SquareUp

I can think of no other piece of equipment or software more important to a new and growing business than the cash management system.  The traditional options for new businesses range from a used or reconditoned cash register (+-$200) or cheap alternative (+-$100) found at your local office supply store to a fully supported touchscreen system run from a cpu with supported software (+-$5000).  When attending a Specialty Coffee event you are sure to run into one of several companies that offer products tailored to the coffee industry.

It was when attending a Specialty Coffee event in Anaheim in 2010 that I became aware of a new company called SquareUp which advertised discount credit card rates when using their tiny unique reader, turning your iphone or android device into a credit card processor.  In addition, SquareUp offers FREE software which runs and stores all of you transactions "in the cloud" from an Apple ipad with Square Reader plugged into the earphone jack.  This program is unbelievably easy to set up and customize with your own product photos, unlimited taxation rates, unbelievable back office real time programming and reporting...ALL FREE!  I registered for SquareUp immediatley, but since I live in Canada, needed to wait until they launched in Canada (launched Oct 24) to use the system in a practical way.  Note:  There are other similar systems including Shopkeep, which is very easy to use and very attractive to look at, but is limited in its taxation rates and has a monthly fee associated with it.

The SquareUp system simply requires an ipad, a Star TSP143LAN receipt printer, and a cash drawer which engages off the impulse sent wirelessly to the printer.  SquareUp recommends a Vasario 1416 or 1616 drawer.  It is wise to also include an ipad stand capable of rotating to face the customer for signatures (done on screen).  All included the complete cash management system should cost less than $900 with NO MONTHLY FEES.  While Square requires a wireless internet connection, the ability to go mobile and run the transactions from your iphone or android device is a useful option should internet become unavailable for short periods.http://www.squareup.com

The SquareUp system generates revenues by charging an industry best $2.75% per credit card transaction, which in many cases, can save the business owner thousands of dollars per year.  The processed funds are normally deposited into the business owners account within 48 hours, confirmed by an email from SquareUp.  The only downside to the SquareUp transaction model is it's lack of a debit card capability, which in Canada represents approximately 40% of all transactions.  Even so, for the new business owner the benefits derived from the free software and backup, inexpensive hardware, traceability by remote, and back office real time programming, makes the choice of SquareUp Register cost effective and sensible.

SquareUp also provides the retailer the ability to go paperless by emailing or texting receipts, and also using the retained addresses to offer loyalty benefits without customers needing to carry punch cards.  The ability to delight customers by managing their rewards and receiving immediate text receipts cannot be underestimated.  Further, the act of signing their names on screen using their finger is also a novel and special experience for customers who unintentionally participate in the future of financial transactions and are sure to share this experience with their coworkers and family.

Finally, by registering with SquareUp, each business is listed online in the Square Directory where businesses can post their menus, hours of operation, photos and a store locator.  Square has also launched a new Mobile Phone Cashless Payment System named Square Wallet.  At checkout, Square Wallet recognizes your mobile device and your name and photo appear on the register screen.  The cashier simply confirms the photo is of the purchaser and the transaction is completed.

I know I appear to be a little biased here, and I even believe my company was the first to perform a Square transaction in Canada, but this blog is dedicated to helping businesses to save and make money in the coffee business and I am truly impressed with the product and service.  That said, I feel the need to declare that I have not been paid or compensated for such a glowing review, but after running SquareUp in our own cafes for the past month, I highly recommend SquareUp for new and established businesses for its ease of set up and use, cost effectiveness, relatively cheap hardware, free software, industry leading processing rates, quick deposits, remote tracking of sales, robust reporting options, and  marketing potential through the directory, loyalty program management and ability to delight customers.  For now, SquareUp is only available in the United States and Canada, but the company indicates that they plan to launch in many new countries in 2013.  *Note: All of the photos included in this post were taken directly from the SquareUp site http://www.squareup.com 

The 5M's Redux

While roasting away the hours there is a period of time after the next roast is loaded and ready, and before first crack, when I can divert my thoughts to things that interest me.  After I completed and published my last post I contemplated the limitations of my binary declaration that each of the 5 M's plus Water be declared as either acceptable/unacceptable.  As I described in my previous post, this yields the equation 2^6=64 different possibilities each time a barista approaches the espresso machine.

Upon further reflection I've decided that declaring something as acceptable/unacceptable is not appropriate since:

• acceptable does not adequately describe perfection in any or all elements
• the spectrum of acceptable may be mathematically described by a differential equation and therefore assigning even 2 extra descriptors to each of the 5 M's plus Water is not unreasonable.
• unacceptable is clearly definable, and once the threshold is crossed, the degrees of unacceptability is moot.  

