The relationship between Roasters and Importers in Developed Countries and Growers has received plenty of review and critique. I don't want to dig too deeply into the social and environmental aspects of this relationship, but want to focus on an interesting idea that deserves consideration.
As we all know we are in a time of high green coffee prices and one would think this condition would provide fantastic cover for growers, but hot markets fed to a certain degree by speculative interests, can crash quickly if demand falls short of supply once new plantings begin producing in a year or so. In an effort to protect growers from catastrophic price shocks various schemes have been devised to provide a price floor. This price guarantee acts as a sort of crop insurance for growers who still must produce enough crop to cover production costs and G&A with the threat of ruin hidden in every weather forecast.
The price run up can also present problems for growers who may have sold early in the year, only to see the value of what they contracted increase wildly as experienced this year. This condition may encourage some to hold coffee off the market this year in the hope of higher prices, but like tulips and real estate, when there are no buyers, there's no market.
What I'm proposing for consideration is for interested direct traders to not only set a minimum price, but provide an upside for the grower should prices increase, eliminating for the grower the opportunity cost of selling early. (Opportunity Cost is the price difference between what was paid to the farmer, and what the farmer could have sold for later in the year if prices go up) This mechanism would also encourage farmers to sell instead of holding coffee off the market by providing the real chance of further revenue and zero chance of losing revenue. For all involved this would also provide more transparency and information in determining the actual amount of coffee available in any year by flushing out coffee being held back, also dampening the likelihood of significant price moves throughout the year. Essentially this would provide extra grower income should prices rise, while reducing the likelihood of significant price changes through greater transparency.
Roasters and Importers are in a much better position to adjust to higher prices by passing real per pound costs onto wholesale customers than are producers who's costs fluctuate vastly per pound harvested depending on yield. While this sort of scheme is anathema to all capitalist theory, any price scheme already offends those sensibilities. The form and function of this upside pricing scheme is something best determined by individual roasters and importers but is completely reasonable when considered alongside all of the factors and benefits we quote in support for direct trade.
I"m curious whether any roasters and importers are already using some sort of mechanism to provide extra revenue, and would be happy to learn the details.
Food for thought.
Monday, March 28, 2011
Saturday, March 19, 2011
Copycats
If you've been following my blog you've figured out that I'm highly skeptical of business models built on following the latest trends and having the latest equipment. I've included mild criticisms of manual brewing, $20,000 espresso machines and extravagant leasehold costs. While I haven't expressed it in my blog, I've been personally dismissive of some of the coffee luminaries written and blogged about, but now I think I'm wrong in directing the criticsm at them and not giving them enough credit.
I read all the time, every spare minute I can, always non-fiction and mostly business/finance related. I don't know how I've overlooked it but recently I started reading ReWork by Jason Fried and David Heinemeier Hansson, the founders of 37Signals. It is a spectacularly simple book filled with excellent advice that would benefit every business. The Chapter that inspired this post is called "Don't Copy". The chapter articulates beautifully what I've struggled to get across, that is the idea that copying someone else's work/ideas/business model is not only lazy, but dangerous because you don't need to understand anything to copy an idea. Skipping the knowledge/skills/understanding necessary to successfully model Intelligentsia, Square Mile or Stumptown and simply parroting their words and actions is dangerous and foolhardy. In addition, your business will always be playing catch up because you are never leading, always following and satisfying yourself by creating a lesser model of what you admire. I can think of a dozen companies that are modelling the leaders, but just aren't quite as good at convincing us they're in the same league. They may very well be as good or better at delivering excellence, it's just that perception is everything when you're trying to displace an incumbent.
Remember: Mud Flaps follow the Big Wheels
Instead, try to admire, learn from and most importantly understand what industry leaders are doing, but use it as inspiration to carve out your own space and be the best version of your business. That first and foremost means the most profitable version you can be. Spend your "coffee time" learning how to be rigorous in your management and application of sound business principles. If you are walking into Intelligentsia, taking mental notes and copying the menu boards on your iphone, to replicate in your hometown...you're dead. You are missing the 99% of the work behind what gets presented to the public. The back office.
