If you’ve started a business, or have thought about starting a business, then you’ve probably created a very specific spreadsheet. It’s the one that tells you how much profit you’re going to make. It is, I suspect, lying to you.
If you’ve started already then chances are you’ve worked out that your spreadsheet lied, and it was probably a dispiriting moment, a frustrating or one that felt like a blow to the stomach.
I hated writing a business plan. I hated it all the more knowing that the people who read them mostly don’t care, they just want to see that you’ve done the work. It is very easy, in the nascent stages of a business idea, to create this spreadsheet. You’ll start by working out roughly what revenue you’ll make. You’ll factor in costs, and find yourself with a reasonable gross margin, you’ll add some staff, rent, rates and the rest. Likely there’ll be a nice little sum of net profit to show for your future hard work. If there isn’t much profit at the bottom of the sheet you’ll do something we’ve all done: slowly massage the numbers to work out how you could maybe make a healthy profit. It goes from being a prediction (which is how you’ll continue to think about it) to being a near-impossible challenge (you won’t think about it this way).
One can write a sensible looking spreadsheet for just about any business model. Revenue will seem realistic, costs fair and the outcome very positive. This is the spreadsheet that lies to you.
The most successful operators don’t trust this spreadsheet. They bring it to meetings before they open their business, to have people try and work out where the spreadsheet is lying to them. They want to find out where the realistic goals actually lie. They don’t trust it, even a little. These people are few and far between because, to many people, a realistic prediction is very difficult to work towards at the early stages.
I’ve said often that there has never been a better time than right now for speciality coffee. It has never been better – as a raw product, a roasted product or a drink. I’ll also say this: there has never been a more challenging time to open a speciality coffee shop or roastery. There has never been more competition than there is right now for the customers that you want, those people your spreadsheet assumes will immediately, and happily, stop buying coffee where they usually do and switch straight over to you.
I still have spreadsheets that lie to me. I can’t help it, I’m an optimist. Over the years they’ve morphed into budgets and have been refined and tested regularly against the real world. I believe the world of accounting, especially cloud-based accounting, has changed enough that every business should be benchmarking their deceitful spreadsheets against quarterly management accounts. The model must be updated, and the numbers you want to massage to fix the profit problem actually tested in the real world. That’s how the little lies of the numbers may come true.
I quite enjoy writing these end of year posts. They’re more fun than the predictions posts I used to make in the past, sort of…
Words written on the blog: 15,575 (2016) Vs 18,376 (2015)
I wasn’t surprised that I wrote less this year. I actually posted more often, but there were a bunch of shorter posts (which I will come to later). Looking back I’m actually really proud of some of the pieces I wrote this year, and they’re amongst the most read things I’ve written. Here’s my own top ten, in no particular order:
Lightness and Darkness in Roasting
The Problem is Delicious is Easy
Automation and Espresso
Are We Sure About Pastries?
When Speciality Stops Being Special
A Challenging Idea About Speciality Coffee
The Cafe Reviews I Wish People Would Write
Coffee is a Dead End Job
Is Coffee Getting Cheaper
Coffee and Opportunity Cost
2016: A Year of Finishing Projects?
Last year I wrote that I wanted to finish a bunch of things. I’m not sure if that is true, but it was definitely a year where I did a better job of closing out certain things:
Cascara Chocolate: I look forward to seeing what people do with this in 2017. There’s a video, and also a blog post, about how to make it and I hope more people experiment with it. I know a few people are working on something, myself included, but this was a challenging and frustrating project for me and one I was happy to finish!
Longberry: I was really pleased with Issue 2. I thought it was entertaining and challenging. I have no idea how often we’ll release these – it is hard for the three of us to find the time, especially when it is a pure passion project. There’s still a few left if you’re curious, or if you want to resell…
Coffee Variety Timeline Family Tree: I had had this in my head for a couple of years, so was very happy to final produce and ship this. Thanks to everyone who posted a photo and tagged me in it – I love seeing this stuff! They’re available here.
Coffee Jobs Podcast: Technically this isn’t quite finished, there’s one more episode but I need to re-record it because of sound issues. It’ll hopefully be a little January bonus. I don’t really know how I feel about this project. I think I hoped it would appeal to a wider audience than it did. With limited time it is important to spend it where it makes a difference, and if I personally hadn’t gotten a lot from the project, then I don’t know if this returned the time and effort I put into it. If I do a second season in 2017 I think the format will change quite a lot, we shall see… You can listen to episodes here.