Therefore, what I am proposing is to assign two further designations to each of the 5 M's plus Water that reflect acceptable faults which individually do not fatally flaw the espresso.

For example:

• Grind

1. Perfect
2. Too course but acceptable
3. Too fine but acceptable
4. unacceptable

• Water

1. Perfect
2. Too Soft but acceptable
3. Too Hard but acceptable
4. unacceptable

• Blend

1. Perfect
2. Too fruity but acceptable
3. Too flat but acceptable
4. unacceptable

The others can be fleshed out and debated as to what would adequately describe acceptable opposing variables, but I believe including two extra designations is a better reflection of the possible outcomes when a barista attempts to make an espresso.

If the inclusion of two extra descriptors are accepted then the new equation becomes:

4^6= 4096 

This means there are 4096 possible outcomes each time a barista attempts to make an espresso.

This greatly increases the number of possibilities for espresso outcomes but I think is helpful to put in perspective how difficult it is to make a perfect espresso, and even how unlikely it is that one ever gets made.  While this statement is no doubt going to raise some eyebrows, remember, that if even one of the variables is less than perfect, then necessarily the beverage is not perfect.

I'm curious to see what others think of this description of espresso and whether it is productive to think of it in these terms.

5M's: The Odds Are Against You

1. Mano dell'operatore (the hand) 
2. Miscela (the blend) 
3. Macinadosatore (the grinder) 
4. Macchina Espresso (the espresso machine) 
5. Manutenzione (maintenance) 
6. Aqua (Water: upside down M) 

2^6=64 

     One of the time tested axioms of espresso is the 5 M’s (plus Water) which each contribute to the creation of a perfect espresso. It is understood that a fatal fault in any of the 6 contributing factors necessarily leads to a flawed beverage. Treating each factor as a binary, and declaring it as either acceptable or unacceptable, we can confidently identify through simple mathematics that there are 64 possible unique results each time a barista attempts to make an espresso. 

2 represents the binary (acceptable/unacceptable) 
6 represents the 5 M’s plus Water 
2^6=64

 The perfect shot occurs when each of the 6 variables are determined to be acceptable. Any determination that one or more of the factors is unacceptable automatically makes the beverage fall somewhere on a scale from less than perfect (1 factor unacceptable) to horrible (all 6 factors unacceptable). It is understood that assigning a grade of acceptable/unacceptable is decidedly diplomatic in an industry replete with specialty coffee partisans, however it is productive and helpful to know how badly the odds are stacked against you when you approach the machine and how hopelessly unfair they are if your equipment and materials are sub par.

Mark to Market

Mark to Market is a term whose frequency of use increased in late 2008 with the collapse of complex derivatives and options based on ill advised mortgages to American home buyers. Basically GAAP (Generally Accepted Accounting Principles) compelled financial firms to reduce the value of paper they held at Book Value (Purchase Price) as market conditions deteriorated and residential real estate values plummeted. The concept of Mark to Market was created to determine the credit/debit status of Margin traders in the Commodity Markets but is important in valuing the contracts and commitments of coffee brokers and roasting companies (less so the inventory of retail companies).

Coffee growers, brokers and buyers typically use the Commodity price for coffee as a baseline to determine specialty coffee prices. An example would be where a Specialty Coffee is determined to be valued "C" plus a fluid amount depending upon quality (ie "C" plus $1.20). This method of valuing specialty coffee is a simple linear equation, easy to understand with a transparent and logical baseline. If a coffee was purchased at "C" plus $1.20 at harvest, and the commodity price falls after the date of the contract, the coffee is worth less and should be reflected that way in your balance sheet.

Most brokers continuously adjust their pricing with the rise and fall of commodity price...most.
One exception is the purveyors of ultra high end coffee. These coffees don't come to market through normal channels, and so there may be an argument to be made that it's value is delinked from the commodity price, however there is very little transparency or logic in this type of valuation. If the commodity price fluctuates freely and the price of ultra high end coffee remains constant, the value of high end coffee is arbitrary and based on purchase price rather than market conditions. Currently many ultra high end coffee sellers would have secured their inventory while the "C" was floating near historical highs in 2011. Beginning late 2011 coffee commodity prices began to deflate, theoretically reducing the value of all coffee under contract. The problem for newer brokers working on bank loans and margin is that they cannot reduce the value of their contracts without jeopardizing their debt to equity ratio displayed in the Balance Sheet. The reality is that the broker uses a formula to determine purchase price, whether it is a simple equation or differential calculus, there is a formula. If there is a formula to determine value at purchase, then the same formula should be used to reduce the value as the price of the underlying commodity deteriorates.

