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The price of a cup of..

Again, the topic of finance in the cafe world comes up.

Issues to be outlined in this post are: ingredient cost, selling price and staff pay.

I have drawn a lot on conversations I have had from other people in the industry. 

 

Ingredient cost:

In general, you can buy coffee from a speciality UK based roaster for cheaper than you can buy Illy etc. One will be freshly roasted speciality grade beans, the other will not. This seems odd.

When it comes to tea, a serving of loose leaf tea is cheaper than your 'quality' tea bag. Again, one is normally fresh,higher quality and with full provenance. Tea bags do have the added cost of bag manufacture, which is for convenience instead of taste.

The obvious question to be asked is, are wholesalers charging too little? The cost of green coffee beans is a lot more transparent than speciality tea. So is there a fear to charge more because of this?

I think it is good to be competitive with others, to a degree. 'Economics theory' dictates that you can charge whatever you want, if people are prepared to pay for it. Some roasters in the UK sell a kilo of coffee at close to £5. So, is what holds back roasters from charging too much, is that they know a competitor will be able to charge considerably less?

I can also buy loose leaf tea for $2 a kilo.

But we do not use these suppliers. We pay between £13 and £20 per kilo of coffee, and ten times as much for our basic teas. (speciality tea prices can go up to hundreds per kilo).

One of the problems is the low public awareness of speciality grade coffee compared to commodity grade. This is evident whenever you pass a bustling coffee chain. Why pay more when the public don't care? This is an issue that affects every speciality. We geek out over it, other people 'just dont get it'.

When it comes to tea, we have a similar problem. We buy what we love and what the farmers are proudest about. These command huge prices, but we are willing to pay. Knowing that you are buying picks of the season gives you confidence when dealing with customers. If someone comes up to the counter and tells you that they didn't enjoy that tea, you never feel bad. This is because you have performed your part of the bargain - by sourcing the highest quality tea you can. Price hasn't come into it and you haven't tried to palm off some basic tea to people kind enough to choose yours as a place to spend their money.

In summary, there is a lot of competition between businesses in this field. Once public awareness increases, speciality wholesale prices can also increase. If they increased now, then the number of customers for the wholesale company would probably decrease - which would result in no overall benefit for the company.

 

Cafe Pricing

Should we charge a lot more for our products? This question gets asked a lot. Would we be able to keep our staff for longer if they were paid more? Would higher prices on the front line allow roasters to charge more and in turn allow farmers to charge more? Would cafes be financially sound investments, rather than lifestyle business?

A lot of questions.

So, lets say we charge £5 for a cappuccino. Would customers pay? I don't think they would. Sure in some areas they would, but on the whole, no. I understand they do pay these kind of prices in nice restaurants and hotels. But I'm talking about all of this with cafes being 'everyday places', with people popping in a few times a week, refuelling on 'essentials' as opposed to luxury occasional spends.

When it comes to tea, you can aim to be a venue that attracts 20 customers a day, charging £10 per pot, and making money on retail sales of tea and tea ware. Or, you can have a cafe format, attracting hundreds of people per day, with a smaller percentage coming from retail sales.

Personally, I think that speciality tea and coffee should be part of everyday life. They should no longer be served just in 'boutique' places.

People say that the big chains charge more that independents for these goods. The chains are very good at setting prices. They are charging the maximum that they can get away with. The chains in this field can charge a premium because of the 'comfort' factor associated with them. We should not compete with them on price. We should be comfortable charging what they charge. Our points of difference should be noticeable enough for customers to realise what we offer.

There are added costs for good independents. I spoke about the costs involved with buying coffee. In a good cafe, the coffee is 'dialled in', to achieve a good brew/extraction. This involves changing the grinder settings and sometimes temperature settings. We taste, we decide, we change. this all uses up coffee. I would say at least 5-8% of coffee bought gets used up like this. This gets added onto the cost of the drink. I have never seen this happen in a chain. Everytime i see an espresso pulled in a chain, it looks terrible. Even without tasting it, I can tell that it hasnt been extracted well. I have never seen staff in these chains throwing away a bad shot of espresso. I have never seen them dial in coffee in between peaks and troughs in trade. Good independents do this throughout the day.

