Are the signs emerging ?

mycuppa

I like to think that we care about our customers - whether they are existing or prospective.

As suppliers with knowledge and experience, we have a basic obligation to guide, coach, offer our best and most honest informed opinions in the context of helping our customers become and continue to be.......successful.

Every decent and long-term focused supplier does this - it's not a unique value proposition and the majority of suppliers think and act in the same ways.

For a while now I have been lamenting the state of a saturated cafe market here in Melbourne and how it's now a high risk, short-term game of build and flip (sell) at the peak because it will always ultimately trend down as new places open in the vicinity and customers drift via attraction to something new and different.

These cycles are now becoming increasingly and dangerously shorter with higher entry costs and lower goodwill residuals - or in some cases zero goodwill.

For clarity, I'm not talking about the supply side of the cafe market, e.g. roasters and distributors, etc. which have also arrived at the same destination - with perhaps similar implications - but the cafe outlet market that prepares coffee beverages for the paying consumer, e.g. the drinker.

On weekend mornings I drive past footy fields and there are numerous mobile coffee vans staking out their small patch of area in the hope of luring the parents for a cuppa - hustling for the best spot.

At almost every event now in Melbourne the picture becomes similar - coffee operators desperate for turnover and staring with daggers at their competitors a short distance away.

In the commercial estates where we work, the mobile coffee vans can be seen and heard trying to solicit customers.

Cafe owners are unhappy about increasing competition. It's not that they are greedy or selfish - they are just trying to survive.

Landlords rub their hands at escalating property prices and raising rent yields, cafe customers are addicted to the myriad of TV food shows and armed with their Urbanspoon, Yelp and Beanhunter reviews are only too happy to trash a business's reputation if they have to wait 2 mins longer than their patience can tolerate at that time, or the order was wrong in the morning rush.

The hospitality industry has been suffering from an acute staff shortage for a long time and this is reflected in service levels.

These days owners can not afford to leave their premises are are constantly running their eyeballs across the entire space to keep service running efficiently.

Sure, you can publish a vacancy online and receive a handful of responses very quickly, but it's generally accepted that the quality of candidates will be relatively low and inexperienced with core problems in hospitality labour of declining attitudes towards responsibility, commitment and loyalty.

You can see the staff churn everywhere and it's now accepted that to keep a good staff member for 12 months can be a rare blessing. Is it a pay issue, a pressure issue, a truncated career path or a work ethic issue.......who knows.

I had been looking at some retail space in Melbourne and needed to speak with an Agent because the property portals tend to have more and more listings with that annoying "Contact Agent for Price".

Before I could explain who I was and what I wanted, the very earnest and helpful agent stumped up this opening cracker "please tell me your not going to do coffee or a cafe in that space" !.

This opened up an opportunity then for me to have a bit of fun........

Me: "Geez, that was a good guess......I didn't even need to give you any clues about why I was inquiring and the space is not setup for cafe at the momentn - have you got special powers"

Agent: "It happens all day, every day mate.......every single bit of space that comes onto the market, I get 10 - 20 calls from people wanting to put a cafe or serve coffee"

Me: "really.......it is that bad"

Agent: "We are in XXXXXX road (a suburban road in Melbourne) and there are 38 coffee places within 70 metres and only 2 of them are coping"

Me: "Surely that is a good thing"

Agent: "not when they can't pay their rent and we burn so much time going back and forth between tenant and landlord. Everyone that makes an enquiry about a cafe for a space tells me they are different and their coffee is better and food will be superb....."

Me: "Sounds a bit delusional"

Agent: "Yes, everyone's coffee is the same - the people in our office just go where it's convenient and the food is reasonable"

At this point, the agent was still unaware of who I was, my background or my intentions......

Me: "OK, so that kills that idea........thanks for the information"

Your typical property agent makes money on signing up and then leasing premises - whether it's a winner or not - they want to close the deal and move onto the next transaction.

The episode got me thinking more about the current state of retail and whether this cycle has always been the case but just not as prominent - or did I encounter a person with a thoughtful or unexpected conscience.

