The Exchange: Episode 21 - The Coffee Roaster & Providing Retail Equipment - Part 1
Into the life of every coffee roaster the equipment question must fall. Are you going to provide brewing equipment to your wholesale accounts? Under what conditions? Mark and Todd tackle these and other questions in The Coffee Roaster & Providing Retail Equipment - Part 1.
Available on iTunes and Full Transcript Below
The Exchange is Presented by Olam Specialty Coffee
Hosted by Mark Inman and Todd Mackey
Directed by Mike Ferguson
All music is used under Creative Commons:
Opening Theme, Behind a Coffeebar by Identity
Closing Theme, Coffee by Professor Kilq
Email Mark and Todd with thoughts and questions:
Mike: Welcome back to The Exchange, presented by Olam Specialty Coffee, hosted by Mark Inman and Todd Mackey. I'm Mike Ferguson. This is Episode 10 of Season two and podcast number 21. The topic: providing equipment to retail accounts. A question and challenge that all coffee roasters face eventually. And now here they are, Mark and Todd.
Mark: Welcome to The Exchange, presented by Olam Specialty Coffee. I'm your host, Mark Inman, and with me always is my good friend and co-host, Todd Mackey. Todd, how are you doing?
Todd: I'm doing well, Mark. How are you tonight?
Mark: I'm doing quite well. It's a warm, I would say a balmy evening here in California as we're recording.
Todd: Oh, descriptive. That's awfully nice. So warm and humid. Is it typically humid in the evenings there?
Mark: No, not at all. It's usually a dry heat, but it's harvest season here. There's fog in the morning and then heat. So you're getting some humidity here. So it's unseasonably balmy and I guess is supposed to be that way for a while here, but not not too bad here in the office.
Todd: Interesting. Now, is this technically part of this... I've heard the term crush. Is that the season we're in or is that more of a moment?
Mark: Oh, yeah. No, no. We're fully into the crush now. I mean, it started about a week and a half ago, and this town comes to a screeching halt during that time. People that work in the industry are working, you know, 18-hour days. They don't go out. People will say, “I'll see you in November.” And until then any friend of yours in the wine industry is completely gone.
Todd: Got it. Now, for folks who might be interested in wine and don't live amongst the wine in a famous area, and busy working area like you.
Mark: Yeah.
Todd: What is the rhythm that you'd suggest in terms to consider around the business for someone who wants to do some wine tourism? Like if someone wanted to visit Sonoma. Is it now that you go because things are going? Is it after the fact? I mean this is something we'll get into. I believe in our impending origin trips episode, as it relates to coffee, but practically speaking, when does someone who's wine interested visit Sonoma?
Mark: Well, I mean they've got the visiting year-round here. There's no bad time to come here. I would say that the big markers are barrel tasting, which doesn't happen now. That's happening later, after the wine has been sitting for a while they're going to get into the barrels and taste it. So, if you want it is young wines, people come for that specifically. There are wine event weekends. Those are the big times of the year, and they're kind of spaced out every few months. So, it'll be like tours of Carneros Valley or the Russian River Wine Road. And in those particular weekends, you pay a flat fee of, I don't know, 50 bucks, and you get a glass and a map to a hundred wineries, and you could just go from one to the other. And it's, you know, thousands of people here at any given weekend doing that. Right now, this is if you want to see grapes being picked and all the bustle with the trucks moving around, people come for that. But there's really nothing for the wine tourists to experience during this time other than just seeing a lot of busywork.
Todd: Now, you must be busy. I mean, you have a side hustle going where you essentially are brought out to essentially raise your hand over the vineyard from the highest point and say a blessing of sorts, if you will, for the harvest.
Mark: Yeah. Yeah. That's my side hustle.
Todd: How do you manage all the all the moving parts?
Mark: You know, it's a lot to juggle this time of the year. I just... It's good planning. I keep a good day planner, you know, at the handy and make sure I don't miss an appointment. {laughter}
Todd: We can only all aspire to be more like you, Mark.
Mark: Yeah.
Todd: But let's... {laughter}
Mark: Well, you know... {laughter}.
Todd: Speaking of you, let's get into our classic opening segment here for...
Mark: Yes.
Todd: ...the coffee roaster and providing retail equipment. What is in your cup today?
