The Exchange: Episode 22 - The Coffee Roaster & Providing Retail Equipment - Part 2
Part 2 starts with Todd doing math and ends with Todd barely avoiding electrocution at the end of his career as an equipment tech. There's never a dull moment as Mark and Todd continue their conversation on The Coffee Roaster & Providing Retail Equipment.
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:
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, and this is Episode 11 of Season 2 and our twenty second podcast, Part Two of The Coffee Roaster and Providing Retail Equipment. In Part One, when we faded out on Mark, he had just finished talking about the types of formal agreements that should exist between roasters and the retailers to whom they provide equipment. Todd moves the conversation forward from there, and fair warning, he's going to do some math. And now here they are... Mark and Todd...
Todd: Yeah, you bring up a fantastic thing to consider for companies that are small, that are skeleton crews, that don't have the time and energy to be chasing AR, to be drafting contracts to get into the complexities of this and do the proper counterparty appraisal and really feel out the new customers as their onboarding. I mean, the extra work that it takes to really process and come to a conclusion as to how comfortable you are getting into business with someone that you're about to essentially finance their coffee program by placing equipment, you know, enter an elaborate agreement that even if it's terminated and you're contractually protected, is going to require lots of time and energy and capacity to follow up on. I mean, you know, you're in this place where the last thing you want to do is do that, and not only are you sort of out on the machine, but you're struggling to actually collect the money that you floated in coffee to boot.
Mark: Right.
Todd: So, it can be a mess if that's not something that you're ready to get into and you don't structure this side of the program clearly. I would say, one way that I've seen roasters kind of, I wouldn't say fall apart, that's overdramatic, but certainly a shortcoming and it causes a ton of confusion is when this side of their program is like very case to case.
Mark: Right.
Todd: If they don't essentially have... It's kind of like not having a single minded proposition in your marketing campaign. You know, if you don't have one guiding idea, if you don't have one structure to how you might approach policing equipment or providing retail equipment in your accounts, it becomes very wishy washy. The team that's executing has a really hard time, actually holding accounts to the line. And if everyone comes back to you just like at retail and says, "Hey, you guys should offer this," and you say, "Sure," all of a sudden there's very little predictable that becomes actionable when you're growing, and different people are responsible to actually get these different pieces of the puzzle put into place. So, something to look out for for sure.
Mark: Well, I think there're a ways to avoid this. A client I talked to the other day, they're a smaller, regional, roaster surrounded by, or in their mind, the people that they wanted to start taking accounts from were very large, very well equipped, very old companies. And he was asking me, "Well, how do I do this? How do I get in? How do I offer equipment to get my foot in the door?" And my answer to him was, "Go find another playing field," because you're going to lose against a company that owns one hundred thousand brewers, and they could just swap them out all the time. You're not equipped for this. You don't have an equipment guy internally that can go in and fix the equipment and maintain it. You're not selling equipment. You don't have a resale license for that. So play to your strengths. And in the case of these companies that you're mentioning that you're up against, what they have is equipment and what they have is cheap prices. But what they lack is high quality coffee. And what they lack is the baristas in the stores that you're wanting, that you're attracted by can't pour latte art, but they know that everybody's doing that. So offer them training, offer them, you know, higher quality products, consistent training, which is just your time at that point and encourage them to invest in good equipment that professional baristas use. So if they were given, you know, some free, cheap machine, well, you know what? Maybe you want to go buy something of very high quality and then we'll train you how to be great on it. That may be your foot in the door with that account. And that doesn't cost you anything because you're not selling that equipment. You could actually partner up with a distributor of equipment that sells these brands and say, look, I'm going to do some of these sales for you, and work out some deal with them. And then you can provide the training. And that is one way to do it when you're smaller and leaner and you're not equipped to be a bank to be funding clients as they grow.
Todd: Absolutely. Yeah. I mean, I think that the question is much more, you know, when to consider where you might consider financing equipment. When we've talking about brewing equipment, you know.