The Newsletter: Again, this isn’t a finished project. It is still on-going, if a little quiet over the holidays. This one has been tricky to balance. I like to read a lot, and thought it would be fun to share things I found interesting or relevant. The feedback from people has been very positive, and I love that people send me things to read now! You can sign up here, I’ll email you a few things to read every couple of weeks.
The jimseven Book: This is happening, and sadly wasn’t wrapped up in 2016 but should be done in early 2017. Here’s the deal: I’m printing physical copies once. There’ll be preordering, and some fun stuff. I’ll print a few extra but then it is done. There’ll be a digital version. It’s structured to be an organised best-of-the blog covering up to the end of 2015, having been better edited, updated and formatted. The cover is designed, page layouts pretty much complete. Just printing and shipping. I’ll post more here when there’s news.
The Youtube Channel: As I said in the most recent video, this wasn’t about creating a vlog. It was about learning to make films. I’m still at the very start of that journey, and I’m looking forward to working on different kinds of films about coffee. It’s been personally challenging, in a host of ways, and as such one of the most enjoyable projects of 2016. You can see my videos here. (If you just want one then I’d recommend the one I made in Huila, it is the best thing I’ve done yet I think).
Plans for 2017
The newsletter, podcast, youtube channel and a few other things all kicked off around the same time. It turned out to be pretty demanding to do these things, while also doing the various things I do for a living (a lot of which I don’t ever really talk about here). It has resulted in a little creative burnout for me. Part of my recuperation is going to be time away from social media. I’ve obviously been uncomfortable with my relationship with this stuff in the past, hence my previous digital sabbatical. So twitter, instagram, facebook et al will all go dormant for a while. I don’t like the way they so easily drain my attention, and how easily I can waste time on them.
I may still write a little on here, and I plan to release a few more videos in the next few month (of a different nature to most of my previous stuff, more instructional).
There is a lot planned for 2017 already, with SQM, with espresso machine development, with Coffee Jobs Board and a lot more. However, I’m going to be narrowing my focus in a couple of areas. I want to apply myself fully to work that I think is important and valuable. I look forward to sharing that work in the future. Thanks for reading, sharing, supporting and teaching me things. I hope you have a great 2017.
Ordering the pâté in a restaurant is an interesting thing to me. It tells me a lot about a chef and the empathy within the business. This has nothing to do with ingredients or preparation. It has to do with toast.
All too often I get to the last few bites of the dish, and more often than not there is not enough toast left. The last few mouthfuls are scraps of toast, piled way too high. It is a little bit frustrating but it also tells me whether any actually ate the dish before putting it on the menu. Not tasted it, but ate it. Start to finish. Sat down like a customer and finished the whole thing.
More often than not dishes like this get tasted, and then plated in a way that looks nice. However, the ratio is a total giveaway of whether they’re thinking life chefs or like customers. Another classic example is sending out a sharing plate with five of whichever item on it. Each one alone tastes very good. The plating of five looks generous and attractive. However, for sharing it is one of the worst numbers – how often are there ever five guests at a table? Nothing divides well into it, and so you sprinkle in a tiny bit of awkwardness into the dish, and into the meal.
Restaurants aren’t the only businesses guilty of this. Coffees only cupped by roasters, but never brewed and drunk to the bottom of the cup or pot by the same QC team. Espresso that is enjoyable for a single sip, served as an overwhelming and unnecessary double from a naked portafilter.
The bar on which an espresso machine sits can easily become a divide between us and them. We stop thinking and acting, eating and drinking, ordering and paying like our customers. The single taste is an assessment of a single moment, and we’re all trying to offer a lot more than that.
While I’ve been playing around learning to make videos over the last few months, I haven’t really posted them here. I thought sharing this one would be fun. I spent 5 days in China (I’m currently in Japan, heading to Auckland tomorrow) and it was a pretty intense experience. Getting to share the book like this (I hadn’t really done much touring to promote it) makes me want to do more stuff like this. I am scheming for the start of next year…
The video is really just supposed to be a bit of fun, and perhaps a vague answer for people who want to know exactly what it is I do for a living…
The historical data for coffee pricing causes me some headaches. The C-Market price for coffee is currently about $1.55 per lb. Looking at historical data, you can see that in February 1982 the price of coffee was $1.28 per lb. So, in the simplest terms, you might see coffee as being more expensive now. The important thing you’d be forgetting is inflation. A dollar was worth a lot more in 1982 than it is today.
The fact that the price of coffee per lb hasn’t really risen with inflation has increasingly bothered me. I decided to dig a little deeper into it, and take the monthly price for C-market coffee going back to 1980 and to adjust it for inflation.