Despite what is portrayed to the public, the guys making money for Intelli et al are not wearing vests and serving capps in black and white videos, they are costing, analyzing P&L statements and negotiating better deals from vendors. Even companies like Stumptown, Square Mile and Intelli will be displaced by new inspirational leaders and only sound management will keep them on top. Losing your "cool factor" is inevitable and truthfully beyond control, losing your profitability is completely within your control.
I read all the time, every spare minute I can, always non-fiction and mostly business/finance related. I don't know how I've overlooked it but recently I started reading ReWork by Jason Fried and David Heinemeier Hansson, the founders of 37Signals. It is a spectacularly simple book filled with excellent advice that would benefit every business. The Chapter that inspired this post is called "Don't Copy". The chapter articulates beautifully what I've struggled to get across, that is the idea that copying someone else's work/ideas/business model is not only lazy, but dangerous because you don't need to understand anything to copy an idea. Skipping the knowledge/skills/understanding necessary to successfully model Intelligentsia, Square Mile or Stumptown and simply parroting their words and actions is dangerous and foolhardy. In addition, your business will always be playing catch up because you are never leading, always following and satisfying yourself by creating a lesser model of what you admire. I can think of a dozen companies that are modelling the leaders, but just aren't quite as good at convincing us they're in the same league. They may very well be as good or better at delivering excellence, it's just that perception is everything when you're trying to displace an incumbent.
Remember: Mud Flaps follow the Big Wheels
Instead, try to admire, learn from and most importantly understand what industry leaders are doing, but use it as inspiration to carve out your own space and be the best version of your business. That first and foremost means the most profitable version you can be. Spend your "coffee time" learning how to be rigorous in your management and application of sound business principles. If you are walking into Intelligentsia, taking mental notes and copying the menu boards on your iphone, to replicate in your hometown...you're dead. You are missing the 99% of the work behind what gets presented to the public. The back office.
Despite what is portrayed to the public, the guys making money for Intelli et al are not wearing vests and serving capps in black and white videos, they are costing, analyzing P&L statements and negotiating better deals from vendors. Even companies like Stumptown, Square Mile and Intelli will be displaced by new inspirational leaders and only sound management will keep them on top. Losing your "cool factor" is inevitable and truthfully beyond control, losing your profitability is completely within your control.
Saturday, March 12, 2011
50 Grand Business Plan
This week, after a protracted search, I've managed to secure a lease for a 3rd location for my company's espresso bars. I've been giving out lots of advice on this blog, but you know the definition of a consultant right?...A guy who tells you how to do something he has never had the guts to risk a penny on himself. Well at least in order to be an actual consultant, I'd have to be overpaid so I'm in the clear because I'm free.
Some of my favourite espresso bars are sparse, filled with recycled, repurposed and vintage fixtures, built with lots of sweat and toil on a shoestring budget. I can think of one in Toronto called Sam James Coffee Pocket which makes me smile every time I think about it, stunningly simple, awesome. So what I've decided to do is build this location as if I was just starting out, new to the business and on a super tight budget. I'm going to disclose the details of the lease, post a budget, keep you all posted on progress with photos, and tell you when I screw up. I'm going to prove to all you out there that I can build a cafe for less than $50,000 and make it look awesome. The process will begin with some preliminary drawings, and budget development complete with equipment and material list. The goal is to stick to my budget, no exceptions. If I find that something has come in over budget, I will cut money in another area, all real life decisions new owners must have the discipline to make.
Why would I do this? I want to show all of you baristas sitting on the sidelines, or folks who are looking for a new career as an entrepreneur that you don't need to go into massive debt to make it happen. The measure of a great coffee shop or espresso bar is the quality of the products and people, not the fixtures and fittings. That being said, I expect to install pebbled limestone flooring, marble counters and oak cabinetry, nothing cheap. Some of the products will be recycled or repurposed, but all of it will be first class finishes when installed and approved by the local health unit of course.
I'll use the label "50 Grand Business Plan" on all posts related to what I've just described, because I still intend to post on other financial issues as they pop into my head.
Please ask any questions you like and I'll answer them a completely as I can. Good reading and get building!