Mark: Yeah.
Todd: Strictly batch brewed filter coffee. Lower cost equipment, more low maintenance relative to espresso equipment. I just wanted to put out some numbers that I ran in preparation for our episode here that might...
Mark: I was told there wasn't gonna be any math tonight, Todd.
Todd: Well, I'm saving our listeners here from having to break out their calculators, so...
Mark: Ok. Good.
Todd: So that's the idea here. The case I want to make is that you shouldn't finance espresso equipment for your account.
Mark: No. Agreed.
Todd: In almost any case and for certain, if you are a lean, independent, growing specialty coffee roaster, just don't do it. Now we know one pound of finished roasted coffee is 454 grams. Follow me now. If you are brewing espresso from 19 grams of coffee, now this... You may be up from here. You may be down from here. I'm not looking to be completely true to every individual model. Adjust as you will for yourself. This gives you clean with zero waste. Ha ha ha. Which is not a reality. But if there were a zero waste environment, this would give you 24 shots of espresso per pound of finished roasted coffee.
Mark: Right. Which is not happening.
Todd: Which is not happening. But let's say that you have a relatively efficient model and you're 5-10% down from there. Either way, I'm basing this off of twenty four shots of espresso on 19 grams. That's out of one pound of coffee or 454 roasted grams of coffee. So that cut across at a shop that is putting across three hundred and fifty some odd espresso shots per day, that would be straight espressos, Americanos, lattes, cappuccino, et cetera. That's a fair volume. This amounts to 14.6, just over fourteen and a half pounds of coffee used per day. Now, if you are placing what is, you know, mid to high tier espresso equipment, it's not unlikely that you might be between the actual brewing machine, the espresso machine, and a good grinder for both the espresso and a decaf or maybe a single origin. You might be out $10,000 in this case. And that's probably not the furthest extent of it. I mean, if you're really at the bleeding edge, a lot of our listeners most likely are. And if they're not enjoying a significant volume discount with the machine manufacturer, which you're likely not, this equipment for one account that might be doing three hundred and fifty drinks or just under fifteen pounds of coffee a day is going to have you spending ten grand to get this equipment on the bar. Now, 10 grand, assuming you are getting a dollar out of each pound of coffee, it's going to take you six hundred and eighty five days of that consistent volume. If you are assuming one full dollar is going back just to the principle amount, the initial principle, no interest, no maintenance, no anything that that the real world, as you've well outlined prior to this this little math problem, you've given it to us what you need to consider, which is well above and beyond this. But even if that's just the hard principle cost of this investment at day one, that is going to take nearly two full calendar years to recoup just that initial investment. None of your training in time, none of your preventative maintenance. None of the additional parts and maintenance this way. So, you know, there's just in my mind with this type of of analysis available, there's really little to no reason why anyone should consider this.
Mark: Right.
Todd: And I think it's beyond advisable. I mean, it's really it's dubious to think that you might go down this road. It's the same as the wholesale roaster saying, "Hey, I'm going to open X number of shops in one fell swoop when cash is tight." And I mean, this is essentially why. So, you know, what I want to segue the discussion towards is well, what do you do instead? What are the opportunities for solving the problem? "Hey, this potentially fantastic cafe account needs an espresso machine and doesn't have the connections, How do I create value for them while solving that problem?" And one of the very first ways that you can is to recognize essentially how the espresso machine manufacturers have entered our market, and they use roasting companies as distributors. So there's very often, if not always, the opportunity to become a distributor, even at a very small size for some of these espresso machines that you want your brand aligned with, and that you want to get preferred pricing. You can pass that pricing at exactly your cost. And in the same spirit that you are suggesting in opening your books to a potential customer to show you where your break even is and justify what type of markup you need to add in the case that you do place a brewer, you can say, "Hey, what I'm going to do is actually give you my cost on this machine and come in and that's sort of a good faith. Let's meet here. I'm going to give you a chance to do not buy this at a sticker price MSRP, and you know, you go in with the same amount of skin in the game as I do, you know, coming in with your brewer. There are other ways as well. Have you ever seen or experienced or maybe this was something you did in some capacity, but there's also leasing companies, third parties that will finance equipment. And you can take that, you know, that sort of risk obligation out of house. I mean, that's something that you've had your hands in over the years.
