Eleven Questions for Paul Stack of Marco

I have posted several times on the subjects of manual brewing and equipment purchasing as they apply to financial statements and profitability modelling. As a special feature heading into the Specialty Coffee Association of America annual trade show and conference in Houston Texas, I have posed some questions to Paul Stack of Marco located in Dublin Ireland. Marco is on the leading edge of technical innovations in hot water delivery systems suited to shops and roasters alike.
Coffeekings: Marco and Uber project may be something unknown to many in the North American coffee business. What core business was the company founded on?
Paul: Marco is 30 years old this year, which is surprising to some. The core business is the design and manufacture of hot water delivery systems for the food and beverage industry. This is embodied in the design and production of both hot water systems and automatic filter (drip) coffee machines. However we only sell hot water systems in North America for now.

Coffeekings: Innovation, research and development, and entrepreneurship are extremely challenging at the best of times. Do you perceive Marco in an R&D/building phase or approaching a marketing/management phase of the business cycle?
Paul: Both, to be honest. Innovation and R&D is incessant in Marco. It is our future. Parts of our business are very much on the marketing/management side but probably more so in the more traditional mature Marco markets.

Coffeekings: There are plenty of examples within the coffee industry that support the notion that great talent is attracted to great companies. Marco is also blessed with some knowledgeable and skilled staff. Tell me about some key staff and what they contribute to the company.
Paul: People are attracted to companies which will offer them an experience aligned with their own personal and professional ambitions. To be part of something they believe in. We have a lot of great people and I am loathe to single any out. An exception- Drewry Pearson, our Managing Director is something of a visionary and singular in the drive for innovative product offerings with an underlining belief in continuous education. We have very knowledgable and caring people looking after customer service including after sales care. To use sporting parlance, they play in a position to which they are suited. They give the business a solid spine. Our R&D team is a great mix of abilities from mech eng to software design to industrial design to innovation and research into market need. I could go on but it's a bit trumpet-blowing. In short, we have a good team.

Coffeekings: Ireland is undergoing a very challenging time for businesses and finance due largely to banking and real estate collapses. Describe for me the sentiment among Irish businesses regarding access to needed credit, availability of willing buyers for your products, and prospects for the future.
Paul: Ireland has been gorging in the greedy trough for too long and it's payback time. As always with these things, those who gorged and those who pay are misaligned. Established businesses like our own are lucky to have cash strength and a strong banking history, allowing us to continue to invest in our chosen strategic direction even in the face of market uncertainty and revenue dips in our home market in '09/'10. Newer companies with great opportunities are being hamstrung by the lack of credit available. Some banks in Ireland are money collection bureaux rather than financing institutions. Thus, the gears of Irish recovery are sticking as the lubricant that is fluid financial structures is lacking.The core economy in Ireland is strong. A stupid decision to make bank debt sovereign debt is the millstone we carry as a nation. For that, business sentiment is a mixture of simmering anger tinged with embarrassment as brand Ireland has taken a blow.

Coffeekings: Ireland is a touchstone for millions of Diaspora generations removed from the Island, and in many ways has always influenced the world well beyond their population. On my first visit I was struck by how advanced Bewleys on Grafton Street was compared to North American counterparts in terms of quality and traceability. To what do you credit the incredible depth of coffee talent in such a small population?
Paul: I'm not sure the coffee talent in Ireland is that deep, loud maybe...... Regarding coffee and Ireland, Patrick Bewley was at the forefront of a lot of what has become the Irish speciality coffee scene. He invested heavily in the SCAE, both personally and professionally. He was a founder member and is a past president of SCAE. In his own company he invested heavily in the training and education of his staff. Most of the coffee companies in Ireland with speciality leanings have either a founder or some of their team who is ex-Bewleys, including Marco. In the last five or so years Drewry Pearson has taken up the baton, more so from a patron viewpoint nationally while being at the forefront internationally, being a board member of the SCAE and WBC (now WCE). Nationally, he was the prodding stick behind 'internationalising' the Irish Coffee Championships, the SCAE Gold Cup and a strong education content in the Irish industry.

Coffeekings: I had been following the progress of Uber boiler online for some time before marveling in Anaheim at its beauty, advanced technology and logical solution to problems faced in manual brew methods. Please describe the problem it was designed to solve and some technological barriers to achieving success.
Paul: As most know, the Uber Boiler was the result of a one off project with a nascent London coffee company called Square Mile Coffee Roasters in 2008/2009, at the time comprising the impressive trio of James Hoffmann, Anette Moldvaer and Stephen Morrissey. Our challenge was to produce one under counter water delivery system with counter top font to deliver water to within 1 degree Celcius of a chosen temperature, which could pour directly onto a weighing platform. This would allow James et al cup coffees with accuracy allowing them highlight nuances. While we already had undercounter systems, their accuracy was approx +/-2.5C and there was no weighing platform. Tightening the accuracy was the key challenge. The rest was packaging and having a will to do it.