Mark: Well, tonight's a special night. And I've actually taken some photographs live while I'm doing this and sent them to you and our producer, Mike Ferguson, to post on our... I don't know what page wherever we do our stuff on, but some page where you can see us, a picture of me drinking tonight. We had we had a submission by MoonGoat Coffee there down in Costa Mesa, California, Southern California. And they stoked us out pretty nicely. They sent two coffees. The one I'm drinking tonight is the Burundi Red Bourbon from Masanga Hill. And there's an El Salvador. It's, I think, a San Jose, a Pacas and Bourbon coffee, which I have not brewed yet. And he sent me his roaster curve, looks like from his Cropster. So, I can see how he roasted this. And an awesome I mean, no joke, an awesome T-shirt probably, you know, for a roasting company, one of the nicest T-shirts I've ever seen as a branding and marketing giveaway shirt. Very nice. Almost too nice. So, I'm actually wearing it.
Todd: Yeah nice enough that you're wearing it. I mean, that's no joke.
Mark: I'm wearing it in here in the studio. Yeah. My MoonGoat shirt, drinking my Burundi coffee, which tastes delicious. And yeah, it's a fantastic cup tonight. So, yeah, he did quite... You know, it's on the lighter end of the medium spectrum of the roast. Real good expression of the nice fruit notes. Good dark red fruit notes... Plum, some prune, some good dark chocolate. Swiss chocolate. Very well balanced. Great body. Just like a good nighttime heavy, hearty coffee. So, enjoying that quite a bit here while we record.
Todd: Yeah. That's great. So, I'm not drinking this coffee currently, but we receive the same care package, or similar, from Mr. Yardley himself and MoonGoat Coffee, which we are super grateful for. Shout out to David and team. But yeah, I mean, I would describe this Burundi coffee as quintessential in that the best way that you see Rwanda, Burundi and DRC coffees, you know, extremely sweet, chocolate driven, structured.
Mark: Yes.
Todd: And then really nice notes beyond the plum, jammie description you gave, which I absolutely agree with. There’re also these really nice, sweet, mellow red apple notes that I just absolutely love in coffees like this. So really well done. And awesome to have the chance to speak about it on air. I myself, I'm enjoying a can, as per the usge, though it has been a few... And I'm actually enjoying a beer that was gifted by another roaster partner of ours. This is Jacob Failla at Blue State Coffee out in Connecticut. They're obviously active roaster retailer throughout Connecticut, Rhode Island and up into Boston, Massachusetts. But I'm drinking Thimble Island Brewing Company out of Branford, Connecticut's Sea Mist, New England style IPA, which is...
Mark: Is Thimble Island, an actual place?
Todd: You know, it's interesting. I'd have to assume so. But I don't... I don't have... I believe it's it's a network of islands, if I'm not mistaken. I'll have to look into this. But there is obviously Long Island south of Connecticut. So, there's a lot of...there's a ferry network and a large fishing community that's out here. I believe the Thimble Islands are islands that's sort of spur off Long Island. You know, if it's the same sort of land structure, I'm not totally sure. But I believe it's a network and not a singular island. I'll have to look into that. And if there is ever a way that that comes back to discussion, I'll certainly bring it up. But certainly, grateful for this opportunity with the Sea Mist IPA, and it's crushable. So, I'm gonna stay with it as we get into The Coffee Roaster and Providing Retail Equipment. Whoa... Lo and behold, Mike Ferguson, our producer, comes to bat with the Thimble Islands and the designation. I am indeed correct. It's an archipelago of small islands in Long Island Sound in the harbor of Stony Creek, southeast corner of Branford, Connecticut. Obviously, Thimble being located in Branford on the mainland.
Mark: See, I thought it was a mythical island from Gulliver's Travels, so that shows you what I know.
Todd: Yeah. Well, the story would have been good. But Mike would have had you there. So, thanks, Mike, for the support.
Mark: Yes.
Todd: And yeah, it's certainly delicious. Jacob, thank you for the beer. But our episode tonight we're getting into is The Coffee Roaster and Providing Retail Equipment, which I think a lot of folks coming in in the small roaster space will have to appreciate, or at least wrestle with a little bit. If you haven't already run into this question in a sales call, you certainly will. And Mark, I'll kick it back to you since I've been talking for a bit here.