Some of my favourite espresso bars are sparse, filled with recycled, repurposed and vintage fixtures, built with lots of sweat and toil on a shoestring budget. I can think of one in Toronto called Sam James Coffee Pocket which makes me smile every time I think about it, stunningly simple, awesome. So what I've decided to do is build this location as if I was just starting out, new to the business and on a super tight budget. I'm going to disclose the details of the lease, post a budget, keep you all posted on progress with photos, and tell you when I screw up. I'm going to prove to all you out there that I can build a cafe for less than $50,000 and make it look awesome. The process will begin with some preliminary drawings, and budget development complete with equipment and material list. The goal is to stick to my budget, no exceptions. If I find that something has come in over budget, I will cut money in another area, all real life decisions new owners must have the discipline to make.
Why would I do this? I want to show all of you baristas sitting on the sidelines, or folks who are looking for a new career as an entrepreneur that you don't need to go into massive debt to make it happen. The measure of a great coffee shop or espresso bar is the quality of the products and people, not the fixtures and fittings. That being said, I expect to install pebbled limestone flooring, marble counters and oak cabinetry, nothing cheap. Some of the products will be recycled or repurposed, but all of it will be first class finishes when installed and approved by the local health unit of course.
I'll use the label "50 Grand Business Plan" on all posts related to what I've just described, because I still intend to post on other financial issues as they pop into my head.
Please ask any questions you like and I'll answer them a completely as I can. Good reading and get building!
Thursday, March 10, 2011
The "C"
I am amazed at how little some coffee luminaries know about the "C", how it functions, the factors that impact it and what strategies are useful in protecting your company from price spikes. The "C" is the widely accepted commodity price for Arabica coffee sourced from any of 19 approved countries and traded as contracts on the New York Mercantile Exchange.
The extreme lows of the "C" experienced in the recent past caused an expansion of coffee consumption and the introduction into many new markets at very low costs. The low market price acted as a disincentive to growers to plant more crops and expand capacity. As consumption surpasses production, the price naturally rises. This is not a new story, but a fact of life when playing commodities.
There are many things that separately and concurrently effect price moves in the "C". Traditionally most feel that scarcity or supply concerns are the main market mover. If you listen to news reports or read blogs all the talk is about increased consumption in developing nations plus China, Russia and India. While this does have some impact, there are other things at play which are pushing coffee higher.
As the world struggles to exit from the great recession, every developed country has injected borrowed money into their economies to boost economic activity and employment. This, along with ridiculously low interest rates is the perceived magic bullet for most economies. The thing about super low interest rates is that anyone with money to invest is not looking to place it where they can expect 0.25% on bonds. The lack of interest in the American Bond market leads to the US dollar weakening...when no one wants to buy what you're selling you reduce the price.
The result of a lower USD is that all commodities get an instant bump every time the dollar drops because the commodities and the "C" are priced in USD. For fun just watch how the USD behaves against major currencies, and watch what happens to commodity prices on the same day.
Equity markets over the past decade have not performed in a rational way, with two extreme bubbles forming as a result of irrational exhuberance attached to tech companies in the 90's, and a housing bubble collapsing the market most recently. This has caused people with money to look for actual things to purchase, rather than stocks. Commodities are things that people don't need advanced degrees in math to figure out. They are things where prices behave in a rational way in reactions to real world inputs that you can read about and understand. When the weather in Brazil is bad, the price goes up. When there is trouble in the middle east oil supply chain, the price of oil increases. No accounting scandal is going to bring down the value of your investment in any commodity.
The thing with the "C" is almost no one actually takes delivery of coffee purchased on the market although the final settlement of the contract can result in delivery. The coffee is purchased as a contract with a set delivery date in the future. As the delivery date nears, it is normal for the purchaser to role the contract into a new one with the appropriate adjustments to the account made at the time of the rollover.
An individual can participate in the commodity market in one of several different ways including Non-discretionary account, a Managed Account or Commodity Pools. The important thing to understand is most participants have no intention of ever taking possession of coffee, they are simply trading futures in the hope of making profit.
FYI: There is another cost attached to commodity trading referred to as Contango. This is a universal term which encompasses storage, insurance, loss etc.
