Reply to KJ Comments!

KJ posted the following, and my comments follow...


KayJay has left a new comment on your post "Long time, no updates…":

Hi JD!

Your blog has been tremendously educational... I just spent six hours reading it from the very beginning.

I've been researching the coffee business for the last three years, and have several years' experience in food service management (I love it, actually) -- and although I've yet to own my own place, a few things jumped out at me as I covered the last 18+ months of your life in a short span of time. Keep in mind, I have no experience at running a coffee house, obviously, so YMMV.

1) You listed your COGS as 40% for your first year of operation, and were satisfied with it. Every forum, book, or website I've read recommends 30-32% COGS, maybe 35% maximum. Cuts can be made in sourcing product, or prices can be raised. As you said earlier, food costs have skyrocketed; no one expects a business to absorb it all, and raising prices once or twice a year may be scary (for you) but regular customers will bounce back. Are your prices in line with your competition's?

2) You stated several times you have yet to do "advertising." Again, that's something that could have made a difference in the past months, and can definitely have an impact now. If you have 80K cars passing by your shop every day (one way? are you on the morning commute side?), but getting less than 200(?) in the door, then there's work to be done. I think the term is "work smarter, not harder". Getting Nemo's name and product in front of eyes at least half a dozen times gets it remembered. One-time flyers won't do it. I think it's pretty standard for folks to build in a 3-5% advertising/marketing budget in their figures. Again, so I read. (In practice it's MUCH harder, I know!)

3) You're breaking even -- but are you really? You and Tracy, God bless you both, have been working for free...? Is Tracy drawing a salary at all, as a manager? If not... then everything I've seen says that's not breaking even at all. Your labor is not covered. If something happened where either one or both of you were not able to cover the store for a period of time, what would happen to your labor costs? Looks like you've been running 22-26% labor -- industry standard for fast food is about that, but I worked in a family-style restaurant (pizza) and their goal was 18%. Difficult, yes. But doable.

All told, you have done phenomenally well and I am awed by the incredible work you both have put into your shop and your lives. I certainly couldn't have done all that you have. I would be remiss, however, if I didn't speak up and point you in the direction of the Small Business Development Center in your area -- they have FREE services for people like you, and can help pinpoint areas where you can improve performance and change the way things are done, to get you into the black.

I've always lived by the three ways to improve your bottom line: lower COGS, decrease labor, or increase sales. As far as I know, there are no other options.

I want to see you continue to succeed... because then, maybe I can too if I ever take the plunge! God is in the details.

Good luck!

KJ



First of all, I think it is amazing that you spent six hours reading the entire thing!! I had no idea that this blog was that entertaining, or maybe you were just really bored! Either way, I appreciate that you spent some time taking a look at what we have done, and took even more time to offer some advice. Thanks!

In reply, we set a goal to maintain our Cost of Goods Sold at 40% maximum, even with the dramatic increase in product costs. One task I have been working on recently is to build a spreadsheet that allows me to enter the current cost of various products. The spreadsheet will then calculate our COGS for each retail product we sell. For example, the spreadsheet knows how much egg, sausage, cheese, potato, tortilla, salsa, salsa portion cup and lid, and aluminum foil wrap goes into each breakfast burrito. It then adds up our product cost based upon the main list of overall costs, and compares it to our retail prices. Our breakfast burrito is currently at 30% for COGS, right where we want to be. I am slowly adding all of our products to the spreadsheet. Once complete, I can calculate an average COGS based upon quantities of items sold. If one item has a COGS of 31% and we sell 225 of them a month and another item has a COGS of 42% but we only sell 10 a month, the overall calculation will be weighted for quantities sold. I imagine our Quickbooks Pro software could do all of this for us if I took the time to enter all of our inventory items and build each product sold as an ‘assembly’ in Quickbooks. I am much more comfortable using Excel than Quickboooks.
Anyway, I set up a “rough” break even budget using 40% as a worst case scenario. Based on the items I have entered so far, I think we are going to land in the 34 to 35% range for overall COGS. We also recently tweaked our prices a little. We did not do a dramatic, across the board increase, but we did bump a few prices up by 10 cents on some drinks, and by 25 to 35 cents on some food items. Our demographics are a little strange. We have doctors, nurses, lawyers, stockbrokers and other well paid professionals as customers, but we also have a large number of middle class and lower earners in surrounding businesses. The neighborhood itself has a high number of elderly on fixed incomes (homes are approximately 30-45 years old in this area, with many elderly residents that have been in their homes for 30+ years), and some lower income demographics. Our decision to choose this location was based upon the quantity of daytime workers that commute into the area and work in surrounding buildings and complexes. The neighborhood demographics would not make for a successful shop alone. The 80,000 cars a day are very important. They are additional workers heading to and from downtown (the downtown business district is about 1.5 miles to the west of us). Pikes Peak Ave is a four lane two way street, not one way, which is good. We have discussed having people stand out by the street with a sign during morning rush hours to attract attention to our shop. I am sure that most commuters that travel Pikes Peak Ave do not know we are there. We have also considered advertising $1 coffee for awhile to commuters to get some people in the door to try our product and learn that we are here!