Mark: Sure.
Todd: You want to set the stage for how this has come up in your experience and maybe a little bit of the institutional history of what we're talking about here, in terms of pressure on providing retail equipment for potential wholesale partners.
Mark: It's funny that you bring that up because I just had a conversation with a client yesterday who wanted to go over this topic that he's struggling with in his particular marketplace. And essentially what it boils down to is when you're negotiating a deal with a wholesale client to have your coffee served in their location, if you're lucky, you never have to go down this road. But more likely than not, what's going to end up happening is, "Yeah, we like your coffee, we like the price, but the competitor's offering me a free brewer and grinder. What are you going to give me?" And you get into this tug of war with free equipment placed in their store to brew your coffee, and in the Bay Area here, in San Francisco Bay Area, it has been a real struggle for coffee roasting companies because it was the norm here for so many years. And to the point that people were giving away espresso machines and super automatic espresso machines. And before you knew it for a decent sized account, you were putting in 18 to 20 thousand dollars of free equipment to sell your coffee in their store. So, as a former wholesale roaster, I dealt with that. I had my own equipment repairman. I had my own... I was selling equipment as well. And I had to create various programs, a) to ensure profitability for my company and b) to try to mitigate the growth of this phenomenon in our territory, because no roaster really wanted to participate. But we all felt obligated to play because we were afraid the other person was outdoing us in some way.
Todd: Yeah. So, in light of that pressure... Before I even go here, do you have a sense of where this entered the market? I've always assumed that this was day one. You know, looking at the beer industry, you see obviously the long-standing history of large brewers actually financing full pubs. And the old architecture is throughout the country. You go into small locals throughout the Midwest, especially, and you see the PBR and Budweiser signs with the bar's unique name noted underneath. These stock signs that were stamped and pressed by the hundreds. And these bars were essentially outfitted by these large brewers as long as they owned the draft levers. Right.
Mark: Right.
Todd: This is essentially the same type of model. Do you know or is there any sort of oral history that's been passed down about this? Has this always been the way the businesses worked or was it something that someone introduced along the way as essentially an added value proposition that just kind of changed everything? Because it's certainly you know, when I got into selling roasted coffee twelve some odd years ago, this was the norm, and it really was the largest question. And we got it out of the way early in the meeting because if you know you don't want to go there, it didn't even matter to have any other conversation whatsoever.
Mark: Right. Well, I mean, my belief was that this came from the commercial coffee industry where they did do a similar program to the beer companies where you had the glass ball, you know, the glass carafe brewers that, you know, you did the bun brewers, but they had the glass and the glass would have the branding etched on of the whatever, you know, commercial coffee company. And they would give a brew station with five burners of a bunch of those glass carafes. And that was the deal. And a grinder, which wasn't really a grinder, it was more pour the ground coffee in this dispenser, and it dispensed the right amount of coffee per batch. And I think at that point, the companies were providing filters, the little dump dispenser that was portioned out, and the brewers. How specialty got involved in this, I think it was initially when specialty was trying to establish its foothold in all the marketplaces, was if you wanted to take the space of a commercial, in an old commercial, like a diner that was selling Farmer Brothers or Boyds, or whatever coffee in your marketplace, you had to match what they were doing to get your foot in the door. So, I think it's somewhat... And here in the Bay Area, that would be Peerless Coffee was a major one. Hills Brothers, Farmer Brothers... They were all giving all this equipment away. And then I think as specialty took off in his espresso got introduced into the market, it kind of warped that program because, "Well, that's a brewing piece of equipment as well, so why would I pay for that?" And the difference was that that piece of equipment costs considerably more than a normal drip brewer with just hot plate burners.
Todd: When faced with this question, we can take a look at it and essentially close the door and say, "Wow, whoa, whoa, whoa, it's not worth it." We could also take a little more critical approach and say, "Well, first, what are the positives surrounding providing equipment?" And if you're the coffee roaster who's growing, you're wanting to pick off post commercial accounts, let's say, for lack of a real, like, accurate designation. You're wanting to accommodate retail accounts that might be accustomed to having equipment. They might be actually tied to equipment. And all of a sudden, if they swap up to you. I mean, they literally have nothing to brew coffee on... What are the positives to you beyond just closing the sale? I mean, the first I think about it is quality control, the ability to actually reshape how the coffee is being put out. But, you know, what else do you see there?
