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Coffee Profitability:
The Genesis of Profit Calculators


By John W. Starr

A few years ago we had a sales meeting at a nice hotel in mid-town Manhattan that caters mostly to business travelers. Our focus as an equipment manufacturer was on reviewing and refreshing the same fundamental themes we always address: quality, reliability and value. Value translates into making sure our customers are profitable and satisfied, and their customers keep coming back. In the coffee business, profitability over the past several years has been a given to everyone except the growers who produce the beans. When times are buoyant, those selling coffee sometimes take for granted just how good, “good” can be. And, conversely, in certain situations those paying for coffee beverages just sign the check because they were going to have coffee service for coffee breaks anyway, and in a hotel meeting room how much more captive could an audience be?

The point of this story is that following the meeting we noticed the coffee service charge slip laying on the serving cart and took a closer look. Not surprisingly we were staring at some hefty numbers. But then, with paper, pencil and a calculator we decided to break things down further, and the upshot is that the coffee we’d been drinking that morning priced out at $60 a gallon. Do the math yourselves at your next meeting and you'll probably come up with comparable numbers. Stunned as we were, we then decided to follow-up on that calculation and take a measure of coffee profitability at all the beverage dispensing profit centers in that particular hotel. All of the results were similarly amazing - whether it was served by room service, in the fine dining room, at the cafeteria, at the lobby bar, etc., coffee was generating extraordinary profits, way beyond what we felt anyone at the hotel probably realized. Needless to say, it was a time consuming but worthwhile exercise.

And that is the second point of this story. At most all hotel properties the food and beverage director can tell you within several decimal points exactly how much his coffee program costs. That’s because the pressure to control food costs today is non-stop relentless. But, what a great many, perhaps even the majority of F & B directors cannot tell you with accuracy is how much profit their coffee program makes. And this profitability figure is the number that counts.

Hoteliers have been in the dark about profitability because there was no quick way to measure it. So we decided to correct this situation by developing interactive, easy-to-use profit calculator software programs to enable any hotel manager to input the exact parameters of his or her particular property and instantaneously pull up the profit profile. This data is available for individual coffee serving profit centers and for the property as a whole. And that was the genesis of our BUNN Hotel Profit Calculator program.

Here's an example: Take a property with 400 rooms at 80% occupancy, with 60% of occupied rooms having only one guest. Then suppose that you have five coffee profit centers in your hotel: room service, fine dining, meeting rooms, lunchtime cafeteria, and convention meeting hall. Your assumptions: for room service 25% of guest rooms order average one serving; for fine dining, assume 30% of all hotel guests use this facility; for meeting rooms, assume there are six meeting rooms that are 80% occupied with coffee servings in the a.m. and p.m.; for lunchtime cafeteria, assume there are 200 guests with 50% ordering coffee; and for a convention meeting hall accommodating 500 people and used six times a month with one coffee break at each session. These calculations, tailored and updated to what the real situation actually is, provide your consumption parameters.

Then add the coffee cost per pound into the equation and adjust the cost to each serving venue. For example, the lobby bar may offer espresso with a special blend costing $11 per pound; whereas the lunchtime cafeteria may have filter coffee costing half that much, and similarly throughout the different beverage profit center locations. And then, just as the type and/or quality of coffee will vary per location, so too will the price, as noted from the meeting-room reality check mentioned at the outset of this story. In other words, we have put in the real numbers for volume, cost and price. In this case we then pull up profitability by location and for the property as a whole - and that total was $450,900 annually.

By itself, that is an impressive number, but it gets better when we incorporate a reference calculation to translate that profitability into terms the hotelier understands and deals with every day. First, how many guestrooms would have to be rented to generate the same amount of gross profit? Our program does that using his specific room cost. Second, what kind of payback is realized on his coffee equipment investment? Again the return is comparably astonishing. In our example the hotelier would have had to rent 3,500 room nights to generate comparable profits, and his payback on coffee sales was five days.

