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Accurate Cost of Sales for Specialty Coffee

Written on 18 Jan 2019

In the world of specialty coffee shops there are a handful of multi-shop operators; some of them straddle borders, but most of them are local to a country or city. The tail of the specialty coffee shop sector is, then, lots of single owner-operator shops (or two shops, if the first has gone well).

It’s quite a big market and has a large tail which is very fragmented. Having been working in coffee shops and technology (it’s a thing!) for the best part of 6 years, I’ve come to the conclusions that there are few technologies/systems that really represent the nuances of running a specialty coffee shop.

One particular irritation I have is around inventory tracking and cost of sales for coffee shops. This is a very niche irritation, I admit, but undermines my confidence in any inventory system that is “designed for coffee shops”. I’ve seen this in huge enterprise systems and small disrupter/start-up systems. I’ve seen it have an impact at scale, then I’ve seen it ignored at scale because it came out in the wash with each unit’s PnL.

Briefly, and at a high level, an inventory system should show you how much you spend on your ingredients, how many and at what price you sold your finished products for and then ultimately what your profit was.

Extending this to specialty coffee shops, you’d want an inventory system:

  • to show you how much your milk and coffee cost you
  • to let you specify that a flat white takes 220ml of milk and 18g of coffee (ideally with some small % wastage/loss)
  • report that your gross margin on a flat white is 75% (e.g.)
  • report that your overall margin on a flat white on a certain day was 70% (because, you know, free ones and discounts)

Pretty much every inventory system can do this.

Now what happens, say, when you sell a flat white with oat milk?

Typically you’d just put an “Oat” modifier on your point of sale, right?

Remember, your inventory system recognises a “flat white” as being made of whole milk and coffee.

When that sale hits your inventory system, your costs are going to include 220ml whole milk, 18g of coffee and now 220ml oat milk as a modifier. Your overall margin is now being falsely reduced.

Now someone wants a decaf flat white with oat milk. Your margin drops again because the system calculates costs for regular coffee as well as the decaf modifier coffee. You now have positive shrink on whole milk and regular coffee (you have more milk in your fridge than you inventory system thinks).

In a busy owner-operated environment, as many specialty shops are, I understand this is rarely going to be the top of the list of worries or frustrations, but it slowly builds up an underlying distrust of your key financial metrics. Great that you’ve got margin reporting on food, but roll it up with your coffee that probably accounts for 50% of revenue and your ability to make evidence based decisions is severely limited.

So, what’s the solution?

I haven’t seen a perfect solution to this problem; certainly not one that comes off the shelf.

Stock take to make up for it Being disciplined and doing a stock take on a regular basis will help keep margins under control, but this only works at the business level - your coffees will still be misrepresented.

Create a menu item for every possible combination

A menu item lives in your inventory system and is usually represented by one button on your point of sale (with optional modifiers).

It’s possible, but not something to be encouraged. Just with a flat white, decaf and oat you’d need 4 buttons. Factor in other m!lks, other drinks and you soon have an untameable point of sale.

Manually import negative modifier sales

On a very strange day of trading, let’s say you only sold 100 decaf oat milk flat whites.

Your inventory system thinks you’ve given out:

  • 22 litres of whole milk
  • 1.8kg of regular coffee
  • 1.8kg of decaf coffee
  • 22 litres of oat milk

You can imagine your margin is going to be all over the place. You didn’t give out any whole milk or regular coffee!

If your system supports it, however, you can tell it that you’ve ALSO sold -100 “whole milk measures” and -100 “regular coffee measures” where these “menu items” have a single milk and coffee ingredient respectively. Given an sympathetic inventory system (some are, so are not), your flat white margin is back to where it should be!

Note that in food service hospitality systems, the concept of negative quantity sales is a little odd. At a dumb level, this suggests you’ve given a food item out then taking it back into your stock. Typically refunds and voids would mean you’ve given out a food item then binned it due to some other issue.

More intelligent inventory systems

The ultimate solution, in my opinion, is a more intelligent inventory system that lets you define the composition of a menu item. All your milk/m!lk options are sat in parallel as options on your flat white, so that they are interchangeable as ingredients on your menu item.

I haven’t seen this done (maybe it does exist?!), but would make cost of sales reporting in specialty coffee shops much happier.