Mark: Oh, yeah. I was a distributor for Nuova Simonnelli, and Lamar Zoko, and as well as Franke. I was selling a lot of super automatics to hotels and institutional manufacturing companies, computer companies. So I did all three brands and had to do a combination of everything you just laid out there. I did a lot of the "We'll sell to a cost and do the training and maintenance. But you have to lay this out and you own it." And we did turn them on to third party financing if we didn't want to do a cost deal, but we would make it worth their while to do that. I would say that that is a great... Those are great avenues for you to look down when you're pretty stable as a business. If you're new and up and coming, this gets very complicated very quickly. And you have to add a layer. If you're going to become a distributor for any of these brands, you're going to need an in-house tech that would be your equipment person. You're not going to be able to avoid that. So you have to be ready to develop that infrastructure, keeping parts on hand, and being ready to go do on-call repairs for your equipment. You have to be prepared to invest in that whole avenue if you're going to go do this.
Todd: Yeah. If you had a ballpark that figure just for folks that are on edge thinking, "Yeah, well, maybe that's for me." What do you speculate the investment to bring on or push someone on a team to even a minor specialization in equipment maintenance and carry the bare minimum necessary on hand part stock? And then was it something you felt where there was value in carrying an inventory of machines? Like, "Hey, I'll ship that to you tomorrow..."
Mark: No. Most of that stuff we ordered per deal, and we were able to get the machines sent pretty quickly. That was never an issue. When I did it, there wasn't a lot of... You just can't put an ad out for a espresso repair person or coffee equipment repair person and hire somebody. We actually had to send somebody to every brand we dealt with and got full training. I would say the super automatics were the toughest thing to learn. That was a solid six month investment in travel with all the airline and hotel stays to go for two weeks at one company to learn how to tear apart and rebuild a machine and then off to another city to go learn how to tear apart and rebuild another brand of machine. So there was a good investment. And then once that is done, and you have the trained person, it's roughly about $100,000 a year in cost to you between the the person, the parts, the truck you need to drive around, and just all of everything that surrounds having that end of the business. Now, you can make money at this venture very easily, because for people that own that brand of equipment, and in some markets, there're very few, if any, repair around. The hourly rate for a repair person is quite nice, and it can become a great avenue for your business if you want to go down that road. So it's not necessarily 100 grand out the door. You you do recoup, and you can be profitable in this venture, as well. But it does change the nature of your business. It does change the focus where your resources are going. It adds another layer to your company that you have to be prepared to take on.
Todd: Yeah. Having been at a time a Lamar Zoko tech, a Simonnelli tech. I went in for training at both factories and worked on plenty of machines and have been under many a counter. And I've flooded several cafes and certainly knocked out like power in a couple of places. {laughter}.
Mark: Sure.
Todd: But yeah, I do think it's a huge ask, and it's an opportunity that you can create out of it. But, man, it's not something to underestimate. And beyond that, it is an absolute requirement to have this type of in-house service so as not to open the door to someone else who does have it, and who is servicing your accounts for you indirectly, you know, where people start to see that value and start to drift in terms of their interests.
Mark: Right.
Todd: But additionally, I mean, you have to always bear in mind that when someone doesn't have a machine, I mean, they're not brewing coffee. So, typically you have to carry one or two loaner machines where you can take something out, and if it requires a few days of service, you know, you have something that you can leave them with in the meantime.
