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Single Cup Brewers and OCS© 2001 Stuart Daw The advent of single cup coffee brewers for business offices has created considerable confusion, not just for operators looking in from the outside, but for those who have already taken the plunge and are wondering where it will lead them. But if we have yet to learn all the answers, at least we should know enough now to ask the right questions. What are the current customer buying habits in coffee service and what, if anything, has changed? What can you do to provide a higher perceived value, and what can you charge for it? In the case of coffee service specifically, what motivates any company to have coffee in the office in the first place? Will buyers now be willing to pay more than the traditional five or ten cents a cup to have coffee right in the office? After all, we are in an era when specialty stores can charge $1.75 or more for a tablespoon or so of espresso. And can you protect yourself against being caught with pricing that is too low, and what kind of profit contribution should you expect from each unit? The answers to the price question may be clearer now than ever before. With today’s scarcity of good help and the high cost of recruiting, employers are desperate to get and hold people. They are willing to pay as never before for employee benefits calculated to keep them on the job. Many workers love to trot out of the office morning and afternoon for their mood enhancing beverage, taking a half hour each time to do so. "Gourmet" coffee right in the workplace may seem much less costly, especially in an era when, it is said, some executives pay up to $30 per hour to someone just to stand in line on their behalf. I heard this of Washington, where of course the bureaucrats’ time is too precious to be standing in line for anything. As to equipment, single cup machines of the class now creating all the excitement are still in the embryonic stage of development. They seem to be lying in a "no man’s land" between coffee service and vending, though so far the former seems to be paying more attention to it. In any case we have to await a clearer picture of all the variables in the equation before we can make solid predictions about the future. The industry mortality rate could be high if great care is not taken regarding entry or expansion in this field. There was a time when the line of demarcation between coffee service and vending was clear. Each method of providing coffee in office/industrial settings had its own set of economics, and the differences were easy to identify. One was coin controlled, the other was not; one was capital intensive, the other was not; one was able to gain and service customers fairly easily, the other was not. And vending tended to cater to larger accounts. Single cup is much more capital intensive than traditional coffee service, relating directly to equipment costs. How many generations of new models will appear before we reach the summit, and what will they cost when we get there? There are more than a half dozen types of these brewers on the market. New modifications and models are appearing regularly, so obsolescence becomes a factor and the old norms for equipment depreciation do not apply. Will the machine you buy today wind up back in the shop in a couple of years? Are you leaving lots of room in your coffee pricing to be flexible if costs and equipment obsolescence demand higher margins to cover shorter payback periods? And given another "Great Depression," how many employer paid coffee programs will be canceled, resulting in warehouses full of expensive used brewers? While single cup brewers can cost many times more than traditional batch machines, they are also expensive to locate. And remember that you will have to place some units more than once, and competition will make this a bigger problem as the market matures. They require a higher degree of sophistication on the part of service personnel, and while some models are reported to be relatively service free, others are proving to be extremely expensive . What is a good approach to protect yourself when it comes to pricing, given the high machine cost? Some operators rent machines to the customer, which is one way of hedging against obsolescence, as a customer commitment for 36 months can guarantee a decent location period. Of course in leasing machines to the customer, gross profit requirements on coffee are more modest. Selling prices for coffee are "all over the map." The cost of ingredients in machines not using cartridges is a much lower percentage of the selling price than in traditional coffee service, so the gross profit per cup is higher. In cartridge type units, because of high product cost a decent selling price can still generate good absolute markups in cents per cup, though the GP percentage is low. Given the cost of condiments including disposable cups, a cup of coffee from the top of the line cartridge machine can cost an office over 50 cents. Some units using bulk filled coffee can have installed a relatively cheap coin acceptor, but that raises serious pricing questions arising from lower volume Given that almost all operators have existing businesses into which these new single cup numbers are being merged, the best way I know of setting prices is through a simple break-even chart analyses for each and every unit going on location. First, estimate the "fixed" monthly cost of the machine in interest, depreciation, maintenance and service. Establish the per cup cost of ingredients and a hypothetical selling price. These last two are the "variables", variable in that they vary directly with each cup sold, whereas the fixed monthly cost of the machine remains constant.
To illustrate the point, just as an arbitrarily example take the cost for a bulk filled machine (as opposed to a cartridge type) including interest, maintenance and service, and not rented out, at $120 per month, with sales at 30 cents per cup, and ingredient costs at 10 cents. The break-even point would come at 600 cups (a 20 cent GP X 600 = $120). And at 1000 cups sold, a GP of 20 cents would make a profit contribution of $80. An actual break-even chart is a very handy tool in helping establish the right numbers. The chart above indicates where the revenue line intersects with the line showing the sum of the "fixed + ingredients" costs, as in the above example. If that point comes from more cup sales than you anticipate from a location, then draw a revenue line representing a higher price per cup, until you see a satisfactory profit level relative to anticipated cup sales. Beyond that intersection is the profit contribution, expanding with each incremental cup sale. Hoping that you go well beyond that point, we wish you good fortune in your profit hunt with the single cup technology. © 2001 Stuart Daw
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