Mark: In theory... I think that's in theory. That often never works out that way. But yes, I think that's the initial thing is you could establish your brewing parameters, and your style of brewing with that client to maintain your product consistency or your product quality. A prime example of that, that is probably the one that sticks out the most to me was Blue Bottle, when they it was somewhat reverse the psychology. If you wanted to sell their coffee in your store, you had to get rid of your brewer. You had to get rid of, you know, all of the brewing equipment that you had prior to and you had to buy pour over stations. And I think they were using Bonavita cones, if I'm not mistaken. But you had to buy their drippers, their drip station, and that's the only way you could brew coffee if you wanted to sell Blue Bottle. I don't believe they had any restriction on espresso preparation. But I have known plenty of coffee companies that require you to use a certain brand of espresso machine because that's the one that they train on. That's the one that they either sell or repair. But that's the one that this particular companies deem the espresso machine that expresses their coffee the best. So those are the requirements. Now, in many cases, they weren't giving espresso machines away. They may offset the cost or sell them to the account at a dramatic discount. But that's where I've seen that. I think the other thing is it establishes an ability to keep competition out, because the psychology is if you give somebody that much money and equipment, you're investing that much money in their place, that they're going to stick with you for quite a long time, and you could make your money out of that account. And that can work. And it also doesn't work a lot of the time. It depends on how you, as the roaster, set up that relationship. Yeah.
Todd: And you're leading to the question of the moment, right? Which is how do you set up that relationship? Because you are laying out a tremendous amount of cash with a huge amount of risk. And it's very insecure unless there's a super strong relationship. The assumption being if this isn't a brand new account, you're essentially coming on as a new supplier. What have you seen done that you feel like is the most responsible way to structure a contract or a supply agreement that actually makes this type of investment worthwhile?
Mark: Well, Todd, not only have I seen that before, I'm actually here tonight to walk you the audience through how to do this, because I created one of these. It was quite successful. And as you know, Todd, I'd like to get here pretty early before our show and prepare and have everything ready to bring value to our listeners. {laughter} So here's exactly what I would do. We created a formula.
Todd: Sorry, continue.
Mark: It's fine. We created a formula at my company, and it was through a dialogue with a client. First, you want to just start the dialogue with a client of, "Look, I understand that the norm here is equipment is provided. But to be perfectly frank and open and above board, you're in business to make money, as am I. That's how we exist. That's how we are able to do the things we do. So, if I'm going to make this investment in your company and to provide you coffee, I need to have insurances that I'm going to actually, that this is going to be a profitable or fruitful venture for me. And if it's not, it's too risky and I can't do it." And that, to me is the first litmus test, because if they say, "Well, I'm not going to sign any deal or lock myself into any contract..." I cannot stress this enough. Walk away, because that customer is the customer who's going to dump you as soon as they get a cheaper per pound offer. They get more equipment offer. They get some perk. They're going to have no loyalty, and you will lose money guaranteed one hundred percent of the time. So, if they're not willing to even entertain an honest dialogue and show the math behind this, just walk away.
Todd: Yeah. At the core, Mark, this is not a transactional exchange, right? You are signing a contract as the supplier, just putting the machine that is an open-ended continual investment, incrementally speaking, over day by day, by month by month, hopefully year after year. So, yeah, I think you're absolutely right. Continue, please.