Mark: You need that because nothing's worse than trying to fix an espresso machine in an actually working, open cafe. You're just in the way. It's a nightmare. Pull the machine, put in a loaner, and get that thing to your bench and work on it there.
Todd: Absolutely. And it changes the whole dynamic. I mean, having been a tech in the field, I love doing that work in my workshop. In the cafe, it's a nightmare. And the best of techs still struggle just for mental clarity and the sort of space that they need to actually do the job right. When you know, they're not like having people like shouting at him for espressos and cappuccinos. They're like, "Yeah. And I don't even work here. Come on." {laughter}
Mark: Yeah. As the funny little side story, I had a guy that worked for me that I thought was perfect for this job. He was a musician, but he was somewhat looking for something more stable. And I said, "Look, this is something I'm willing to train you and invest with you on." And frankly, and I'll add this to our topic here tonight, because in many ways, repairing equipment is the safest bet you have as a business person out there, and in the Bay Area here, in San Francisco Bay Area, with I don't know how many thousands of cafes and roasting plants and wholesale coffee companies, there are two equipment companies that repair equipment from San Francisco to the Oregon border, which is unbelievable to me. And so when somebody would come to me and say, "I'm retiring, and I want to open up a cafe." I'm just like, {snore} I mean, oh, my God, don't. This is a boring story. Let me tell you another avenue you should go down, and that is maybe learning how to repair and sell equipment. It's not as attractive as having a cafe. But man, it's a sure thing. And man, you're never going to have a hard time making money. And if you decide you don't want to live here, you can take your tools and go anywhere in the world and start working tomorrow. Anyway... So this is where the story is. I train this person, I invested all this money, and I had a large hotel down in Southern California that had Titan Brewers, you know, the three gallon urn brewers. And I had six super automatics in this hotel. And we had a situation where three of the machines went down. They were doing, I think it was the Tony Awards or something. They did like Hollywood awards in this major facility. And the equipment went down and they said, "Hey, we need your guy down here immediately. We've got all these problems." I said, "Great, I'll get him down there. No problem." So he drives from northern California down to southern California. It's about an eight hour drive, and he's going to work all night. And I go to bed like, "Great. I know he's down there. He's starting his work." And he's pretty new to this, and he's down there and has basically an anxiety attack with the amount of pressure it is to work on equipment in a working hotel with people breathing down his neck, and everybody's preparing for one of these award shows. And the next morning I wake up, I go to work, and there he is sitting in my warehouse. And I said, "What are you doing here?" And he said, "I couldn't deal with it, man. I just left." He left the equipment completely open with wires hanging out and just drove eight hours home. He just didn't even think to call me or tell me what was going on. And meanwhile, the account calls me flipping their lid like, "Your guy just disappeared!" and he's sitting right in my warehouse. So, yeah, you have to have a certain stomach for that side of the business. {laughter} And he ended up becoming a great employee, but the initial trial by fire was not a good moment for me as a business person.
Todd: Yeah. I can totally empathize. I was in an open cafe. Lamar Zoko Linea...old, you know, AV, very like, the ones that went out in the initial Starbucks run that we always joke like, "Oh, what's going to outlast Armageddon? Okay. Cockroaches and Lamar Zoko Lineas." But I was in this open cafe in Boston, must have been forty five people, and I won't get into the details, but obviously, if anyone's listening in, you're at all, you know, tech savvy, and you've worked on these machines, I can tell you what happened off line. Give me a call. But, you know, one thing led to another. And I mean, thank God I didn't get electrocuted because 220 amps essentially grounded through this metal counter just on the fact that I didn't shut the machine off before starting with the work I was getting into. And so literally like, a lightning bolt grounded itself through the counter to the floor in an open cafe, and the entire place went black. You know, and this was the day that I was like, yeah, you know, I think I'm it just...I think I'm going to do something else. It's the things that you'd never think like that you would forget to do, whether safety or just basic, you know, step by step. This is the nature of swapping this part or whatever... When you're around people, and there's a myriad of distractions, you know, it's all bets are off. So if you do decide to go down this road. I know we're not talking about how to tech equipment, we're talking about providing equipment, but being that supporting your equipment in the field is absolutely non-negotiable, having an able and then creating a safe and workable space for that person, or persons...is completely essential.
