From In The Black – May 2007:?
You know that coffee is a big and profitable business when the drinks and snackfood giant, Coca-Cola Amatil, turns its attention to it. Two years ago it bought Grinders Coffee, whose founder Giancarlo Giusti is one of Australia’s coffee pioneers.
Grinders was founded in 1962, when coffee in the English-speaking world, including Australia, was considered pretty awful, and the Asian market for coffee had yet to evolve. When sold it had a turnover of $11m, employed about 50 people and ground 10 tonnes of coffee each week.
But while coffee roasting may be a profitable business, the story of the humble café is very different.
According to official statistics the café business isn’t profitable. George Sabados, consultant to franchise groups and retail chains globally, specialises in helping these businesses increase profits. ‘The net profitability of cafés has fallen to ridiculous levels, about 4 per cent is the average,’ he says. ‘You can think of far better investments than working seven days a week in a café.’
One constraint on profitability is the cost of hiring baristas. A good one will cost $1,000 to $1,500 a week. Sabados says that a seven-day-a-week operation creating good coffee would need two or three people working behind the machine. ‘Before you can even make a profit you must turn over 15kg of coffee a week,’ he says. ‘The national average is 11kg. You have to be above average to begin with to even turn a profit.’
Jamie Royal CPA is owner of grinder and café group Kaldi. His coffee, which costs $25 per kg, will make 110 shots of espresso. A litre of milk will fill eight regular cups.
Royal says it costs 55 to 60 cents a cup, depending on whether it is drunk in the café or whether a polystyrene or rippled cardboard takeaway cup is used.
Sabados says the key to a café’s success is not based on coffee alone. Good coffee is simply a hook to bring people in. For a café to be successful it has to offer marginally better coffee than local competitors, consistently.
Some customers will drink three coffees a day. ‘If it is of exceptional quality, a person will come back to one location three times a day,’ Sabados says. ‘If you are average they’ll go to three different locations. If the quality of your product is far above what the local market can produce then you hook people three times a day, and without doubt on one of those occasions they will buy food from you.
‘And you can see from that the average customer spend can go from $3 to about $12.50 quite easily,’ he adds.
Aiming to produce a consistent quality of coffee, companies such as Azkoyen in Spain are developing a new generation of super automatic espresso machines. Sabados says: ‘They [Azkoyen] are not hampered by the tradition like the Italians are. They’ve been able to approach the subject of coffee from a different perspective.’
The idea is that the machine can produce a good quality – not necessarily the best – of espresso without a large investment in staff training.
‘It is producing consistent extraction far beyond what a human can do,’ Sabados says.
Mark Ring, CEO of Starbucks in Australia, says one of the key ingredients to Starbucks’ success is familiarity. A customer should be able to visit a store anywhere worldwide and buy a coffee exactly to specification. This is a formula it has replicated through 12,440-plus stores worldwide.
The chain had an operating margin of 11.5 per cent in 2006 on a revenue that grew 22 per cent to US$7.8bn. Another 2400 stores are planned globally for 2007, with the target of 20,000 stores in the US and 20,000 elsewhere in the world.
Ring says: ‘Consistency is really important to our customers. It is a consistency in the product but I think it’s [also about] the overall experience when you walk into a café. It’s about the music, it’s about the lighting, it’s about the furniture, it’s about the person who is working the bar.’
For Starbucks in Australia it all starts with training, and $1m will be spent during the next year on its 1000 staff, who operate 89 outlets. ‘It pays off,’ Ring says. ‘A great store manager means a great store.’ He says it is important to have the right leaders to drive overall performance. ‘And to not have any illusions that it is anything different whether you are a chain of 10,000 stores or your one store. It’s about having a great store manager.’
Ring says that it is frustrating to regular customers when in the same café coffee may be made three different ways by three different baristas.
Outside of the coffee chains there exists a niche of about 5 per cent of cafés that wish to be seen as classy boutique operators, and many of these are very profitable.
Melbourne café and restaurant entrepreneur Con Christopolous is one such operator. He founded the Degraves Espresso Bar 11 years ago (although he sold it last year) and owns venues including the Supper Club, The European, Journal and the Commercial Bakery, among others. He stopped buying coffee from Grinders soon after the Coca-Cola Amatil takeover because he says it became too corporate. Instead, he imports his own coffee and is using difficult hand-pull Victoria Arduino machines rather than semi-automatics.