For coffee, a typical contract is 37500 lbs, or one container of coffee. A savvy investor in coffee would be required to only put down a small deposit on the value of the contract, typically 5%. If the "C" is trading at $2.75, the value of the contract is $103,125.00 and 5% of that is $5156.25. If the price moves up 10%, then the contract is now worth $113,437.50 , a profit of $10,312.50 on a small investment of $5156.25. This example clearly demonstrates the power of leverage in commodity trading is an incredible draw for those with discretionary dollars to invest. Conversely, if the price drops, the investor will receive a "margin call" requesting more money to cover the daily losses if the value of the contract has dropped more than 50% of the initial investment.
There are many factors which indicate to me that the price is not about to drop in any significant way in the near term.
1. The American Dollar is weak and getting weaker. Printing money always results in inflation and a devalued currency, both working against a reduction in the price of coffee. The US is not likely to increase interest rates (raising the USD) which would stifle any recovery.
2. Supply is something that can take up to 3 years to address. Trees planted this year, won't produce anything this year or next and so we are stuck with the supply we have, or less if there is a natural weather event.
3. Emerging economies are doing quite well, and those that are disengaged from the American market are doing even better. Any growth in coffee consumption in those countries is not likely to wane, and put more pressure on the "C".
4. Commodities as a group of investments are doing remarkably well, and yielding excellent returns for investors, something that encourages new participants. The excellent liquidity in the "C" also benefits more participants as contracts trade at high volumes with many eager buyers and sellers. The ability to apply leverage when trading coffee makes it an attractive play when there is still room to move up.
5. Total coffee consumption is relatively inelastic to price spikes on a macro level. The real pain will be felt on a store level where individual customers will make rational choices based on price and quality. As the price at your favourite shop increases, customers will search for strategies to reduce the impact either by reducing their numbers of visits, or choosing a slightly cheaper option with more perceived value.
6. As I stated in a previous post, compared to a classic hedge like Gold, coffee has actually lost about 38% of it's value over the past 10 years leaving a lot of room to move up.
I hope this provides a little information for all to consider. Remember, there are many things in play in the coffee market which are driving prices higher. Here is an excellent source for further information on trading commodities
The extreme lows of the "C" experienced in the recent past caused an expansion of coffee consumption and the introduction into many new markets at very low costs. The low market price acted as a disincentive to growers to plant more crops and expand capacity. As consumption surpasses production, the price naturally rises. This is not a new story, but a fact of life when playing commodities.
There are many things that separately and concurrently effect price moves in the "C". Traditionally most feel that scarcity or supply concerns are the main market mover. If you listen to news reports or read blogs all the talk is about increased consumption in developing nations plus China, Russia and India. While this does have some impact, there are other things at play which are pushing coffee higher.
As the world struggles to exit from the great recession, every developed country has injected borrowed money into their economies to boost economic activity and employment. This, along with ridiculously low interest rates is the perceived magic bullet for most economies. The thing about super low interest rates is that anyone with money to invest is not looking to place it where they can expect 0.25% on bonds. The lack of interest in the American Bond market leads to the US dollar weakening...when no one wants to buy what you're selling you reduce the price.
The result of a lower USD is that all commodities get an instant bump every time the dollar drops because the commodities and the "C" are priced in USD. For fun just watch how the USD behaves against major currencies, and watch what happens to commodity prices on the same day.
Equity markets over the past decade have not performed in a rational way, with two extreme bubbles forming as a result of irrational exhuberance attached to tech companies in the 90's, and a housing bubble collapsing the market most recently. This has caused people with money to look for actual things to purchase, rather than stocks. Commodities are things that people don't need advanced degrees in math to figure out. They are things where prices behave in a rational way in reactions to real world inputs that you can read about and understand. When the weather in Brazil is bad, the price goes up. When there is trouble in the middle east oil supply chain, the price of oil increases. No accounting scandal is going to bring down the value of your investment in any commodity.
The thing with the "C" is almost no one actually takes delivery of coffee purchased on the market although the final settlement of the contract can result in delivery. The coffee is purchased as a contract with a set delivery date in the future. As the delivery date nears, it is normal for the purchaser to role the contract into a new one with the appropriate adjustments to the account made at the time of the rollover.
An individual can participate in the commodity market in one of several different ways including Non-discretionary account, a Managed Account or Commodity Pools. The important thing to understand is most participants have no intention of ever taking possession of coffee, they are simply trading futures in the hope of making profit.
