e percent of shipments in each equipment class is relatively constant over time and the lifetime of each equipment class is the same (10 years typical, 15 years maximum), the ratio of shipments to equi pment class is indicative of the market share for that class ( MKT(y)) . DOE estimated the MKT(y) for a particular equipment class to be a constant value equal to the average of the yearly percent historical ship ments for that equipment class. Based on industry comments, the market for BVMs has undergone significant changes in the last 5 years. Recently, these shipments have been 55 percent for Class A machines and 45 percent for Class B machines, where the per centages used to be almost the exact opposite between Classes A and B machines. Each equipm ent class was further divided into large, medium, and small sizes, with about 25 percent each for large and 75 percent for medium-size machines and no shipments of small machines. A ll shipments are currently for replacement only and are assumed to remain that way. Any shipments to new locations are assumed to be offset by losses at old locations. For the historical stoc k, Class B machines are assumed to be about 85

10-6percent of the stock and Class A machines are at 15 percent. Large, medium, and small machines of the historical stock are assumed to co mprise 25, 65, and 10 percent, respectively.

MKTSHIP(t,y) = MKT(y) x (UN(t) + UB(t)) Eq. 10.4

Where: MKTSHIP(t,y) = total market shipments of equipment class y in year t MKT(y) = percentage of total market shipments of equipment class y UN(t) = total shipments to new locations in year t (assumed to be zero) UB(t) = total replacement shipments in year t
DOE estimated total sales by adding replacem ent sales to new sales in each year. DOE estimated the total number of units for each type that were replacement units. DOE assumed that new units last an average of 10 years and that their lifetimes follow a Weibull distribution (commonly assumed for equipment failure studies). The initial si ze of the existing stock was back-calculated. DOE set up an inventory acco unting scheme to keep track of required replacements and the aging of new units as they are added to the inventory each year.

10.4.3 Equipment Price
Equipment price is the price paid by th e customer for BVMs. It includes both the purchase p rice of the equipment a nd installation costs. As discusse d in the engineering analysis (chapter 5) and the life-cycle cost and payback period analysis (chapter 8), equipment prices in this analysis are functions of efficiency (or reduced energy consumption). DOE based equipment price projections on potential equipment efficien cy options but did not develop estimates of market trends in efficiency. DOE developed an efficiency mix for the base case (i.e., the case without new efficiency standards) and for each sta ndard efficiency level, which are discussed in detail in chapter 11.

10.5 RESULTS

Table 10.5.1 shows the forecasted shipments for BVM equipment classes and size categories for the baseline efficiency level (Level 1) for select years from 2012–2042. As equipm ent purchase price increases with effici ency, a drop in shipments would be expected. Although there is a provisi on in the shipments analysis spreadsh eet for a change in shipments as the efficiency level increases, DOE had no in formation with which to calibrate such a relationship. Therefore, for the ANOPR analysis , DOE presumed that shipments do not change with efficiency level. Table 10.5.1 also shows the cumulative shipments for BVM equipment for the entire 31-year period (2012–2042).

Table 10.5.1 Forecasted Shipments for BVM Equipm ent (Baseline Efficiency, Level 1) for Selected Years

Thousands of Units Shipped

Equipment

Category 2012 2015 2020 2025 2030 2035 2040 2042 Cumulative Shipments (2012-2042) A-L-IN 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 383.6 A-M-IN 37.1 37.1 37.1 37.1 37.1 37.1 37.1 37.1 1,150.9

10-7A-S-IN - - - - - - - - - B-L-IO 10.1 10.1 10.1 10.1 10. 1 10.1 10.1 10.1 313.9 B-M-IO 30.4 30.4 30.4 30.4 30.4 30.4 30.4 30.4 941.6 B-S-IO - - - - - - - - -

10-810-9 REFERENCES

1. Automa tic Merchandiser. State of the Vending Industry Report . 2006. <http:// www.amonline.com > (Last accessed May 2007).

2. Eils, L. Personal communication . National Automatic Merchandising Association, Chicago, IL. E-mail to Dr. Sriram Somasundaram, P acific Northwest National Laboratory, May 24, 2007.