Customers often say, 'coffee only costs 15 pence per cup'. I hope all the above outlines why for a good independent this isn't the case. We havent even started talking about costs of milk, and in particular using fresh milk everytime, as opposed to reheating old milk...

 

So what should we charge per cup? Again, whatever we can get away with. If you are lucky, and in an area where you have no competition, or an affluent clientele, or a 'superstar barista', you can charge more. If you are doing the same s everyone else, using the same beans etc  - you will price accordingly. The time it takes to train a barista should also be taken in to account.

When we look at tea, the price can be determined on the exclusivity of the tea sourced, as well as the time taken to drink it. Pots are priced more than cups, and this has no direct correlation to ingredient cost, but time taken to drink.

 

Business sense

All of this leads onto staff pay, and profitability. If we charge the same as chains although our costs are higher, can we compete and grow? The obvious answer is no. Something has to give. We cannot buy as cheaply as them, and in many cases, we don't want to. We cannot expect to have amazing staff, and pay them less than what they would get in a supermarket. The option of increasing prices, when the customers aren't aware of the 'gain' associated with the higher prices is dangerous. Are we destined to be lifestyle businesses if we don't cut corners?

In my previous full time profession of pharmacy, we encountered these issues all the time. I remember doing a locum shift in a chemist shop. They had lost every single member of staff in one go. A supermarket had opened across the road, and they got paid more sitting at a checkout. with more flexible working patterns. This is despite the fact in pharmacy there is obvious career progression, education, associated wage increases. The staff just wanted less stress, an easier life. In cafes, we expect the staff to be as passionate as us. This may be asking a bit too much. This post is about profitability, and staff think on the same lines. They don't just want to be able to afford an iPad, they want to put a deposit down on a house. They are often young, educated and ambitious. They think bottom line, in the same way as we do.

So, do we pay more for staff? As stated before, if you can afford to pay, why not. Generally, there is the perception that great cafe staff should be paid more. My belief is that all staff should be paid more. The national minimum wage has been a step in the right direction, as well as compulsory holiday pay. But can we afford to have cafe  staff earning £30k per year? I would say not. This leads on to the famous problem of staff retention. We have had members of staff leave and instantly double their wage, by going to work in a good restaurant. This has not been down the increase in basic pay, but an increase in tips received. I remember when i used to work in restaurants during my university days. My basic was £4.50 per hour. On an 8 hour shift I would make £36 in wages. My tips would be between £40 and £100.

Speciality cafes need to embrace table service. We need to be different to the streamline systems that chains adopt. We need to give the customers a reason to tip. We should hide the till. Bills should be brought to the table. Whenever I eat out, I always round up when I pay. I am not for one second saying that tipping should be compulsory. I hated the system in the US where you felt compelled to tip. But, if the service is good, then you may deserve a tip. If service is routine, then don'd expect a tip. This in turn would increase the quality of service in cafes. If staff knew they could buy their iPad quicker if they smiled, they would smile.

Buying groups. In pharmacy we have companies that negotiate with manufacturers on the behalf of a number of independents in their group. Prices are much better than you could negotiate independently. I'm not sure how this would translate into the speciality cafe market, but in some areas it could work well. Milk is an obvious target product. As an independent you will always want to treat your suppliers as you would wish to be treated. This sometimes steers owners away from negotiating win-win situations.

In summary

Wholesalers should charge more, but only when they have effectively communicated to the masses why their product is better. For now, they should make it a 'no risk' situation to buyers.

Retailers should be comfortable selling at the same price as chains, and more if they can highlight their points of excellence well. If you walk in to an independent and the customer experience is the same as when you walk into a chain, then I would say you should charge less than them. Chains can often justify charging a premium because of high street locations and premiums associated with 'knowing what you are going to get'.

Staff should be paid more than they are. As stated, costs to independents are higher than those to chains. Costs of drinks shouldn't go astronomically up, as that would push speciality coffee and tea into the domain of 'niche'. Instead, we should encourage the tipping culture in places of excellence. If people like it, they will pay. This has obvious and measurable advantages.

 

Yeah, that's what I reckon..


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