So what does all that mean? Well, it reassures us that we are definitely adding value to his operation...big time. Second, it brings a 32-tooth smile to the food and beverage director because now they know precisely how good they can be at bringing profits into the hotel! And third, it puts bringing the highest quality coffee into such obvious economic perspective that there is no reason to go with anything but the very best coffee and equipment. This validates the age-old theme that you run your business on how much you make, not how much it costs. That's certainly our quality and profit message, and the Profit Calculators provide an easy way to instantly bring any coffee profit questions or doubts immediately down to earth.

After creating the Profit Calculator software for hotels, we turned to convenience stores where the same need for making profit information available is just as immediate. Although in the case of c-stores, the comparable "value translation" usually is built around profit per linear foot of counter space or, in Japan per linear millimeter.... or less. So we created the Beverage Bar Creator that allows the customer to build their own equipment scenario as well as input volume, cost and sales price information specific to his store, then immediately calculate what the payback is on either his investment or his amount of dedicated real estate. This software program works for the largest as well as the smallest installations. One of the most innovative hot beverage programs in the industry, the 7-Eleven Modular System, in test at selected sites in Texas takes the full coffee menu to the max, including brewed, powder, flavored coffees - everything the consumer could want.

So How High is Up?
When you really know how much money you are making, and the profit calculators can show you on the spot, the cost of quality diminishes just as quickly. This sounds like validating a truism, but having the best quality pays for itself and now you know you can measure that. So, if we look to the present coffee profit situation in the U.S. and, by extension, around the world, it is fair to ask, "How high is up?” One answer is somewhere above the “Aspirational Plateau.”

The “Aspirational Plateau”: What's That?
A few weeks ago while wrestling with ways to approach writing this article, a group of us were in Glasgow at Matthew Algie's brilliantly remodeled headquarters when David Williamson said something very interesting. He observed that espresso and espresso-based specialty coffee drinks are now almost universally regarded as "aspirational." So the great challenge and opportunity is to do what’s necessary so that filter coffee can earn and acquire a comparable level of respect. In other words, if people come to think about filter coffee the same way they do about espresso, in terms of the quality of the product and the presentation, the taste and the ambience, then the profit potential for "regular" coffee can move up closer to the stratospheric pricing levels specialty coffee drinks now take for granted. I thought "aspirational" was one of those words that captured exactly what the situation required, especially coming from David, since to say he just “roasts” coffee is like saying Armani just “sews” clothes.

Once again this goes back to providing value for money and that goes back to quality. Hence the great importance of emphasizing and adhering to standards such as those always being promoted by the Specialty Coffee Association of America (SCAA), the Specialty Coffee Association of Europe (SCAE), or the Specialty Coffee Association of Japan (SCAJ). Everyone involved in the chain from seed to cup has to participate. Certainly from the equipment standpoint our efforts are focused on assuring the highest standards of brewing consistency, most recently via the introduction of our BrewWISE system. It allows all the brewing parameters to be pre-programmed on recipe chip cards that make it possible for a single outlet or nationwide chain to know the quality profile they establish is served uniformly at one or multiple locations.

Growing the Profits...
Sharing the Wealth

The business of business is achieving profitable performance that justifies shareholder investment. In the coffee industry, opportunities exist for record profits for almost everyone except those who produce the beans upon which everything else depends. As the trade is well aware, the current and projected outlook for coffee producing nations, unless they boost internal consumption dramatically, is the antithesis of the profitable market opportunities in the consuming countries.

There needs to be some balance in all this, whether through Fair Trade, green purchasing or whatever other mechanism might emerge to make sure the sourcing point for all else remains viable. Suggesting broad solutions to the problem is far beyond the scope of these comments - other than to say that it is self-evident that glaring inequities exist that will have to be addressed; pretending otherwise moves us into the mode of changing deck chairs on the Titanic.

Perhaps the best message is that the unparalleled opportunities we see before us to enhance profitability in the global coffee industry also give us an unparalleled wherewithal to make sure that enhanced prosperity extends all the way back to the source.

John W. Starr wrote this article shortly before his unfortunate demise in mid-December. John was an interested contributor to our magazine and we mourn his death and offer our sympathies to his family and assocites at the BUNN Corporation. Starr was the vice president worldwide marketing, managing director International, BUNN Corporation. The company can be reached at: (800)637-8606 or (1)(217) 529-6601. Website: www.bunnomatic.com


Tea & Coffee - February/March, 2004
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