For many cafe owners, beverages and in particular the coffee sales actually prop up the rest of their business - food is marginal or a loss leader at best.

What will happen to the cafe market - will it continue to grow, will it specialize into more pronounced and visible segments or will it mature into a commodity where price and cost overrule quality (e.g. Europe).

Brett H

What an incredible post Jeff.  Thank you! You've posed lots of questions that will never have tangible or at the very least, static answers.  Nonetheless your frustrations and lamentations are well-founded.  I think that if we added all the posts that mention the saturated market that's is coffee we'd be surprised (or possibly not) at the percentage.  A great business is a great business... Irrespective of the category, market or competition.  It doesn't take long to work out how a business failed after it fails.  Working out why they work when they work... well, answer that question.....  :thumb: Warren Buffett is everyone's favourite investor and all prospective cafe owners could do worse than read his baclklog if Berkshire Hathaway Newsletters.  The MyCuppa ones are up there too!

Lwowiak

10 yrs ago, myself and a group of friends and colleagues put some serious time and effort into an in depth business plan to open a coffee shop. Different offerings of food, pastries, bakey, chocolate etc were all considered. In the end we did not proceed. Since then the situation has got worse. Our reasons for not going ahead were simple. No return for our investment. By the time you paid wages, rent, costs, interest on borrowed money, and factored in the cost of a refit in ten years or less, the venture is nonviable. I do know many who have built the business into a profitable enterprise, but it involved a group effort, so huge hours were not compensated for. However, in every case, the rent was reasonable, or the property owned. Others nearby failed due to high rents. Having assessed a venture in an overseas location (for a friend), the stand out reasons for it being a worthy proposition is lower wages, and reasonable rent. Also lower fitout costs. In Australia, if coffee is $4.50 (average), then it requires at least 6-8 cups per hour to cover the cost of wages (true wages which include super, holidays etc) of the barista. In the venture mentioned, only 3 cups are needed. At local prices. In reality, a cup of coffee in a prime retail position, should be at least $6 or $7. A simple smoothie or juice starts at $6. A lot more cost and effort is required to make a good cup of coffee. I have said for years, our property boom has forced up wages and is slowly destroying this country. The cost to eat out has to increase if small business is to say viable. Commercial property is a very interesting market at the moment.

askthecoffeeguy

staff tenure is certainly a big concern for cafe owners as loyalty seems to be a thing of the past - also, having done briefing and debriefing before and after every service for a good while now (as well as providing responsible and constructive feedback during service as required) - I can tell you that a lot of young staff are either not used to receiving constructive criticism, or else they take it as an affront to their personal sensibility - and Ive seen staff walk for this very reason Sure paying more is one option and you get what you pay for, but given the relative shortage of capable baristas especially, you're pretty much competing on an even playing field, and some staff will still disappear at the slightest provocation At my last cafe we were turning over 55kg of coffee per week - but that still doesnt mean that we were making good money, after the tax man and everyone else has been paid it was still only pretty much a break even proposition Unless you're willing to work 100plus hours per week yourself, there's not really any real money to be made in im guessing 90 per cent of cafes - sure some do well. but believe me they are the exception rather than the rule quality service comes at a cost to the operator - so its either reduce staff and lower the service levels (and invariably increase staff turnover) or keep staff levels up and take a direct hit in the hop pocket not saying its a mugs game by any means but its definitely in most instances a labor of love... P

borat123

Lazy Gen Y'ss...  I can tell you it's not only the cafe industry suffering.  It's an unfortunate fact that many kids these days have a very difficult time adjusting to work life until some work ethic and 'attitude readjustment' has taken place. In my day we used to walk 50 miles before breakfast & all we had to eat was lard on a burnt bit of toast ...  Cough cough

Brett H

Right you are Borat.  Riiiight you aaaare!! Who'd a thought we'd be sitting here drinking Chateau Espresso... we ha it tough in the old days... I have spent my working life with young people and rest assured there are still plenty of the go-getters and hard workers.  I have a student who is a UMAT guaranteed entry to medicine and had the parental support and networks to be assured a remarkable career.  He is spending his holidays cleaning the bathrooms at the local hospital (part-time job) because in his chosen field he wants to know how the entire machine works.  He is remarkable but he's not the only one. I have as many good stories as you've got minutes to listen.  But will you hear about them in the media?  Nope!  Not until they make a public error and earn more than a footballer.