FYI: There is another cost attached to commodity trading referred to as Contango. This is a universal term which encompasses storage, insurance, loss etc.
For coffee, a typical contract is 37500 lbs, or one container of coffee. A savvy investor in coffee would be required to only put down a small deposit on the value of the contract, typically 5%. If the "C" is trading at $2.75, the value of the contract is $103,125.00 and 5% of that is $5156.25. If the price moves up 10%, then the contract is now worth $113,437.50 , a profit of $10,312.50 on a small investment of $5156.25. This example clearly demonstrates the power of leverage in commodity trading is an incredible draw for those with discretionary dollars to invest. Conversely, if the price drops, the investor will receive a "margin call" requesting more money to cover the daily losses if the value of the contract has dropped more than 50% of the initial investment.
There are many factors which indicate to me that the price is not about to drop in any significant way in the near term.
1. The American Dollar is weak and getting weaker. Printing money always results in inflation and a devalued currency, both working against a reduction in the price of coffee. The US is not likely to increase interest rates (raising the USD) which would stifle any recovery.
2. Supply is something that can take up to 3 years to address. Trees planted this year, won't produce anything this year or next and so we are stuck with the supply we have, or less if there is a natural weather event.
3. Emerging economies are doing quite well, and those that are disengaged from the American market are doing even better. Any growth in coffee consumption in those countries is not likely to wane, and put more pressure on the "C".
4. Commodities as a group of investments are doing remarkably well, and yielding excellent returns for investors, something that encourages new participants. The excellent liquidity in the "C" also benefits more participants as contracts trade at high volumes with many eager buyers and sellers. The ability to apply leverage when trading coffee makes it an attractive play when there is still room to move up.
5. Total coffee consumption is relatively inelastic to price spikes on a macro level. The real pain will be felt on a store level where individual customers will make rational choices based on price and quality. As the price at your favourite shop increases, customers will search for strategies to reduce the impact either by reducing their numbers of visits, or choosing a slightly cheaper option with more perceived value.
6. As I stated in a previous post, compared to a classic hedge like Gold, coffee has actually lost about 38% of it's value over the past 10 years leaving a lot of room to move up.
I hope this provides a little information for all to consider. Remember, there are many things in play in the coffee market which are driving prices higher. Here is an excellent source for further information on trading commodities
Tuesday, March 8, 2011
Raison D'etre
Raison d'etre is a french phrase which literally means "reason to be", or what do you want to be.
This is perhaps the most important question you can answer when deciding to start a coffee business. There are many different answers and motivations that all impact your decision making once your business is up and running. Admittedly I get focussed on financials, but I also run a business that roasts and serves Fair Trade Organic coffee, composts everything ourselves, sources our power from renewable resources, donates dollars and hours to many local charities and causes, and attempts to be responsible members of our community. I want to list some different motivations along with how that choice will impact your business going forward.
1. Passion: this term is perhaps the most overused word in coffee, which I typically reserve for teenaged girls dreaming of werewolves and vampires battling for their affection. For me passion implies a short attention span and a short career in coffee. Someone who describes themselves as passionate is likely looking to seek out the newest trends and adopt them quickly. This strategy will by necessity incur much higher training and capital costs and unless that is replaced with much higher sales, a lower profit margin. Try using LOVE instead of Passion. See how it fits? Love remains even when your business is a little saggy, needs improvement and even annoying. (Just ask a married person) You never give up on a love...ever! A company founded on a love of coffee in my mind is much more likely to endure the vagaries of the market, and will likely be seen by the owner as a long term life's work and not a passionate whim.
2. Sustainable: this term may be the second most overused word in coffee. It is usually applied to companies that are attempting to benefit community, farmers, employees, the environment and any other number of beneficiaries you can think of. As I mentioned in my prelude to this post, my company would probably fall quite easily into this category but with an important caveat...you can't be sustainable if your business is not financially sustainable. YOU CAN'T BE SUSTAINABLE IF YOU'RE NOT FINANCIALLY SUSTAINABLE! You can't help anyone if you're business is insolvent in a year.