Coffeekings: Where are the uber boiler manufactured and how much time is required to take one from shop drawing to tabletop? Have you considered licensing the technology to larger manufacturers and focusing on marketing and distribution?
Paul: Uber Boilers are manufactured in our production facility in Dublin, about 7 miles from the city centre. We build four Ubers per run. Build time from punching steel to boxed Uber is 4 days. As the Uber Boiler is a constant work in progress I haven't considered licensing the technology. Is someone interested ?

Coffeekings: It seems to me that the past 5 years or so have become a period where companies are applying increasingly advanced technologies to address problems posed by increasingly simpler brewing techniques. One of the problems I see with manual brewing is the increased labour and wait time. How has the uberboiler addressed these problems?
Paul: It has and it hasn't. That's a bit Irish, eh? It has by giving the Barista a workstation from which (s)he need not move and can engage with a customer, thus maximising efficiencies and customer service. More importantly, it hasn't as it is not designed to decrease wait time. The ECOBOILER & ECOSMART series do that.

Coffeekings: The most visible elements of the high-end coffee market communicate at length about the subtle nuances and characteristics of their coffees cupping profiles. This sort of customer interaction can pay big dividends but only if the customer can distinguish the traits too. What about the uberboiler increases the chances of successfully brewing coffee to reveal the desired profiles.
Paul: Precision. At its heart is the UberBoiler's capability to allow the Barista change every brew variable, from coffee to water ratio (+/-0.5g) to contact time (+/-1s) to temperature (+/-0.1C) to turbulence (via flow rate and flow direction).

Coffeekings: Marketing and distribution are for me big black holes for profits and cash flow. What is the marketing strategy for Marco and how are you addressing distribution in North America?
Paul: Never a truer word spoken. We never targeted North America. The uber project dragged us there. It would have been too big a step for us to set up Marco USA when that opportunity presented. La Marzocco USA handle our brand and our product in North America, exclusively in the US. The alignment of both companies' brand positioning, strategic intent and vision coupled with the simple fact that we get on well made it an easy decision.


Coffeekings: One thing I like to repeat to staff is we don’t get to choose our customers, they choose you. Are there any customers using Marco’s products and services that surprise you by not fitting the target customer profile. Is anyone using the uber boiler for products other than coffee and do you market to any other industries?
Paul: It's a great question to which I am unsure how to answer. Our products are used widely in catering institutions where the need is often basic regarding brewing but crucial regarding reliability, ease of use and service. Cost of ownership and our products' energy-saving credentials are fast becoming as big a decision factor as the customary features of well-designed, well-made kit which do the job. Regarding Uber Boiler, it's main and happiest home is the cupping room or the Barista-driven brew bar. It is also used in gourmet tea shops.

Ratios

I look at my P&L, Cash Flow and Balance Sheet almost daily out of habit, probably like a child checks to make sure their favourite toy is still on the shelf where they left it. This morning I noticed something out of whack after our bookkeeper made updating entries after some Green Bean purchases. Our ratios are off.
Normally my ratios are pretty close to the following: Cogs 40%, Labour 25%, G&A 20%, EBIDTA 15% with some minor seasonal changes resulting from the fact that I treat labour as a fixed cost since if we aren't busy, I don't send anyone home.
This morning my ratios showed: Cogs 51%, Labour 14%, G&A 13%, EBIDTA 22%.
So what's going on.
As most of you are experiencing first hand, green coffee prices have increased significantly and last years stock has pretty much been exhausted leading me to rely more on spot coffees which are carrying higher prices than last year's. In advance of this years bookings with the understanding that prices won't plummet any time soon I raised all prices across the board to accommodate the new reality. These two moves necessarily reduce the overall impact of labour and G&A while sometimes helping the bottom line. As I stated before, labour for me is considered fixed, therefore any price increase which doesn't reduce volume must make labour more productive and profit positive. Since we are increasing revenue without increasing traditional fixed costs such as rent, utilities, phone and legals other than what is predictable, those costs as a portion of sales are reduced.

While the exact impact of increased COGS and Prices cannot be known ahead of time, using a spreadsheet to quickly inject new costs and produce corresponding pricing is a great way to monitor profitability in a foolproof way. The spreadsheet I use employs fixed per pound costs which are adjusted semi annually to reflect increase/decreased G&A and labour. The inputs for COGS are changed almost weekly now, and once I push beyond a price by 5%, I make a change in our wholesale pricing. If you get nothing else from this post take this part to heart, look at your Financials every day and learn your own ratios. It is a great way to see trouble on the horizon well before anyone else notices.

