|
BROWSE THE
SITE:
[Home]
[About Heritage]
[Heritage Coffee Canada]
[Vending & OCS]
[Specialty Coffee]
[Food Service]
[Green Coffee Buyers]
[Stuart Daw Reports]
[Business Resources]
[Coffee Humor]
[Helpful Links]
[A Few Coffee Facts]
Sales
800-791-7811
Fax: 519-668-1384
97 Bessemer Rd., #1
London, ON N6E 1P9
Contact Us
| |
[ Up ] [ How Much is Your Business Worth? ] [ Making it Buying, or Selling ] [ Of Coffee, Grounds and Percolators ] [ Prince and the Predator ] [ Profits and the New Tycoon ] [ Transactional Cost Analysis for OCS ] [ What's Your Price ] [ Where Do Prices Come From ]
Profits and the New Tycoon
© Copyright 2002 by Stuart Daw
Recent consolidations
taking place in vending and OCS make us wonder just how many small operators and
startups are left "out there." With the high demand for, and cost of
new single cup equipment, and with the obsolescence factor applying to old
brewers, the question arises as to how it is possible for the traditional
newcomer-entrepreneur to get started.
The major operators in each market are currently focused on single cup. The main
battle lines are drawn over which type will win the day, cartridge or bulk
brewer, and little attention seems to be devoted by these companies to
traditional equipment. Does that create somewhat of a vacuum at the lower end of
the sales spectrum for the little guy to slip in while no one is looking? For
even as the market for single cup moves toward a saturation point, there will
always be the small office customer that doesn’t warrant the high capital
cost.
The question remains: how many new, small coffee service operators are there
today? Where are the bodies buried, as it were? We don’t see them at
conventions -- maybe they can’t afford to go. Another reason we aren’t aware
of them may be the way today’s typical startup gets going. Given the plethora
of used brewers lying around, and the ease with which someone can walk into a
warehouse club and buy cheap nationally branded coffee and other products, the
temptation for some budding entrepreneur to venture forth may seem irresistible.
But it’s funny how the same old pattern is followed in these situations.
First, almost all OCS startups have been by salesmen. And nearly all were
salesmen who had experience with existing coffee services. In the literally
dozens of startups I have witnessed, I have yet to see one done by an
accountant. That might explain why the sales aspect of a startup can be going
quite well, while its operation as a business may be unknowingly headed for an
eventual Armageddon.
The salesman by definition knows how to get new accounts. He’s usually in a
hurry in his new enterprise, so price becomes his method of choice for getting
them. And mature services are less likely than in days of old to rush out with
messianic fervor to save their old pour-over accounts. He likely can’t afford
single cup units, so he’s stuck with traditional pour-overs and automatics.
Even so, the faster he places machines, the quicker he is building his business,
but he may be doing that building on a mountain of debt. For even without single
cup units, new equipment, of which he is bound to need at least some, costs much
more than it used to.
The new operator knows what his coffee and allied products cost, and he is
(hopefully) selling them for more than that. When he subtracts his materials
cost, equipment leasing and van expense, what’s left over seems to be his
profit. After all, he doesn’t have to pay for the space he uses in his own
home garage or for any of the support staff associated with a more mature
business. So any price he charges may seem okay to him. The extra number of
rejections he would get by asking for more might seem a waste of time.
The trouble often comes at around 100 to 200 locations, depending on
demographics, customer size, etc. Our budding businessman then needs that
inconvenient thing called overhead to allow him to service his accounts and keep
doing what he does best - acquire more of them. Rent, labor, telephone, and
other elements of overhead mean a lot of new expenses to cover. But his prices
may be too low, and the day often arrives when he can’t make his lease
payments. He has stretched his creditors to or beyond the limit. What to do? The
advice I would give to operators in this position is to always be aware of the
value the business will have to an acquirer. For as long as it is worth
more than he owes, he hasn’t yet reached that personal Armageddon.
To take a hypothetical example, let’s look at a business which is a few years
old but has been continuously mired in debt. Sales are running just over $50,000
monthly, so it’s not as if it were some recent startup. The balance sheet is
in bad shape. His liquidity ratio is seriously negative. His GP percentage seems
pretty good at first glance, but his average account size is small, showing the
need for higher prices. His income statement indicates a running loss of nearly
$5,000 monthly, and is larded with some expendable overhead.
On calculating the likely value of the business if he offered it for sale, and
given the current norms for evaluating these small companies, the indication is
that it is still worth somewhat more than its accumulated indebtedness. This is
thanks to the big savior of operations like this one -- its goodwill value.
That value represents the premium a buyer traditionally pays, representing its
own cost of acquiring new accounts, among other motives. And most buyers with a
large number of accounts suffer an attrition rate that makes acquisitions an
imperative for growth (e.g.- a buyer having 2,000 accounts with an attrition rate
of, say, 1.5% of his accounts monthly (18% annually), needs to replace 360
locations per year).
Time for our operator is running out, and the need to cut overhead and/or
increase prices is crucial. Only a few more months of such losses would use up
the difference between the value of the business and the amount owed to
creditors. The owner’s choice is clear: do what needs to be done and do it
now, or sell out before it’s too late. It’s a tough choice, and great
strength of will is needed if he "cuts the suit to fit the cloth,"
performing rapid surgery on expenses and responding to the need for higher
prices. Such a company needs to carefully plan its reforms, tailored to its
particular circumstances. Evasion of reality is not the way out. A keen
awareness and careful administration of the remedies is.
Long before the kind of problems described above develop, the newcomer needs to
understand the true cost of "service" in the words "coffee
service." For help in this respect, one can refer to the case history now
being taught in MBA courses in many countries. That is the "Transactional
Analysis" approach to cost-driven pricing, based on my own coffee service
experience. Click here for a summary of
this analysis.
|