3. Owning a coffee shop looks like fun!: Everyone who visits a cafe, (especially a great one) thinks they would love to own one just like it. There is something very appealing in picturing yourself in a pleasing, bustling environment, surrounded by intellectuals, students, film makers and musicians. The reality is that you don't get to choose your customers (my customers happen to fit the examples, good for me) they choose you. Cultivating a cafe culture requires countless hours of work, which is interrupted by plugged toilets, stock shortages, employee absenteeism, and lack lustre sales. If you think owning a coffee shop looks like fun and you have a passion for coffee, beware. Instead you'd be better off Loving coffee and thinking owning a coffee shop looks like a lot of work.
4. I want to teach people about great coffee: There are some incredibly knowledgeable folks out there who have a ridiculous amount of information bidding it's time inside their cranium, looking for an excuse to make an appearance. Giving, well meaning, awesome teachers, terrible business people. Unless your business IS teaching people about coffee in a classroom/lab area, this is a bad reason to start a coffee business. Here's a little anecdote to show you the pitfalls of taking on the role of single handedly changing your local market. Several years ago my company was supplying a local health food store with organic coffee. We tried to introduce CO2 Organic Decaf because I thought it tasted better than Swiss Water. The owner (not the brightest bulb) couldn't get it through his head that CO2 wasn't a chemical, but a gas that we expired about once every 10 seconds. Every time we delivered the CO2 Decaf, I would have the same conversation and he'd be grumpy. Then I came up with the perfect solution...I started selling him the Swiss Water that I thought didn't taste as good, and he was happy. There is an old saying in coffee that goes like this: Q How should I drink my coffee? A The way you like it. Guiding customers to make the better choice is a great strategy, telling them how to drink it is a terrible one.
5. I'm a great barista and I want to run my own shop: I happen to think all committed baristas should own their own shops. As a barista, you should be fully acquainted with the less than glamourous side of espresso, if not the paperwork side. You are one of the main reasons I'm taking the time to write this blog. While your skills behind the cash register and espresso machine may be impeccable, the money is made in the back office. Leverage your skills by attracting other quality baristas, and step back to learn the business side of cafes. Know your break even...cold. You should be able to recite your daily, weekly and monthly break evens, and massage your costs to yield desired results once your are familiar with your expected revenues. For goodness sake, take time to read my pointers on negotiating a lease, and managing your capital costs before you even consider writing a business plan. Remember Love, hard work, good intentions, community, education and skills all factor into a successful start up cafe.
This is perhaps the most important question you can answer when deciding to start a coffee business. There are many different answers and motivations that all impact your decision making once your business is up and running. Admittedly I get focussed on financials, but I also run a business that roasts and serves Fair Trade Organic coffee, composts everything ourselves, sources our power from renewable resources, donates dollars and hours to many local charities and causes, and attempts to be responsible members of our community. I want to list some different motivations along with how that choice will impact your business going forward.
1. Passion: this term is perhaps the most overused word in coffee, which I typically reserve for teenaged girls dreaming of werewolves and vampires battling for their affection. For me passion implies a short attention span and a short career in coffee. Someone who describes themselves as passionate is likely looking to seek out the newest trends and adopt them quickly. This strategy will by necessity incur much higher training and capital costs and unless that is replaced with much higher sales, a lower profit margin. Try using LOVE instead of Passion. See how it fits? Love remains even when your business is a little saggy, needs improvement and even annoying. (Just ask a married person) You never give up on a love...ever! A company founded on a love of coffee in my mind is much more likely to endure the vagaries of the market, and will likely be seen by the owner as a long term life's work and not a passionate whim.
2. Sustainable: this term may be the second most overused word in coffee. It is usually applied to companies that are attempting to benefit community, farmers, employees, the environment and any other number of beneficiaries you can think of. As I mentioned in my prelude to this post, my company would probably fall quite easily into this category but with an important caveat...you can't be sustainable if your business is not financially sustainable. YOU CAN'T BE SUSTAINABLE IF YOU'RE NOT FINANCIALLY SUSTAINABLE! You can't help anyone if you're business is insolvent in a year.
