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. A nice husband and wife team that had become desperate and at the same time frustrated, tired and upset at their existing coffee supplier because their business, a cafe, had been struggling and it was all they had.

It's not a new or unique story with similar situations playing out daily across Australia - but it is worth sharing if only to highlight some of the challenges in cafe supply.

During our initial phone chat I asked the standard series of questions whenever engaging with a new client, being careful to explain the reasons why it was important to ask these questions so we can avoid wasting time.

Questions that seemed innocent enough, who is their current supplier are why they had become unhappy. It's never about collecting gossip or trash on a competitor. Supplying customers is like any relationship where humans are involved - things can break down.

The responses from the prospective client were normal and typical for cafe owners. Importantly, it appeared at least initially that their current coffee supplier had done nothing wrong, nor had the supplier let this client down.

But what was abundantly clear is that their business was under-performing and with coffee being a primary source of income for the cafe, it was natural to suspect their coffee was somehow missing the mark with their customers and regulars.

To determine more about their supply arrangement, I asked if there was an existing contract between the cafe owners and the coffee supplier. The owners confirmed the existence of a contract, or what they thought was a contract but they could not remember the "essence" of that contract, e.g. term, conditions, etc.

It is important to fully understand the details of any contract that may exist between a cafe and coffee supplier as it is possible for a cafe owner to breach that contract and risk being taken to court for high costs. We have seen this a few times when cafe owners buy a cafe without undertaking proper diligence and then trying to change the coffee supplier only to end up with a $40K legal threat.

So, I respectfully advised that was not wise for us to continue discussions about changing coffee without clarification of the existing supply contract and thanked them for contacting us, offering to chat further once they were ready.

Curiosity always gets the better of me, I googled up the cafe's address and the following week happened to be driving nearby and decided to stop and stick my head in to order a takeaway coffee - secret shopper style, without introducing myself

Thinking back to our phone conversation, the cafe owners had freely admitted there were problems ever since taking over the cafe - it had never managed to reach 70% of the revenue booked by the previous owner, across both food and all beverages, including coffee.

Unfortunately, that remains a common problem for cafes when changing hands - failing to achieve turnover according to the valuation of the business or the stated sales history.

The owners had bought the cafe 18 months previously and potentially paid a significant goodwill premium due to it's location and existing turnover. Obviously, any good will element factored into a cafe valuation is not directly or intrinsically linked to their suppliers, however when trading is down there is a human instinct to blame many different reasons, e.g. staff, service, ingredients, etc. 

For these owners there was no obvious suspect other than perhaps increased competition in their close proximity with a couple of new places opening or renovating under new ownership. 

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 the coffee company's logo and branding.

The coffee I ordered tasted pretty bad to be honest and I am not going to mention the brand, nor the cafe. A harsh reality for the owners worn out and literally at their wits end with worry and stress working 7 days a week, struggling to make a profit and having difficulties retaining a skilled barista and staff (the constant curse of hospitality).

My heart went out to the owners, they were lovely people - completely 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 been decline.

In fact, the coffee company had a few times threatened to withdraw the equipment plus ancillary items altogether claiming they were now losing money on that account because of the decline (hard to be realistic when the equipment looked at least 6 years old).

Since taking over the cafe, the owners had lost 3 baristas because staff refused to work on the crappy gear. The owners knew how to make coffee, but they were not top skilled baristas.

Ultimately, one of the owners 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 - basically a prison sentence and preventing them from taking a break or doing other tasks as responsible owners.

The cafe owners told me when we spoke on the phone that they received incredible attention from various Coffee Company reps each week. In fact it was common for 10 or more reps to call into their cafe during the 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 free samples and plenty of incentives, but we have remained loyal and that is almost too difficult to maintain".

Whilst the cafe owners regularly brushed off advances from coffee company reps they were now keen to consider alternatives. They could definitely see that coffee was a key profit contributor to their cafe business, if only they could increase the sales of coffee cups - it became their #1 priority !

I followed this cafe casually as it was on my weekly route to another clients outlet. The cafe eventually succumbed to a very persistent rep from another coffee supplier who promised a beautiful new, shiny and top-of-the-range expensive espresso machine and grinder - pure coffee machinery 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 called us again to chat which I think was a way for them to obtain a 2nd opinion.

The cafe owners thought a decline in coffee sales must be a training or equipment issue and kept on engaging their new coffee rep for ideas and solutions that had also included using a different blend from the coffee company - here, try this one......it's a premium quality coffee, more expensive but because we think you are special, you can have it at the same price.

Another 3 months unimproved coffee sales and unknown to us a relative of the cafe owners had taken a pack of our coffee to the struggled cafe as a way to try and help them, or at least assist to identify where the coffee issues were occurring. Ironically, it was this relative of the cafe owners who encouraged them to contact us originally.

According to a discussion with the cafe owner, allegedly the difference between our coffee and the stuff they were using from another supplier was dramatic enough for the owners to contact us again and beg us to visit in for a detailed chat about how we could help them improve coffee at the cafe.

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. It's never easy or simple when coffee suppliers lose contract customers - so much emotion and anger, sometimes threats with reps accusing us of stealing and underhanded tactics. Often they will call and threaten to steal our clients as payback.

So I don't enjoy this element of the industry - it's undesirable and never fair or reasonable. 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 such as wind barriers and crockery and singage........

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...don't they ?.

Here folks is the core problem we encounter when dealing with some cafe owners that expect all the added elements that are not related to quality coffee - let's call them trinkets.

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 the equivalent of a 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 fact coffee companies are manufacturers with warehouse, plant, equipment, compliance and significant investment in raw materials - literally up to 9 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 properly understand because cafe supply was supposed to be "turn-key".

The owners wanted to use our fresh roasted coffee beans with another suppliers equipment, however, that is not a fair or honest practise, so I firmly explained the reasons why that plan was risky for them and us.

How this story ends is not a happy tale. The cafe owners really did not want to deal with the problem of an inferior tasting coffee in the correct manner and left it to fate. Their contracted supplier discovered they had used a variety of other brand coffee beans (a mix of freebie samples and some bootlegged) and that contracted supplier invoked a breach of contract, removed their equipment and accessories and left them without a coffee solution for 4 days - crippling 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 April 2016, the cafe 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 many months previously.

In the previous week they had arranged their own purchased equipment and ordered coffee from us for their cafe ongoing.

It has been pleasing to report that after almost 2 months of running our coffee, this cafe had more than doubled it's average weekly coffee sales. Their overall performance and feedback from their customers was encouraging.

This is just one example of how lock-in cafe contracts might be convenient in the short-term, or on the surface they solve a problem of owning and running coffee equipment, but when things do not work out properly, then contracts afford limited recourse. 

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.