I have been sampling some self declared ultra high end coffees recently whose pricing is completely detached from the realities of our current market. While considering the value gap I came to the conclusion that the coffee was not poor quality but poorly bought, handcuffing the marketability going forward. It is clear to me that some of these coffees are looking for naive buyers who are captivated by scarcity and marketing material rather than realistic value propositions. My advise is to check your coffee prices as they track throughout this past year, if your prices haven't fallen for similar purchases at a rate that tracks the "C", then you are likely paying for your brokers mistakes and you need to make them aware of the inconsistencies. Paraphrasing Benjamin Graham, "Price is what you pay...Value is what you get".

Garden Hose Water

I wanted to post a quick thought on situational appreciation. As many of you who share a northern climate I am engaged in Spring garden preparations, yard work, and lawn maintenance. The past weekend was seasonally warm in my part of the world and I had worked up quite a thirst while moving some soil. As I am conditioned to do, I turned on the garden hose and quenched my thirst the way I had since I was a child. I can honestly say that often I consider cool water from a garden hose to be the finest water I have ever tasted...because I am particularly thirsty, I have fond memories of childhood summer days, the weather was beautiful, I was having a great day etc.
This started me thinking of how we within our industry disregard and demean customers who enjoy corporate coffee etc without considering how we ourselves lower our standards or disarm our prejudices in favour of situational or conditional factors which eclipse taste. Sometimes a Big Mac tastes as fine as a Prime Rib, sometimes a snickers bar tastes better than a Pain au Chocolat, sometimes garden hose water tastes better than Perrier and sometimes grandma's commercial coffee seems better than Esmerelda. Not always, just sometimes.

The 800 Pound Garrulous

Ok, the title is a groaner but it was either that or "Garrulous in the Missed".

The following is my attempt to expand on my previous post and offer some suggestions to create discussion about bringing focus back on the consumer, or at least adding some programs so that all of us agree there is a focus on the consumer. Some of these ideas are things I've stewed about for some time, some have been inspired by comments on my previous post and some from conversations with interested parties. I'm not going to flesh out the ideas and describe how they would fit into SCAA systems because there are others better suited to that task.

1. Re-establish the Retailers Committee within the SCAA leadership group. I see this as a way to represent a company perspective to counter the barista/competition view that drives strategic planning currently. Barista/Micro Roaster input is invaluable, but we need balance. Coffeefest has established a program to reward great cafes presumably because they recognize there is too much focus on the individual.

2. Establish a Consumers Committee within the SCAA leadership. Stocking this committee may be problematic but if they can represent the full spectrum of consumers effectively they can also reduce resentment and provide some perspective on how we are serving our customers needs.

3. Add an additional component to EVERY lesson plan written by the SCAA in all its branches to apply lesson knowledge into how to better serve the customer. Asking course participants to articulate how they would leverage course material to better serve each customer would remind us all who we should be pleasing. If customer service is a component of every lesson plan and not just an online entry level course, it would no doubt improve service across the industry.

4. More effective and balanced use of conventional and social media by SCAA. Re-tweeting and publishing by the SCAA of individuals is perceived as an endorsement (like it or not). That endorsement damages the SCAA when the "endorsed" lash out and behave unprofessionally online or elsewhere. There are many within the Specialty Industry who are routinely criticized and demeaned simply for expressing an opinion. That has to stop and the offenders called out until it stops. There are too many knowledgable and kind coffee people (as Colleen reminded me in my previous post) who have no voice because they are afraid of ridicule or having their head photoshopped on Sprudge or some other form of cyber bullying that characterizes a very small minority of our peers. Having access to SCAA resources comes with responsibility and the beneficiaries can't always claim they were wearing their company hat when they offended some of our community. If it's mean, make it stop and make your voice heard.

5. Reform the barista competition format to make it more closely represent a customer interaction rather than a performance. Maybe it could be based on a sort of "iron chef" type format where signature drinks are based on a unique list of available ingredients for each barista and they are able to construct something blind, or simply shaking up the drink orders so they are not served as a flight, but random like a normal order sequence. There are no doubt many obstacles to this happening, but making the barista demonstrate "working barista" skills rather than performance craft would greatly expand the limited possibilities of the current format. What we would see is a more personal and edgy competition that would both thrill an audience and test the barista's ability to think on their feet, like a normal bar situation.