Mark: Yeah, it's no joke. You can't do this on a shoestring. This has to be a real investment in your company.
Todd: Totally, and it's the type of situation where in hindsight, you know, I mean, thank God everyone was all right, but if I had my hand in the way of that... I mean, not only my personal safety, but the type of liability that the stakeholders in the business that I was representing, and the people who were essentially responsible for the space that we were operating in, and all of the ways that that would have played out would have just been horrible. And it's really, truly sobering to think about. So, you know, something to to really hammer home. Here we are, the coffee roaster and providing retail equipment... What haven't we hit? I feel like we're we're covering our bases pretty good. Mark, where should we bring it?
Mark: I think yeah, the final word is that, you know, there are ways to avoid any of these situations based on your size. And to me, it's always play to your strengths and then feed, or try to address the certain companies' weakness that you're trying to attract. And that doesn't always have to mean giving away free equipment. If you do get to that size, you understand based on what we've talked about, the infrastructure involved. But think creatively before you get to that point because you can get very far in your business cycle without doing that. And in a perfect world, I always thought it was crazy that, you know, you don't see the meat distributor giving away free ovens and you don't see, you know, like the bread company giving away free bread ovens. We for whatever reason, our side of the industry is stuck in this free equipment game. And if you can avoid it, by all means do. If you can be creative about it, by all means try. But these are just some of the systems that I did back in the day and some of the things that Todd has done. And but there're many ways to address this issue that many roasters have talked to. Talk to other roasters. See what they've done. Everyone in this industry I've found to be quite friendly, very open. And this is a topic we all struggle with. So it's something very important for us to be talking about and sharing information with everybody in the industry to see how do we address this in a way that makes sense, that keeps our businesses afloat, and doesn't jeopardize the safety of our staff. In the case of Todd, you working on equipment or your cash flow for your business, which you always desperately need to be holding onto.
Todd: Yeah, right on. And at the bottom line, I mean there's no free lunch.
Mark: No.
Todd: And I'm firmly confident that you are well ahead of the curve in terms of like being transparent around how this plays through a roasting business. I think that it's in the spirit of specialty coffee to be transparent. And I think it endears customers. And I think that small roasters would be wise to essentially open up what the picture looks like from their side, you know, and talk about really the shared risk opportunities that this venue presents for them and their customers. There's no way around the fact that this is a big expense. It's a critical expense. And I really honestly think, ideally speaking beyond just the business case for shedding the expense and letting your customer own it, I mean, that whole idea of stewardship and ownership is so huge when it comes to the role that this stuff plays on the counters that it sits on. And any way that you can can bring that back to the folks you're working with. I think is huge. So certainly something to keep in mind and try to push people towards taking literal ownership of their equipment. And yeah, you know, you can figure out other ways to excel and other ways you already are excelling and message that forward.
Mark: Well, perfect. There we go, another episode of The Exchange in the file there. Again for Todd Mackey, our producer, Mike Ferguson, and myself, Mark Inman, we thank you for tuning in.
Mike: You've been listening to business math and electrical safety for the coffee roaster and also The Exchange, presented by Olam Specialty Coffee, hosted by Mark Inman and Professor Todd Mackey, directed by Mike Ferguson. Our opening theme was "Coffee" by Josh Woodward. Our closing theme, "Coffee Hour" by To Hope. Thank you for listening. And we'll see you next time for our second annual Halloween episode, The Coffee Roaster and Scary Physical Defects. And now your Post-Script.
Mark: I need to have some consultation time with Ferguson. Look at that. I've never even seen an inbox like that.