Mark: So we would first go over the you know, how many pounds a week of coffee do you purchase? The account has an average that they say we do this much. OK. You work that in. So it's how many pounds per week average, we would calculate that and actually write it in the box, and you did the math in the contract. How much, you know, margin are you earning per month on this customer? The break even point on the investment of the equipment that they're requesting. So what's the total cost of the setup plus maintenance? You have to figure out maintenance costs in here because that will come up. And what's your break even point? And then what's your desired profit? And that's your term of the contract. So in a perfect world, you want to be breaking even within one year of having this customer. And, you know, then to me, I always wanted to double my investment. So I would make them do a two to three year deal to make this worthwhile. If they agreed to it, they would sign the contract agreeing to stay with me for two to three years. If not, they had to buy the equipment in full at full retail price. So there was a stinger if they decided to walk away that we would take them to small claims court and get paid for this equipment. At that point, they signed an agreement to maintain the equipment per a maintenance schedule. So we give them just daily maintenance, cleaning and maintaining the equipment. And then we would do periodic maintenance, replacing O-rings or sprinkler heads or, you know, whatever maintenance going...the putting the spring through the brewer to clear out any hard water deposits, et cetera. And that was the deal. So it was a very loose contract that was based on complete transparency, showing this is how much we make when we do sell a pound of coffee to you. This is where I break even. And so there was no mystery. And in many cases, that was a very fruitful way to do business. And these people were very loyal. The biggest catch that we were talking about earlier, where I was kind of saying, "Well, in theory, this is great," is you give somebody free equipment, but that doesn't mean they're going to take care of it. It's not their equipment. They don't own it. They didn't spend any money on it. And what I found before I started doing this contract is, you know, a phone call, "Hey, our brewer's brewing...your coffee just tastes like water. Come on in. Something's wrong with your coffee. You must be roasting it incorrectly." And you go in. You look at the brewer, you pull the basket out and the sprinkler head is gone. And it's just water coming out of that one hole and not brewing correctly. Where did the sprinkler head go? I don't know. It probably got tossed out when we cleaned it. And that kind of attitude just, "I'm not taking care. This is is my equipment. And if it's broken, you fix it." It was a nightmare. And it was just like, this is not what we're in business to do. These people didn't care. So you had to make this kind of formality and the structure around it, so they understand that this is a business deal. This is not just you're not doing them a favor and they're not doing you a favor by allowing you to sell your equipment in there. You're both in business to make money. You want their quality to be high. They want you to deliver good coffee and on time and when they need it and they need help when they have emergencies. And if you're both holding up both sides of the bargain, you both should be making money. So it's OK to have these structured deals. I would say not having these structured deals will be at your detriment.
Todd: For sure. For sure. Now, tell me, did you ever have to take action on.
Mark: Oh, yeah.
Todd: Like a terminated contract. So you actually ended up in court pursuing it.
Mark: Oh yeah.
Todd: What was the rate if you have to just shoot from the hip? I mean, if you put out one hundred contracts, you place equipment in one hundred accounts this way under this contract, how many did you actually have to act on when there was some breach of that contract?
Mark: It was far less than 1 percent. It really wasn't that often. Where it happened more times than not was in the early days when you're desperate for accounts and you take somebody, even though you have that kind of that red flag in your head. These guys don't seem too stable and they don't seem to know what they're doing, but they do decent volume. And those are the people that don't pay on time and they disappear. And I actually had an account that wasn't paid. And then I said, look, I need to come just confiscate the equipment because you haven't paid your bill in months. And every time I came by the cafe was closed, the door was locked, and you could see the person behind the counter hiding. And it was just this mess. And but that's you know, I chalked it up to my own inexperience and naivete, and I learned from that. And then once you really have your footing in business and you're, you know, stable, you tend to sniff out bad business quicker than not. I did have a couple examples of large, decent sized grocery chains that just went bankrupt overnight. And had no intention in paying their vendors, and those are the ones that it was even beyond small claims court, I mean, in one case it was like a seventy five thousand dollar claim I had to do. And it took me years in bankruptcy court to get paid back out. But on the other hand, I had accounts... I had large, you know, for a while... There are large out here in Silicon Valley, and all that dot com and the computer industry manufacturing facilities that I placed seventy five brew stations throughout that they were running 24/7. And the amount of coffee they were buying a week was just staggering. If that would have gone sideways, yeah, I would have been out hundreds of thousands of dollars. But you know, at that point, or even to this point today, these companies were just printing money. So it was a great deal for coffee companies out here.
Mike: You've been listening to The Exchange hosted by Mark Inman and Todd Mackey, directed by Mike Ferguson. Our opening theme was Behind a Coffee Bar by Identity. Our closing theme, Coffee by Professor Kliq. All music is used under Creative Commons. Thank you for listening. And we'll be back soon to finish the conversation on The Coffee Roaster and Providing Retail Equipment. And now your Post-Script.
Todd: Wow. Salty dog. You can tell Mike has to sit next to me everyday now. Hoof he gets tired of hearing me talk about sandwiches...