6. Establish a committee or working group to examine how to recruit more visible minorities into Specialty Coffee. This I think is long overdue. Minorities bring unique perspectives that are vastly under represented currently. I don't know anything about consumer habits within minority communities, but I do know that if the distribution of attendees at SCAA events is any indication, there is a massive amount of business to be gained by engaging with ALL of our society.

Those are my initial thoughts. Please know that these are not intended to demean or diminish anyones past contributions to the coffee community, but my personal suggestions for addressing what is a sore point with many within the industry.

Drop Dead Garrulous

Garrulous: Given to excessive and often trivial or rambling talk; tiresomely talkative, especially on trivial matters.

Specialty Coffee has come a long way from the times when most aspired to be like Starbucks to now when most aspire to be most unlike Starbucks, but I believe companies may be better served taking a peek at what Big Green is doing right. Like it or not, Starbucks is still growing and is having an even bigger impact on coffee perceptions and customer expectations. Starbucks focuses very well on their customers wants and is constantly probing for the right formulae. Howard Schulz (Starbucks CEO) speaks with a very clear voice on satisfying expectations, delivering value and delighting their patrons. Starbucks achieves this by focusing solely on the customer.

Concurrent to this Specialty Coffee has been engaged in an exercise of self-indulgent narcissism that is completely removed from the customer experience and has more to do with gazing in the mirror than looking at the customer. Whether it is the proliferation of new and trivial competitions where contestants are encouraged to elucidate their solitary experiences and the judges stand in as proxies for real customers, or an effort to elevate the barista so far above mere counter service that they fail to serve effectively, the result is the same, an industry so engaged with itself that they've disengaged from the customers.

Very recently a twitter thread appeared in my timeline (re-tweeted by someone I admire and follow) concerning the inconsequential but fashionable topic of cold brew, leveraging standards and protocols that a lab would have a difficult time reproducing. The impression that the garrulous participants (two former Board Members of the Specialty Coffee Association of America) were clearly debating not so the customers might have a better experience, but so their audience might be impressed with their staggering mastery of all things trivial was not lost on the re-tweeter. These exchanges happen every day among the leaders of the Specialty Coffee Industry and are hard to miss given the disproportionate number of times these threads appear in SCAA publications and their social media feeds thereby securing the Associations implicit nod of approval.

Presently we portray an industry that has moved from taking twitter shots of latte art to examining nonsense in minute detail and fetishizing exotic coffees and preparation techniques in the hope of gaining affirmation from our peers instead of our customers. We have completely failed to understand that it’s the customers experience that matters, not the barista’s and that a great conversation over average coffee at Starbucks is better than a great coffee and a performance at (insert café name here). We don’t get it, but Starbucks does.

Here’s hoping that current and future SCAA Leadership and Executive Council positions are populated with people who act like customers, not competitors.

*Drop Dead Garrulous is (what I think) a clever play on words and not a desire that anyone die or be otherwise harmed as a result of my post.

Pay Your Taxes...All of Them!

This is a friendly reminder in this season of the taxman, to pay up!
Importers, Roasters, Cafes, Cafe Owners and Barista all have special and individualized obligations to accurately and truthfully assess and remit tax returns to their respective governments. Governments have special powers to make sure you eventually pay your taxes or face stiff fines, staggering interest rates and even jail time.

While I don't know much about the tax code here in Canada (my accountant does) let alone the Euro Zone, Pacific Rim or the US, I do know that failure to submit a return and tax fraud (intentionally lying on a return) is reserved for especially harsh treatment by the authorities, so here's my advice.

1. Get your paperwork in front of a qualified bookkeeper, accountant or tax professional in good order and on time.

2. File your completed and accurate tax forms on time even if you don't have the money to pay what is due.

3. Immediately contact your government tax office and make arrangements to pay off any tax that is due in a time period you can afford.

4. Business owners must absolutely pay payroll, sales, health taxes and report them accurately. These monies are generally collected by the business owners from customers on behalf of the government and is therefore held "in trust". Failure to pay these taxes can result in the government immediately seizing your bank accounts and shutting down your business overnight.

5. Ignoring the problem will definitely end up in personal and business failure...guaranteed. There is an infamous case of an espresso bar owner who at year end will owe over $800,000 and with it compounding at an annual rate of 20%, will owe over a million dollars next year.
Life changing, life sentence. Pay Your Taxes...All of Them

The Shared Hedge

The Exchange Traded Commodity Price for Arabica (The "C")has been a consistent topic within this blog. It is of such vital importance to both farmers and consumers that I've dedicated a great deal of thought and effort to articulate the factors that affect the price settlement every day. Last year in the middle of a flurry of attention following the price eclipsing $3.00, I posted some thoughts on delinking the Specialty Price from the commodity price although with somewhat sketchy details about basing it on a composite retail price.