Not restricted to coffee

I can’t see how this is restricted to coffee, either. If I want a hawiian pizza with chicken instead of the ham, does the restaurant’s inventory system record usage of both chicken and ham?

As a percentage of the menu item ingredients I expect this pizza example is more diluted than with specialty coffee (two ingredients forming the total cost of the product), but it would still be a poblem for restaurant operators at scale.

Got a solution?

I’d love to hear about it!

Credit Card Tokenization leads to Better Customer Experiences

Written on 21 Jul 2016

Note: I am highly aware, as a Brit, that I’ve sold out and used a Z in tokenisation.

As retailers we are still dealing with cash, so any claims of the credit card being a thing of the past are dramatically premature. Whilst we have digital currencies evolving in parallel, we still continue to see innovation and development on top of card scheme infrastructures. This further entrench credit cards in our lives.

The thing to watch, however, is HOW WE USE credit cards.

I’ve struggled to put this concept in to words, but was greatly helped by a recent article on credit card tokenization (N.B. Alas I can’t find said article, I know it was shared by JudoPay on their LinkedIn page).

Briefly, tokenization is way of inputting your credit card details ONCE, through a browser or an App, and enabling a retailer to charge the card in future without needing anything more from you. Yes it can sound a little unnerving, and you are still protected by the card schemes (and hopefully responsible retailers), but this is ultimately the main enabler for t creative customer experiences in physical shops.

Tokenization forms the basis for most stored value account systems, including the award winning experience we created at Harris + Hoole, and has the added benefit of offloading PCI compliance concerns to someone who really knows what they’re doing.

How we WILL use credit cards

I’ve bemoaned the fallacy of mobile POS previously, whereby you’re really just muddying the waters of how you’d expect to move customers through a transaction flow in a shop.

Ultimately, credit card terminals are also a major blocker to the empowerment of customers ordering the way they want to. Even if you remove cash as an accepted payment, you still need to go and swipe, insert or tap a credit card somewhere to pay for goods rendered.

Tokenization, however, presents an opportunity to centralise payments and empowers retailers to deliver NEW customer experiences. Imagine a world where you can walk in to a cafe with friends, grab a free table - and not worry about losing it whilst you order - whip out your phone (with said App), place and pay for your order and have it brought over to you.

From Tokenization to Customer Experience

Whilst cafes and quick service restaurants will likely place incredible value on front of house to help educate customers, their time would be far more valuably spent helping those customers who need it, and letting their regulars just get on with it - no queue building up, no dropping off the back of the till queue, and front of house team members who don’t have to put up with the quirks of a thumping the screen of a creaking E/mPOS system.

The key to designing truly customer centric experiences - especially in hospitality - lies in this ability to integrate payments in a way that is seamless for the customer and reliably secure for the retailer.

The mPOS Fallacy

Written on 13 Jul 2016

Retail is an old concept; provide goods or services in exchange for other goods or services. In modern times the exchange is typically for money - items are for sale.

As customer expectations have accelerated - perhaps skyrocketed - in the last few years, it’s become clear that retail innovation and theatre in physical (e.g. brick(s) and mortar) shops has lagged. Sympathetically so, though. For any sizeable business (or even a small one), keeping up with the retail experiences that mobile + technology COULD enable is an impossible feat; a line has to be drawn somewhere, but conversely retailers should be making some efforts to move the retail needle forward.

Yes there have been improvements in the way we pay (contactless, Apploid Pay), and the design and functionality of the technology we find in shops, but ultimately the concept of “Point of Sale” is a blocker to any future innovation in the world of retail, especially so in the world of quick service + food and drink.

As cash registers have evolved to POS and POS evolved to EPOS, so we see a lot of buzz around mPOS - mobile point of sale.

Frequently preached (by vendors) as the next big thing in physical retail spaces, they allow freedom-of-movement to serve tables, queue bust and potentially play with the retail space and introduce new concepts.

Unfortunately this concept seems to be, at the core, just a more accessible EPOS with - potentially - an integrated card reader.

