The downside of cafe contracts

A real life example of how lock-in occurs within the cafe industry

In mid 2015, a cafe owner contacted us a few times over the space of many weeks. They were a husband and wife team being rather desperate and at the same time extremely frustrated, tired and upset at their existing coffee supplier. Well, let's say that their anger and impatience for change was being directed at their existing supplier

It's not a new or unique story, but worth sharing.

During the initial phone chat, it's normal to ask a series of questions from my qualification list. I explained on the phone it was important to ask these questions so that we can avoid wasting everyone's time. Questions like.....what supplier they were currently using, why are you unhappy..........have they done anything wrong........what are you looking for in a coffee and a supplier ?

The responses were normal and typical for cafe owners......the supplier had done nothing wrong, didn't let them down, but it appeared as though their business was not performing as well as it should. In one of the exchanges, I worked out there would be an existing contract lurking in the background and the owners confirmed but they did not know or remember the "essence" of that contract, e.g. term, conditions, etc.. So, I respectfully advised that it's probably not possible for us to supply and thanked them for contacting us.

Curiosity always gets the better of me, I googled up the cafe's address and the following week I happened to be driving nearby and decided to stop and stick my head in to order a takeaway coffee - secret shopper style.

Back to our initial phone conversation, the owners had freely admitted there were problems ever since taking over the cafe - it had not reached 70% of the revenue booked by the previous owner, across both food and beverages. This is a common problem for cafes changing hands - failing to achieve turnover according to the valuation of the business.

The owners had bought the cafe 18 months previously and may have paid what could have been a significant goodwill premium - as was and to some extent is still the practice for cafes being traded. Obviously, the more successful the cafe, the higher the goodwill that can be commanded. Of course, any good will element factored into a cafe valuation is not intrinsically linked to their supplier - but when the chips are down........the blame game invariably gets played.

Experienced cafe operators would look at many things - staff, product, pricing, service, competition, training, general ambiance, menus, marketing, attractiveness of the overall offer, etc, but for these owners there was no obvious suspect other than perhaps increased competition in their close proximity - but as we know, this excuse is all too easy to point the finger at or rely upon as the cause for a downturn in trade.

The cafe did have an existing contract with a Melbourne-based coffee company and in return for this contract, they were supplied a rather old, worn-out espresso machine and grinder, some wind barriers and umbrellas out the front that displayed their coffee company's logo and branding.

The harsh reality was that the owners were worn out and literally at their wits end. Working 7 days a week, struggling to make a profit and having difficulties retaining a decent barista and staff (the curse of hospitality).

Unfortunately, it's a similar story we hear every week all across Melbourne - except in the big shopping centres whereby there is enough trade for cafe operators to make a decent turnover. Elsewhere it is Struggle Street Cafe with a dream and a desire to lift their sales of coffee beverages.

The owners were lovely people - honest, frank and desperate for a ray of hope. Their coffee company had refused numerous requests over a long time since they took over the cafe for a machine and grinder upgrade because their weekly coffee volumes had declined. In fact, the coffee company had a few times threatened to withdraw the equipment altogether citing they were losing money on that account.

Since taking over the cafe, the owners had lost 3 baristas because the staff refused to work on the crappy gear. The owners knew how to make coffee, but they were not top skilled baristas and the cup was in my most polite assessment - barely drinkable. Ultimately, one of them had to be stationed permanently on the coffee machine in order to achieve some levels of consistency and this was a very sore point of contention - a prison sentence.

One thing that amazed the cafe owners was the incredible attention they received from many different Coffee Company reps each week. It was not uncommon to have 10 or more reps call into their cafe each week to inquire about the owners propensity for change. In the owners words......"all those reps, they are so desperate to sell us coffee - lots of samples".

Up until recently, the owners had brushed off advances by coffee company reps through a sense of loyalty to their existing supplier, however, this loyalty had been tested and they were now keen to consider alternatives. Like almost all cafe owners, they were astute enough to realize that coffee was a key profit contributor to their business, if only they could increase the sales of coffee cups - it was their #1 priority !

They eventually succumbed to a very persistent rep from another cafe supplier that was promising beautifully new, shiny espresso machine and grinder bling. They went through the change over process which took a day - new machine, new grinder, new logos and some basic training.