3. Owning a coffee shop looks like fun!: Everyone who visits a cafe, (especially a great one) thinks they would love to own one just like it. There is something very appealing in picturing yourself in a pleasing, bustling environment, surrounded by intellectuals, students, film makers and musicians. The reality is that you don't get to choose your customers (my customers happen to fit the examples, good for me) they choose you. Cultivating a cafe culture requires countless hours of work, which is interrupted by plugged toilets, stock shortages, employee absenteeism, and lack lustre sales. If you think owning a coffee shop looks like fun and you have a passion for coffee, beware. Instead you'd be better off Loving coffee and thinking owning a coffee shop looks like a lot of work.
4. I want to teach people about great coffee: There are some incredibly knowledgeable folks out there who have a ridiculous amount of information bidding it's time inside their cranium, looking for an excuse to make an appearance. Giving, well meaning, awesome teachers, terrible business people. Unless your business IS teaching people about coffee in a classroom/lab area, this is a bad reason to start a coffee business. Here's a little anecdote to show you the pitfalls of taking on the role of single handedly changing your local market. Several years ago my company was supplying a local health food store with organic coffee. We tried to introduce CO2 Organic Decaf because I thought it tasted better than Swiss Water. The owner (not the brightest bulb) couldn't get it through his head that CO2 wasn't a chemical, but a gas that we expired about once every 10 seconds. Every time we delivered the CO2 Decaf, I would have the same conversation and he'd be grumpy. Then I came up with the perfect solution...I started selling him the Swiss Water that I thought didn't taste as good, and he was happy. There is an old saying in coffee that goes like this: Q How should I drink my coffee? A The way you like it. Guiding customers to make the better choice is a great strategy, telling them how to drink it is a terrible one.
5. I'm a great barista and I want to run my own shop: I happen to think all committed baristas should own their own shops. As a barista, you should be fully acquainted with the less than glamourous side of espresso, if not the paperwork side. You are one of the main reasons I'm taking the time to write this blog. While your skills behind the cash register and espresso machine may be impeccable, the money is made in the back office. Leverage your skills by attracting other quality baristas, and step back to learn the business side of cafes. Know your break even...cold. You should be able to recite your daily, weekly and monthly break evens, and massage your costs to yield desired results once your are familiar with your expected revenues. For goodness sake, take time to read my pointers on negotiating a lease, and managing your capital costs before you even consider writing a business plan. Remember Love, hard work, good intentions, community, education and skills all factor into a successful start up cafe.
Monday, March 7, 2011
Coffee Pricing Part II
I wanted to add an interesting update to provide some context for the current coffee market price.
In my last post I indicated that the differentiation between the coffee price valued in USD, and that of Canadian and Euro was the effect that a weak American dollar had on the market. Certainly there has been an increase in the "C", but at least 30% of that can be attributed to the fact that the "C" is valued in USD.
As an interesting bit of information, I've figured out the Price of Coffee in Gold for each of the time periods, to determine how coffee has performed against the standard measure of hedged value versus world currencies.
In 2001, one ounce of gold equalled 376.53 lbs of coffee.
In 2005, one ounce of gold equalled 365.60 lbs of coffee.
In 2010, one ounce of gold equalled 496.24 lbs of coffee.
Today, one ounce of gold equals 518.10 lbs of coffee.
From 2001 to present, the price of coffee stated in terms of gold has fallen 38%. Even at the extreme low price of 2001, coffee was worth more in real value, than it is today at relatively high priced "C".
This is relevant because Gold is perceived to be the measure of secure wealth in the world. Currencies pre-1971 were backed up by vaults filled with the stuff as security against the value of the dollar. The US no longer holds near enough gold to guarantee it's currency value, and instead issues promises to pay. Recent events has made those promises increasingly suspect, which makes gold more valuable versus a declining USD. Pricing coffee versus Gold clearly shows us that although the price is relatively high versus USD, against a standard measure of value like gold, it has actually lost value in the past 10 years, even when comparing a $0.71 market of 2001 to today's $2.76.
In my last post I indicated that the differentiation between the coffee price valued in USD, and that of Canadian and Euro was the effect that a weak American dollar had on the market. Certainly there has been an increase in the "C", but at least 30% of that can be attributed to the fact that the "C" is valued in USD.
As an interesting bit of information, I've figured out the Price of Coffee in Gold for each of the time periods, to determine how coffee has performed against the standard measure of hedged value versus world currencies.