In the past few weeks I've begun to flesh out some ideas with the goal of providing some security (hedge) and stability (certainty) within the Specialty Coffee market. This proposal is not universally suited for all and admittedly excludes parties driven solely by profit. First, I'm restricting this concept to those companies who purchase direct from farm, where interaction and negotiation with decision makers at source is possible. Second,this mechanism is intended for growers and purchasers who are both dedicated to price stability with sufficient risk/reward to satisfy normal profit motives. Last, the integrity of the proposed contracts must be unassailable as each participant is the counterparty insuring the hedge.

The proposal is the creation of a proprietary Tailored Options Contract (think of it as an insurance policy) which would be negotiated by each party under the auspices of a Third Party Registrar. This contract would be very different from normal exchange traded options contracts where the counterparties never know who is on the other side of the trade.

The basic structure can be best explained by the following: The Roaster sells a Put at the agreed strike price with an approximate 10% premium which is purchased by the Grower. The Grower Sells a Call at an agreed strike price with an approximate 10% premium which is purchased by the Roaster. Both share an expiration date at harvest the following crop year, for example Jan 1,2013
Example: Let's assume the agreed price for this years crop is $3.50 per pound farm gate. Our Roaster sells a January 2013 Put Option to the grower at $3.15 Strike Price and and receives $0.35 in proceeds. This gives the Grower the Option, but not the obligation to sell his/her coffee next year for $3.15. The Roaster who sold the Put in turn has the obligation to purchase if the Grower exercises his right. So why would the grower exercise his option to sell at $3.15? Let's say next year, the commodity price falls significantly such that similar specialty grade coffees are now selling for $2.50 per pound, by exercising his right to sell at $3.50 the grower has greatly limited his downside risk for next year.

Concurrently, the Grower sells a January 2013 Call Option to the Roaster with a $3.85 strike price and receives $0.35 in proceeds which offsets his/her cost of purchasing the Put. This gives the Roaster the Option, but not the Obligation to purchase coffee next year for $3.85. The Grower also gains the obligation to Sell at $3.85 should the Roaster exercise his right. The Roaster would choose to exercise his right to purchase at $3.85 if the price of similar grade coffees is higher than $3.85, limiting his exposure to even higher prices for a year. The effective result is that Roaster has the Option (but not the obligation) to purchase coffee next year at a 10% increase over this years price. The grower in this scenario will lose the profit potential should the price increase beyond $3.85. Should the price fall instead of rise, the grower has the Option (but not the obligation) to sell coffee to the Roaster at a price 10% below this years price.

The net result is that the exchanged options contracts keep the price within a 20% (10% up $3.85, 10% down $3.15) price range for the next year (2013). If the Commodity price moves vastly higher during 2012, the Roaster can lock in his 2013 Option and buy for $3.85. If the Commodity price moves vastly lower during 2012, the farmer and lock in their January 2013 Option and sell for $3.15. The middle ground is where both parties agreed at the beginning of the year that they wanted the price to be. By creating a specialized Options Contract, the two parties can be certain that under all circumstances that will be the case. If by chance the price remains stable for the year, the options expire and a new contract can be enacted using the same method to achieve stability for the new crop year. The beauty of this model is the spread between the prices which defines the target price for next year can be literally as wide or narrow as the parties desire, and the premiums set accordingly. The premiums can even be structured so that one party pays a lower premium than the other owing to increased risk or asymmetric strike prices on either side of the current price.
In any case the grower foregoes the upside potential beyond the strike price increase, the Roaster foregoes the savings beyond the strike price decrease. Price Stability=Shared Risk= Win/Win

Enacting the proposed structure would greatly benefit from participation of several large independent roasters/importers who are dedicated to farm support and transparency, but also with marketing programs in place to adequately articulate to customers how they are guaranteeing farm income. Alternatively I can imaging an existing Third Party Certifier adopting this type of contract model and branding it as a simple and cheap mechanism to benefit farmers and roasters alike. Remember, the Importer/Roaster benefits from price stability as much as the grower. Last, I imagine that a new legal enterprise could be established to negotiate and monitor contracts with a small net debit premium on each side from the sale of the Put/Call Options and branding the contract something descriptive of it's benefits...The Shared Hedge!

If some Roasters/Importers are currently using Private Options contracts I'd be happy to hear about them, and if anyone is interested in discussing the idea further please let me know.