As for advertising, I know we have been slow to proceed with any major marketing ideas. The center is 40+ years old and looked very “tired” and unattractive. Part of our lease negotiations included discussions that the owners would complete a major renovation of the building façade and parking lot. It includes demolishing 100’ linear feet of the west end of the facility, and rebuilding it to accommodate Intellitec’s automotive campus (an 18 month technical college). This renovation and construction was supposed to happen quickly after our opening, but contract negotiations, design approval, and implementation took a year longer than expected. We really wanted to wait until the center was renovated before we marketed to the masses, but we didn’t expect for it to take so long. I agree with you about getting our name out in front of people 4-6 times, but I’m not sure we have the money for that kind of a campaign right now. We have researched print media and it costs about $1200 to $1800 per advertising event. To do so four to six times would definitely help us to grow sales, but I don’t know that we can afford to do so right now. In the meantime, our goal is to get our name out to the high density office and medical spaces close to us 4-6 times through flier distribution, face to face time including taking product samples to their offices, etc. If we can capture the local business/professional crowd to grow sales, it will get us over the hump and we can do more widespread advertising via print media once we are self sustaining. It is a difficult decision to make to spend remaining capital dollars on advertising. It makes sense to do so, but the cost is huge and cash flow is vital. Once I have liquidated some additional assets and get our operating capital back up to $15,000 or so, I should proceed with some print media advertising. There is a long running radio show here that broadcasts from local restaurants on KVOR 740. We are considering doing a live broadcast lunch special soon. The cost is $600 and we will have to provide lunch for two for $7.40. We could provide two sandwiches and sides for this cost and break even for the day. The show has a huge following and gets lots of response. Unfortunately, the live broadcasts are always on Saturday, and the majority of our customers are Monday-Friday daytime workers in the area. I will have to see if they will do a live broadcast on a Friday.

As far as ‘break even’ goes, you are right… Neither of us has taken a salary from the business, and that does not meet the widely accepted definition of break even. Since I am working full time, we can operate the shop indefinitely without an income. Obviously, that is not our long term goal. We want this business to provide an income, not just be our hobby. In the short term, though, we want to achieve our ‘break even’ definition during this time of high gas prices, mortgage industry meltdown, high inflation and skyrocketing food costs, etc. I do not believe these problems will last much past the November elections, and I just want to be able to operate the shop until things rebound without running out of operating capital. Right now we consider success to be able to operate without having to input additional capital, even if it means not paying ourselves. As things improve, we will change our definition of success. You are right, though. If Tracy and I were not able to run the shop due to illness or injury, our labor costs would hurt us. I just did a quick calculation and our labor costs (including payroll withholding taxes) for July 2008 were 19.5% of our gross sales. Not too bad… If we were to take a salary, that number would go up… We probably need to look at our schedule and see if we can trim some labor.

You are right to point us to the Small Business Administration. I researched their website some time ago and saw lots of valuable information. I have not had the time to meet with them to be mentored on small business ownership. I need to make time for that, as it would be very valuable to us.

And finally, you mentioned that God is in the details. I totally believe in this. If tough times are God’s way of growing and refining us, then so be it. We will stick it out, put in the effort, and mature and grow as people, disciples, and as business owners. If it is not God’s will for us to have a shop, then our efforts are against the grain anyway. Success in business does not equal success in life, nor does failure in business equal failure in life. Our life’s success is based upon relationships with each other, and by living a solid Christian life. The business side of things is irrelevant in the big picture. Our needs are food, shelter, clothing, and strong relationships in our family. Anything above and beyond that is a blessing. The poorest in our nation are rich compared to many places around the globe. Keeping that perspective is important, and a little humility goes a long way, whether successful or not…

Thanks for your comments!
JD