In 2001, one ounce of gold equalled 376.53 lbs of coffee.
In 2005, one ounce of gold equalled 365.60 lbs of coffee.
In 2010, one ounce of gold equalled 496.24 lbs of coffee.
Today, one ounce of gold equals 518.10 lbs of coffee.
From 2001 to present, the price of coffee stated in terms of gold has fallen 38%. Even at the extreme low price of 2001, coffee was worth more in real value, than it is today at relatively high priced "C".
This is relevant because Gold is perceived to be the measure of secure wealth in the world. Currencies pre-1971 were backed up by vaults filled with the stuff as security against the value of the dollar. The US no longer holds near enough gold to guarantee it's currency value, and instead issues promises to pay. Recent events has made those promises increasingly suspect, which makes gold more valuable versus a declining USD. Pricing coffee versus Gold clearly shows us that although the price is relatively high versus USD, against a standard measure of value like gold, it has actually lost value in the past 10 years, even when comparing a $0.71 market of 2001 to today's $2.76.
Thursday, March 3, 2011
Coffee "UN" Common
This is a little off my normal topics of finance and costing but no less relevant to my target reader. My target reader is a barista who wants to own their own shop one day, a family run shop trying to get better, the great majority of shops who serve great coffee every day but lack some technical knowledge, advice and resources to get them there.
For those of you who aren't aware, an association has been launched at the TED Conference in Palm Springs California where the self appointed "creme de la creme" of coffee invite each other to share a space and inform the attendees on how coffee should be experienced. Admittedly I have not witnessed this personally so judging the relative importance of what they are sharing is a mystery, but I believe it is safe to say it is less an educational exercise and more a self promotional one. *I'm sure there'll be a slick black and white video released soon that will shed more light for those of us not attending, so keep an eye out for it!
The reason this is relevant to my target reader is I want to warn you of the pitfalls of believing this is how you build a successful business and make money in coffee. Certainly there is an imperative to constantly draw attention to yourself when you compete for customers in London, Los Angeles or New York City, but not so much in middle America or Canada. Thinking that being part of a self congratulatory "security council" with a veto on who is relevant and who is dismissed will lead to distraction and ruin.
The blurring of lines between some SCAA/Barista Guild executives and the relentless self promotion is becoming hard to ignore, neither of which serve the community as a whole but alienate the supportive base of both organizations. Maybe an unintentional consequence, but a real sentiment felt by thousands of companies who are getting the message "you're not important", but renew anyway.
The main point I want to get across is that it's ok to be a great operator in rural Maine, middle Kansas or Winnepeg Manitoba. The value of what you are bringing to the Specialty Coffee Industry is relevant to all the companies like you, and you are managing to do it without alienating and diminishing your peers. Good on you!
For those of you who aren't aware, an association has been launched at the TED Conference in Palm Springs California where the self appointed "creme de la creme" of coffee invite each other to share a space and inform the attendees on how coffee should be experienced. Admittedly I have not witnessed this personally so judging the relative importance of what they are sharing is a mystery, but I believe it is safe to say it is less an educational exercise and more a self promotional one. *I'm sure there'll be a slick black and white video released soon that will shed more light for those of us not attending, so keep an eye out for it!
The reason this is relevant to my target reader is I want to warn you of the pitfalls of believing this is how you build a successful business and make money in coffee. Certainly there is an imperative to constantly draw attention to yourself when you compete for customers in London, Los Angeles or New York City, but not so much in middle America or Canada. Thinking that being part of a self congratulatory "security council" with a veto on who is relevant and who is dismissed will lead to distraction and ruin.
The blurring of lines between some SCAA/Barista Guild executives and the relentless self promotion is becoming hard to ignore, neither of which serve the community as a whole but alienate the supportive base of both organizations. Maybe an unintentional consequence, but a real sentiment felt by thousands of companies who are getting the message "you're not important", but renew anyway.
The main point I want to get across is that it's ok to be a great operator in rural Maine, middle Kansas or Winnepeg Manitoba. The value of what you are bringing to the Specialty Coffee Industry is relevant to all the companies like you, and you are managing to do it without alienating and diminishing your peers. Good on you!
Subscribe to:
Posts (Atom)
Posts
