Spring must be here because our office is receiving inquiries daily about how to start or branch out in the coffee business. The questions are from enthusiastic and passionate coffee lovers. Since we probably can’t talk them out of it, we decide to prepare them as best as we can. The most important concept to grasp is this: It always looks easy on paper!
How often have you heard the following: “The profit margin in coffee is so big it is easy to make a killing!” If that were true we would all be rich. So, what makes it harder than it seems? The simple answer: profit margin does not pay bills, profit dollars do. With sales, usually at very small dollar amounts, the number of transactions has to be high. The more transactions you do the more infrastructure you need. The more infrastructure in place means less dollars left over in the end.
If you are considering entering the coffee industry, there are a few right ways and many, many wrong ways! The good news is that there are examples of success in every city and literally on most every street corner. A smart business planner would tell you to understand what you want to do and then go find an example of someone doing it to learn from them. But the first part of the suggestion is MOST important: Understand what you want to do in the industry.
To get to the heart of this key understanding, you should find a good coach in the industry to explain how things work on a macro level, as well as high points and low points of different business segments.
An example: You are a roaster and you want to buy a coffee farm to have a vertically integrated supply chain and cut out all middlemen to increase profits when you sell lattes. This is an interesting concept on paper, but requires expertise in several businesses in order to work. You now need to know farming and harvest cycles, green processing, exporting coffee, importing and warehousing coffee, roasting, retailing, and being a barista. I know of few people with the expertise to pull this off.
So how do you discover what you really want to do in the industry and not bite off more than you can chew? Here is a step by step plan:
1) Understand the supply chain and the ‘typical business units’ that make it up.
2) Find the business unit(s) that is of interest to you.
3) Define the scope and size of your business when you are ‘done’ and everything has worked out.
4) Break each business unit into a mini business and define the following:
i. Operating budget
ii. Personnel requirements
iii. Sample P&L
iv. Options to handle certain tasks internally or outsource
As you go through this process you will have a couple of realizations. First, you will see that there is a lot of complexity to the business you did not think all the way through. Second, you will find the things that seem fun and cool to you, as well as what looks like a painful endeavor. Hopefully you will see that you don’t know as much as you thought you did about the industry and running a business.
This is where you need experts on your side. They can either help you with the writing of your plan or review it when you are done. The great thing about asking for advice outside of your immediate business partners is that they have nothing to lose by being blatantly honest. They should also be able to get that extra detail into the plan that will bring clarity to you on what needs to be done.
Now the soul searching begins: This is going to be hard work. It’s going to risk a bunch of money. Many parts will be boring or uncomfortable. Is the good stuff and the potential profit enough to inspire you every day to make this work?
If you say no, then you probably just saved 10’s to 100’s of thousands of dollars.
If you say yes, then you have the mostly fleshed out operational plan and can go even further into the planning before committing the big investment. Continue to work with experts in the various fields you want to get into. Learn to avoid snags they know about.
In the end, you will have a plan that not only looks good on paper, but it has enough thought and depth to reveal the reality of possibilities and problems so you can go forward with a much higher chance of success.
Rocky Rhodes is an 18 year coffee veteran, roaster, and Q-Grader Instructor, and his mission now is to transform the coffee supply chain and make sweeping differences in the lives of those that produce the green coffee. Rocky can be reached at rocky@INTLcoffeeConsulting.com