Making it Buying, or Selling?
by Stuart Daw
(originally appeared in Canadian Vending, October 1998)
Is it true only of the vending and coffee
service industries? Or is it true of most businesses; that when a company is
young it makes its money selling, but as it gets older and bigger, it makes it
buying?
The question is worth examining as we try to
assess the impact of specialty coffee on coffee quality in Vending and OCS.
And it addresses the question of why, in most cases, OCS generally can boast
higher roasted coffee quality than Vending, in spite of its own tendency
toward weakness.
The answer is more than the simple ability
of larger volume buyers to command lower prices. That makes economic sense
outside of any psychological question of coffee drinking or product quality as
such.
The small operator, trying to pass his
breakeven point as fast as possible, does not have the time or buying power to
demand or get the advantage of better costing. To an OCS operator, 10 cents a
pound might raise the average kit cost by around 50 cents, but at the selling
end he gets a much higher variation in price, and usually not from a fixed
price list, but off the top of his head, often in response to the price being
paid by the prospect to his present supplier
And most smaller, newer operators are
convinced of the wisdom of using high grade coffee. They are more one-on-one,
eyeball-to-eyeball with the ultimate user.
But does bigness have to preclude good
product quality? Let me give you a factual case from the past. In the 1970’s
our vending products sales manager was given permission to demo on one of his
prospect’s large vending locations. That prospect in total did an annual
volume of around one million pounds.
Working with the vending people on location,
our man was able to show real success in raising cup sales. Beyond machine
inspections to insure proper brewing apparatus, the test did involve raising
throw weights, grammed out to be precisely the same at each site within the
plant. A concomitant increase in creamer consumption added somewhat to the
average cup cost.
But when the data came back to our office
for evaluation, we generated a breakeven chart analysis that showed a
substantial increase in profit contribution from the coffee machines because
of the improved quality through serving a higher grade of coffee, and with a
heavier gram throw. It was a simple question of the increased average per-cup
cost set against the resultant jump in cup sales.
The improved profit contribution from the
upgraded machines was dramatic, so much so that when I accompanied the vending
sales manager to the head office of the vending prospect, we were confident
that we had a persuasive argument for change.
The buyer reviewed our written presentation
briefly, then turned a to me and asked, "Have you seen our latest annual
report?" This was a public company, and I had made the mistake of taking
its profitability for granted, so I had not seen it. The buyer revealed that
sales the previous year had been, as I recall the figures he gave us, around
$40-million. Their reported pretax profit was something like $50,000, not a
very inspiring number.
Our proposal asked that he pay 10 cents per
pound more for the improved coffee. Quite apart from the heavier gram throws,
that represented, on one million pounds, $100,000 in higher product cost,
twice their last year’s entire profit.
With a look of hopelessness he told us the
obvious — he just couldn’t go to senior management with such a
proposition. Never mind the fancy breakeven chart analysis, which was true,
but not presentable.
He wound up the meeting with a plea for a
new proposal, staying at the present quality level, but lowering the price.
The problem for him, then, was to maybe save 10 cents more, for in his mind he
could see a doubling of the entire company’s profitability by so doing. And
that’s the way it would seem on the surface to top management too.
This is one of the realities of the coffee
business. People see what they are paying, but they have a lot more trouble
accepting that though higher quality, people will drink more, and that the
opposite is true also. As with all of life’s decisions, once made, one never
has the luxury of knowing how it would have been the other way.
Believing in the wisdom of higher quality
coffee, with all the benefits that go along with it besides improved
profitability, is one thing. But because coffee evaluation is so subjective,
merely changing the coffee in a vending machine, or in an OCS location for
that matter, is not enough. The coffee drinking customers have to be informed
as to what is going on.
They may realize the new coffee tastes
different, but they should be told the reason why; the desire of the operator
and location management to improve working conditions for the staff.
National coffee sales figures indicate that
we in the coffee business have a lot left to do in upgrading coffee’s image.
Vending and OCS is a great place to start.
© 1998 Stuart Daw