3 months later with the new supplier and the coffee sales are still declining at a worrying rate. The new equipment looked nice but for some strange reason a few of their regular customers had been feeding back hints the coffee was not good and certainly no match for the previous brand. The owners thought it must be a training or equipment issue and kept on engaging their new coffee rep for solutions that also included using different blends from the coffee company - here, try this one......it's a premium quality coffee.

After another 3 months of still not improving coffee sales, a relative of the owners took a pack of our retail coffee to their cafe to try and help them, or at least assist in identifying issues about why the coffee was not meeting the standards of their cafe customers. Allegedly, the difference in the cup was dramatic enough for the owners to contact us again to beg us to call in for a chat about the coffee.

In the car on the way to the meeting, I was feeling apprehensive again about how to tackle the prospect of yet another meeting with a cafe owner under contract with another company. However, I tried to keep a positive frame of mind despite predicting that the discussions would eventually lead to how much money I would be forced to invest in yet another cafe business with marginal prospects. Upon arriving at the cafe, I noticed the obvious changes from a few months previous - it was still a contract account but with a different company- signs, logos, equipment, etc.

After sitting down and explaining our quality philosophies, I stood up at the coffee machine to run through a few different coffees I had brought with me to trial. Whilst sipping on the coffees, with appreciative faces all round, I posed the question:-

So, you do realize that we don't provide equipment and these sort of non-coffee related ancillaries........

The husband and wife owners looked at each other and then responded....."but you must supply these".....how else do we make coffee or put the barriers and umbrellas up out the front. These are part of what all coffee companies must do...No ?.

Herein lies the problem we encounter all the time when dealing with cafe owners. I do my best to explain the key differences between types of cafe coffee suppliers, including all the investments needed to supply the trinkets (machine, grinder, signs, uniforms, cups, saucers, wind barriers, umbrellas, etc.). I showed the owners on a piece of paper what the typical cost of these freebies/trinkets would involve and their hearts literally sunk........all of a sudden the oxygen had been removed from their lungs and the meeting fell into an unexpectedly awkward silence.

The harsh economics of free-on-loan coffee supply are a deceptively simple concept at face value when you think about the short-term capital expenditure savings for a cafe owner, but a painful sting when the financial engineering is exposed transparently to show the resultant product that is being used to prepare beverages results.......is like the cafe owner boxing with 1 hand tied behind their back.

Capital is a precious resource for any business - regardless of the market or industry. Coffee companies have even greater capital and asset requirements due to the very simple fact that a coffee company is a manufacturer - warehouse, plant, equipment, compliance and significant investment in raw materials - literally up to 6 months of raw coffee inventories.

The owners had some big decisions to make and I did my best to help them understand the various options available - with the likely opportunities, risks and consequences. They had tried no less than 6 times over a 3 month period with their new supplier to improve the coffee but it was not working - ending in a constant circle of blame and finger pointing. They really liked the people they were dealing with at the new coffee company for the last few months, but the product was inferior for reasons they just did not understand and we do not wish to disclose here in this article.

The owners wanted to use our fresh roasted coffee beans with another suppliers equipment, however, I was quite firm in explaining the reasons why that strategy was both risky and short-term. Ultimately, the owners really did not want to deal with the problem in the correct manner and left it to fate - their supplier discovered they were using a variety of other suppliers beans and invoked a breach of contract, removed their equipment and accessories and left them without a coffee solution for 4 days - which crippled their business.

The cafe owners contacted another cafe coffee supplier and arranged the install of equipment and accessories to keep making cups of coffee, but in this case they heeded some good advice by not signing a contract - insisting instead on a 3 months probation period with terms to exit at 7 days notice.

In early December 2015, the owners contacted us again. Over the phone, I learned that they had experienced similar problems to the previous change with inconsistent and poor quality coffees and a rather gracious comment of acceptance in what we had discussed months previously. In the previous week they had arranged their own purchased equipment and ordered coffee from us for their cafe ongoing.

I'm pleased to report that after almost a month of running our coffee, this cafe had more than tripled it's average weekly coffee sales, despite some really hot weather in Melbourne. Their overall performance and feedback from their customers has been encouraging.

This was just one example of how lock-in cafe contracts might be convenient in the short-term, but should things not work out the way you had planned, then you have limited recourse. Obviously, sometimes their arrangements suit certain operations.

Today, more than ever in this over-saturated, competitive cafe sector the truly successful operations are those that have remained fiercely independent and sourcing the best possible product that suits both their philosophy for quality and more importantly can adapt to suit the ever changing taste preferences of their clients.