So what’s his secret in ensuring his businesses pour the best coffee? ‘It’s all about training,’ says Christopolous. ‘It’s as simple as that. It’s 80 per cent user. You can buy the best coffee in the world and have the best equipment and still muck it up.’
Christopolous believes there is a zen to coffee making, baristas work in a zone where minute adjustments can make all the difference in the brew – as can their mood and attitude.
Hand-pulled machines give baristas the ultimate control. ‘To extract the full sugars and oils out of the coffee cake, the cake has to actually be wet,’ he explains. The lever is pulled and under low pressure the cake is wet. The piston then comes into action and under the pressure of 12 or 13 bar it forces hot pressurised water over the cake. Although a hand-pulled espresso may take longer than a semi-auto, Christopolous would rather the customer wait longer and drink – and appreciate – a better product.
Royal has a similar philosophy. ‘We certainly focus on getting the product right, even if that’s to one customer or 10 customers,’ he says. ‘It takes between 18 to 23 seconds to get a good pour of espresso out of a machine. You can have a three-group machine and you can pour six coffees in that time. But at the end of the day that’s as fast as you can go.’
Sabados says out of 650 cafés to which he has consulted, only three had any kind of training program. ‘Consistency will only come through training,’ he says. ‘There needs to be a focus on training and an allocation of money for training.’
So in many respects cafés have the same concerns most businesses understand: staff expertise, finding the right store location, stiff competition from ruthless rivals. They do of course have the advantage of the product itself. A Turkish proverb says coffee is ‘black as hell, strong as death and sweet as love’. Now who could resist that?
Coffee house’s financial legacy
It was in London’s coffee houses in the 17th and 18th century that many of today’s great trading institutions evolved.
Though Lloyd’s of London bears the surname of Edward Lloyd, he never actually conducted any insurance business but simply ran a coffee house. Based near the Tower of London, it was popular with sailors, who shared news with shipping owners and merchants awaiting their cargos. Meanwhile, on Change Alley in the City of London stood two coffee shops, Garraway’s and Jonathan’s. It was here that one broker decided to start publishing stock prices, with the trade in stocks surging right up until the collapse of the South Sea Bubble in 1720.
Following government regulation and registration of stock jobbers, share trading thrived. When in 1748 Jonathan’s eventually burnt down, as buildings were apt to in those days, the institution moved to the less crowded Threadneedle Street. It was renamed the Stock Exchange and remainder there until 2004 when it moved to Pasternoster Square.
In 1774 the Lloyd’s Coffee House evolved into the Society of Lloyd’s when the members of the insurance market collaborated and moved to the Royal Exchange, the centre of commerce in the City of London.
What business can learn from the coffee trade
Coffee house rules:
• Have a clear strategy for growth and success. Starbucks has more than 6500 stores internationally and imagines a future with 25,000 – 6000 in the Asia Pacific. Key business drivers are: expand store footprint, increase average unit volumes, promote continuous innovation, leverage the Starbucks brand with complementary offerings, remain employer of choice, extend the Starbucks experience beyond the stores, leverage business partners.
• Be customer-focused. Good cafés embrace three themes: recognition (saying hello to customers by name and knowing how they like their coffee), consistency (making coffee the same way every time), and excellence (producing a quality product).
• Success is 80 per cent due to the performance of staff, and they must be trained to perform at their best.
• Pay attention to quality control. It’s said there are three variables in making a good coffee: the coffee blend, the machine and the barista. Successful cafés cover all three.
• Know what costs to cut, and in which parts of the business to invest.
Did you know?
• 40 per cent of the world’s coffee consumption is instant
• In 2006, 123m 60 kg bags of coffee were produced worldwide
• In 2006, Vietnam produced 15m bags, making it the second largest producer after Brazil.
• Columbia is the next largest coffee nation, producing about 11m bags annually.
• Indonesia produces 6.8m bags of coffee annually, more than India at 5m bags.
• In Australia prices vary from $1 to $4 a cup. The norm is $2.50.
Sources: International Coffee Organisation and Australian Specialty Coffee Association, Foutainhead
?Reference: May 2007, volume 77:04, pp. 28-31
Food & Drink. Travel. Est. 2005