Inflation calculators are going to be a little unreliable, but I think they’ll prove the point. I checked the numbers with a few different calculators online and they all seemed to agree within an acceptable margin of error.
The graph below is the price of coffee for the last 36 year, against the price of coffee back adjusted for inflation. If a dollar was worth twice as much in 1988, then the price for coffee that year would be doubled, so that we could compare it against today’s pricing. I included simple linear trend lines on both graphs.
Interestingly, the trendlines tell two very different stories. One implies a small increase in the prices paid for green coffee, while the other suggests a significant decline. It also puts into context the previous price spikes, suggesting they were far more dramatic than we might have thought.
The World is Shrinking
This is not to say that the financial models in the world of coffee in 1980 were the same as today. In theory, farmers might have been earning comparatively more, but costs would also have been higher. For example, fertiliser would have cost more historically. In searching for historical data on this topic, I came across this blog post. Here’s the pricing of fertiliser before and after adjustment for inflation.
While increased costs did play a role, and this is just one example, we can’t ignore the fact that growing coffee is a less attractive profession than ever. The greying of farmers most definitely applies to coffee farmers too. The average age of a coffee farmer is around 56 years old. It might have something to do with the fact that it just pays less well.
This is overly simplistic. I have included cost of living in various producing countries, I haven’t looked at the quality of life for coffee farmers historically either. There isn’t much data on the financial model of running a coffee today, let alone 30 years ago. I have no idea on whether data on the profitability of growing coffee over the years even exists. I doubt it.
What about retail?
There isn’t a lot of data about the cost of a cup of coffee, and even now I’d say it is pretty hard to tell say with any certainty what the price of a cup of coffee is today! However, the ICO do publish a retail price per lb in the USA, and that data back to 1990 is freely available online. I took those numbers, adjusted for inflation again, and had a look at the price per pound.
I didn’t use the C-price of arabica for this graph, because arabica isn’t necessarily what all that is going into those retail bags. I used the ICO Indicator price, that is a composite price of all coffee sold. This is why the spikes in price are less dramatic.
So far, not so interesting. They look like they track with each other pretty well. You’ll notice a slight time-shift, where sometimes changes in green coffee pricing seem to kick in the following year. I would presume this is down to the significant stocks held, and forward contracts bought, by the sort of companies whose products make up the bulk of the ICO’s retail pricing measurements. Once adjusted for inflation it would appear the price of a bag of coffee has been relatively stable.
I did want to look at it another way. I was curious about margins, and how they moved. The true cost of goods for products like these are always going to be pretty opaque, and so this next chart is pretty simplistic. If the price of coffee was $1.00 and the retail price was $5.00 then the multiplier here would be 5.
The simplistic reading of this graph would be that when the red line is high, there are high margins in coffee. Again, this is simplistic because of the stocks of coffee, and forward contracts. However, when the market hit its low in 2001-2002 the margins look very good. Coffee didn’t get commensurately cheaper. The nature of competition would ultimately drive prices lower over the next few years, but they don’t bottom out until 2004. (Whether the consumer benefits from there always being someone in the market willing to be cheaper/to make less money is a separate topic). Equally, it looks like coffee companies tried hard not to raise prices until absolutely necessary during the last price spike a few years ago.
I wish I had older data (I have a request in with the ICO, but unfortunately I can’t justify spending £250 on the data for my own satisfaction and interest…) to see how it looks between the 1960s and the 1990s. I think the limited data I have doesn’t really give too much clarification to the question I’m asking.
We live in a world where everything is getting cheaper. That doesn’t mean that this is necessarily a good thing. The USDA has interesting data on food and inflation, as well as spending vs income. I don’t think I can really draw any hard conclusions, even if the prices paid for green coffee (once adjusted) are declining. I think it is far to say that coffee may well be less compelling as a crop for farmers than before, but then farming as a whole may be less compelling. Price competition in consumer markets applies pressure, and so the desire cheaper food, or cheaper coffee, ends up being passed right down the chain to those who ultimately bear the brunt of that pressure: the farmers.
Speciality has long considered itself immune to this, but that is changing. At some point soon cafes, and coffee roasting companies, are going to turn to pricing to be more competitive as they have to fight harder and harder for customers. This ends up being briefly good for the consumer, but ultimately results in less diversity, less choice, and lower quality – and that’s before we consider the impact on the supply chain.
UPDATE: An interesting link to an Economic Sustainability Report [pdf] from the ICO, shared by Thomas Copple on twitter.
UPDATE 2: Another great link covering the historic price of a cup of coffee, thanks to Pascale Schuit on Facebook.
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