Lwowiak

Hi Brett, What is a UMAT guaranteed entry into Medicine? Depending on the Uni, GPA and UMAT are just some of the requirements. Passing an interview is the final step to receiving an offer at Griffith Uni, but the competition is high, thus high GPA and UMAT scores are required.

Brett H

I think I mean that with his score and projected OP along with significant other attributes I've never seen a better placed student for bonded-entry. I'm no expert however so my apologies for the presumption.

Lwowiak

Just curious Brett, that's all. My daughters, and many of their classmates are also vying for the chance to study Medicine. They have finished their degrees (or are about to) and the talk of GAMSAT, GPA's etc is rife in our household. I have had the pleasure of meeting and talking with many "potential" doctors. It is currently extremely cutthroat, but also very biased. Personally, I believe interviews should be mandatory to gain acceptance into Medicine. OP scores are outdated, and flawed. To gain acceptance into Medicine, maturity and and the achievement of a degree in a related pathway makes more sense. However, University Education is big business today. It does not train or prepare people for the real world. This is proven by the high turnover of employees in so many business sectors. Managing, training and retaining good staff (regardless whether it is the hospitality industry or not) is an under valued field of expertise. The Gen Y workforce is a challenge to many employers. I am watching with curiosity as to how Gen Y will manage people in the future.

GaryatGala

It is certainly a saturated market in just about every section of the coffee industry these days. Cafes come and go. The number of so called professional coffee roasters are growing by the week. And of course, the mobile coffee van industry is a low investment venture destined for failure if there are any shortcomings in quality, service and price. I was watching Jeff,s post, and happen to stumble across an ad on Gumtree (Brisbane) a franchisee attempting to sell his business at a low price. It mentions his displeasure of the franchise system and a warning to potential interests. I,m not one to promote doom and gloom, but perhaps it's worth pasting this as a lesson to those who want to enter a small business. ""I have been with this mobile coffee franchise for some time and I want to sell my this business. The franchise fees are too high which is ok for a few busy colder months but the rest of the year it's been hard to find enough business to be able to make a profit. Especially with so many other mobile coffee vans out there. The franchise agreement (5 years) is all in the franchisors favor, and recently I was forced to spend quite a lot of money on rebranding, even though I know it will make no positive difference to my bottom line, only more expenses. The customers don't care about branding they care about good coffee. This franchise is based in gold coast and is run by elderly couple. I was led to believe that this would be a profitable business, just like in the marketing documents I have but unfortunately it has not worked for me so I'm selling this business. Of course the marketing the franchisor gives you to make you purchase one of their franchises is purely based on hypothetical numbers not actual real so do your due diligence and find real figures. Be prepared to pay franchise fees, legal fees, delivery fees, admin fees, marketing fees, and everything in between. If you can make it work, you are good. I strongly suggest you insist on talking to at least 3-4 other franchisees before you buy my business, to get a good feel for if this is for you. you have legally right to get contact info for other franchisees from franchisor. unfortunately i cannot give the franchisors finance report because they didn't give it to me even though they have to according to the franchise code. No matter if I make profit I have to pay them hundreds of dollars every week, so I'm sure their finance report looks good. Steady profitable company. Marketing by these franchise businesses always say "great life style", "work your own flexible hours". it actually means working seven days a week, and mostly just to pay for franchise fees, stock and other fees. Working less and have more profit is not true! Only high profit for franchisor, not you. Also "exclusive" territory of course only means no other coffee van from same franchise, but there are many many coffee vans out there and of course they are free to operate in "your" area. Just misleading marketing. And for franchise you pay tens of thousands for this "exclusive" area, total cost with vehicle over hundred thousand. very bad. To buy my business you pay only little, around a third. Hopefully someone can make my business work, but I need to sell it because is difficult to make it profitable. Everyone says it's easy money, but no you end up working many weekends in addition to week days. "" I was saddened to read of this. But here is a seller who is brutally honest. On another note, a cafe I used to work for is about to sell due to it's owner is a interior designer who have not worked behind a coffee machine in her life, apart from taking part in a short barista course. The quality of the coffee took a dive and she went through quite a number of staff to rectify this. In short, she had enough of it and want to move to Melbourne to open another cafe. Oh dear! Too many people look at the bright lights and colours and think, I can do that, looks like fun. What they don't see is the hard work and the passion of the product that you need to succeed.