De-Linking with the "C" Part II

I've been thinking about my last post, and how the Specialty Coffee Industry might identify a baseline price for specialty grade coffee and de-link any association with the commodity price as established by the New York Mercantile Exchange.

The obstacles to creating a market where the grade can be established, and the price determined is perceptively prohibitive and would likely dissolve before any meaningful progress was made. So what if we established a system where we backed the price out from an industry average of price per pound sold at retail. (Ex: Specialty Grade Price 22.5% of average retail price) The average retail price would be fairly easy to establish with an online survey of selected industry participants selling specialty grade coffees. The retail price presumably is based upon the quality of the coffee, and therefore is not related to the vagaries of the commodity price and speculators. The elevated Specialty Grade posted price would provide immediate distinction between quality operators, and low grade supermarket brands by clearly displaying the price differential while still leaving room at the top to price super premium coffees. (Ex. Specialty Grade + $0.95) Establishing a Specialty Grade price would also remove the criticism often levelled at the industry when the disparity between the commodity and retail prices grow inexplicably large and we are forced to respond with figures relating to labour cost, rent, shipping and packaging as an excuse. A differential between Commodity and Specialty Grade prices would be a good story to tell in low market conditions and an opportunity to talk about why your local retailer is different.

I actually think this idea has some merit and needs to be considered by the industry under the umbrella of regional Specialty Coffee Associations. Obviously the weight of the calculations needs to be negotiated and agreed upon, the quality standards of the baseline green specialty grade needs to be established and a mechanism to track retail pricing, but these are pretty small details in relation to the hurt caused by fluctuating prices at the farm. Looking at the Commodity price right now, there's no urgency, but when the tide turns and we're all talking about low prices in a few years it will be too late for many of your favourite farms and their families.

De-Linking with the "C"

Very recently I posted a piece describing how the Commodity Market for Coffee Traders functions as a backdrop to the recent historic highs reached a few weeks ago. One thing I hoped to make clear is the disconnect between those active in the commodity market and those of us consuming specialty coffee. Commodity traders employ leveraged margin accounts to "punch above their weight" and trade contracts exponentially larger than their investments without EVER taking delivery of a single pound of coffee. For these folks, trading coffee, sugar, oil or Swiss Francs is a way of making money, not securing a reliable supply of any of those goods. So why do we still buy and sell specialty coffee fixed off the "C" price?

I ask this question because it is relevant in not only a hot market, but one where the price is confusingly low. It is common to receive quotes for green specialty coffee priced "C" plus $0.75 or "C" plus $1.50 per pound but if the commodity price is fixed in a market controlled by speculative interests, the price will NEVER reflect the actual value to the end consumer. The current system of making a market for specialty coffee references baselines several steps removed from the true value depending on the motivation of the market participants.

The motivations of bidders in the commodity market for coffee is always the same no matter what season, time of year, harvest conditions, retail climate or weather conditions...profit. The market is set up for speculation and leverage which moves the market disproportionately to the amount of real dollars invested. (See my last post of the "C") Money flows into commodities when the yields on other asset classes are significantly lower, risk considered. Right now, purchasing commodities priced in USD, using foreign currency is a perfect hedge against a falling USD. The more the USD falls, the higher the commodities rise. These market movers have nothing to do with quality or consumption, just return on investment. Small moves downward like we've seen in the past week or so are reflective of end of quarter cash outs by large institutional investors, a normal seasonal dip related to coming Brazilian harvest figures, and inflation concerns which drives expectations of higher interest rates/yields on other investments.

So if the "C" is significantly influence by conditions unrelated to the price determinants of specialty grade coffee, why do we continue to reference it when pricing specialty grade coffee? The Cup of Excellence program has done wonders for creating a market for ultra premium coffees employing panels of cupping professionals and consistent criteria for judging plus an open auction. If we are as an industry seeking to improve our skills and offerings, shouldn't we also be moving towards de-commoditizing our pricing references and instead looking to price off a baseline specialty grade price. Creating a specialty grade pricing market would be too small for investors to participate but would reflect the factors we all want to positively influence, price, quality, growing conditions, social factors. I would think that the best way to elevate the condition of farmers in general is to provide an identifiable standard for specialty grade coffee and an active secondary market for it's products. Surely this is a model of democratizing the market for specialty coffee and eliminating the invisible hand with the brass knuckles we all know impacts our commodity prices. We all complained about the low commodity price for coffee, helped organize co-ops, joined Fair Trade, Coffee Kids, and Rainforest Alliance, but the institutional obstacles to fair and quality reflective pricing remained unchanged in the form of the commodity market.