Brett H

You are absolutely spot on Gary.  There must be good franchise options out there but we rarely read about them on the interwebs and honesty is as reliable as the weather.  Seems this Gold Coast seller's advert is more aimed at getting the franchiser to act lest their name be mud.  The morality of this is at best a shade of grey....

FreshCoffee2

Yes, there is something going on behind the scenes and between the lines in that add, additional to the face value of it. I honestly dont understand why people go into van franchises, and my only experience is with my son's privately set up and run van. That really did deliver on the "promises" because he was a young, energetic, driven (to succeed), entrepeneaur fresh out of uni with no family or other responsibilities to worry about. He enjoyed the work, the time he put in, the flexible hours, working 7 days a week on his own terms, and the money he made, and it only really went pearshaped when it came time to move it on...and that is another story but also to do with coffee van business and what people expect, the type of people it can attract, etc. There is a whole psychology round that "industry". For the rest of it....Jeff is spot on, and that's the free market that is capitalism ! Hard to add to, but I woulo say work smart or get out, and anyone that doesnt have any experience in the industry needs to stay out of it and stop adding to the already enormous fragmentation, before going out the back door or forcing someone else to do so. What many dont realise is that the enormous level of competition through all levels of coffee business affects everyone and makes profitability harder and harder to sustain, and of course it brings with it extra burdens through bankruptcies. Poeple that go out the back door dont pay their suppliers, add costs to chase the money, they dont continue to pay tax and may even end up on a government pension. All that is taking from society rather than adding anything. There is a big picture out there. Australia is already a long time nanny state. May as well add a tier of regulation to "licence" people wanting to go into cafes/roasteries/green bean brokerages.  Anyone that cant satisfy the entry rules, shouldnt be allowed in  .

Brett H

Wonderfully enlightened big-picture post FC!  I hadn't thought about the macro-economic fallout of these failed ventures outside of the immediate personal and familial burdens. 

mycuppa

For the last 3 years I have done the numbers each month and get perilously close to building omni-channel models, but the numbers just don't stack up. It's impossible to cover costs. I just got off the phone to my very good friend who runs a similar business to us - roasting coffee. We go back a long time and always help each other out in times of need. We talked about how some of the larger players now in Melbourne are edging in on the 20 ton per week cycle and busting at the seams being unable to keep up with capacity. So, on top of the ones who do the Golden Arches coffee pumping out 45+ ton per week for Australia & NZ, you now have 5 other players about to hit the 20 ton per week mark each and a couple about to hit 10 tons per week. Begs the question, where is that 150 tons per week of coffee in fact going..........that is a mind-boggling amount of coffee from just a few roasters each week and players that are not always associated with the "specialty" end of town. Only a small portion of this is for the supermarket shelves. The remainder is for chains..........so whilst we might think the Australian cafe market is a rich, vibrant landscape consisting of thriving independent operators, it is in fact the chains that are growing the fastest and pumping out the volumes - dominating the market. It sort of makes sense actually - large investments, processes, systems, end-to-end life cycle management. I don't have any idea of the capacities coming from the Sydney market where you have Australia's #1 volume supplier, but this sort of output from just a few Melbourne businesses is huge and it's affecting both coffee roasting businesses and the cafes that are supplied by those businesses. In every market - the middle ground is always the first to yield. Specailise, Scale or suffer.