I have no doubt that we’ll see a good adoption of these concepts, but even the somewhat-disruptive iPad/tablet based POS startups (ShopKeep, Revel) will frequently be found on a docking arm where it can reliably (a) control the cash drawer, (b) print receipts and (c) not run out of power. It’s hard to see how the retail-tech incumbents will avoid this same fate with their mPOS solutions.

mPOS + Coffee Shops

Arguably the world of quick service restaurants (and by extension coffee shops, for which I can write with experience) are one of the best formats to see mPOS succeed.

Unfortunately there are still some hard realities that prevent this happening. Cash still accounts for a major chunk of sales (in the UK) - people don’t want to walk around with cash belts, nor return to a cash-drawer every second transaction. Retailers are concerned with loss prevention. Retailers will also struggle to allocate labour to a roaming mPOS function; when do you serve tables, is there a backup POS somewhere?

Customers still expect to queue; or at least coagulate at a point of sale then drift to a service point.

If mPOS is only going to ENABLE the option of a flexible point of sale, and still require a physical queue point for busy times, they will likely sit in the office collecting dust.

The dawn of noPOS

We are now in a world where you can order and pay for coffee through a consumer App, as well as paying at a restaurant table without needing someone to come over and split your bill 5 ways.

In the high volume, high frequency and relatively low spend world of coffee shops, the next revolution is going to be noPOS where you walk in having ordered already, sit down at a table and order - or at the very least not have to stand in a queue to get your drink.

It will still require big commitments from retailers to drop cash as a payment method, but the idea of removing a normal quick service transaction flow has huge potential:

Centralisation of technology monitoring/support/assurance, team members spending their time engaging customers in meaningful ways to drive better experiences, reduction in cash and card fraud, labour efficiencies as cash handling becomes redundant and ultimately a faster, smoother, more predictable and above all BETTER experience for customers.

N.B. This is obviously a highly opinionated write up and lacks significant references. Opinion is driven through retail technology experience!

Pokemon Could Be Your Biggest Marketing Opportunity

Written on 13 Jul 2016

Pokemon Go hasn’t landed in the UK yet, but when it does there’s little doubt in my mind that we’ll see the same phenomenon as other countries: people tripping over each other, stumbling across roads and scrambling to catch different Pokemon in Augmented Reality.

However for retailers, it could lead to another kind of phenomenon: incredible new footfall and customer capture.

It’s already been semi-confirmed in a Financial Times Article that this ingenious game will generate absurd amounts of revenue through sponsored places:

Alongside in-app payments, “there is a second component to our business model at Niantic, which is this concept of sponsored locations”, Mr Hanke said, where companies “pay us to be locations within the virtual game board — the premise being that it is an inducement that drives foot traffic”.

I find it mindblowingly incredible (I am in awe) that one of the most potentially lucrative marketing opportunities for brick and mortar retailers will be to have an augmented reality cartoon character tucked under their best selling products, with the hope that hordes of potential customers traipse into their shop to snag a Pokemon.

Certainly they won’t be the most relevantly engaged customer base, but given the furious passion and commitment people have already shown for the game, it’s worth a shot, right?

I’m by no means an expert on Pokemon, but it is surely only a matter of time before the 729 Pokemon characters are joined by “Tescomoth”, “Poundlandpoke” and “M&SWhirl” (this isn’t just any Pokemon character…)

Understanding the Contactless Limit Rise

Written on 04 Sep 2015

September 2015 heralded more than the slow descent to Autumn and Winter; there was a big announcement regarding a change to UK contactless limits.

This announcement was muddled in with the UK launch of Apple Pay back in July, and Apple were very keen to work with retailers who would be able to commit to a higher value contactless limits to bolster the Apple Pay in-shop experience.

General - and even retail - press have been highlighting the contactless limit is going up to £30 per transaction.

What doesn’t seem to be getting much coverage is that the contactless limits are now up to the retailer to decide. In order to take advantage of the new £30 - let’s call it a “new safe limit” - retailers need to update their card machine software (which is rarely a straightforward feature).

Any mid to large retailer is actually now in a position to define their own limits. It’s likely that £30 is being forced through for smaller retailers who aren’t in a position to a direct customer relationship with their card machine provider, but those with closer ties can set the limit to whatever they want.

Payment processors are demonstrating an increased confidence in contactless payments (or prepared to underwrite a bigger risk), so it’s hard to understand the limit only moving to £30; how many more transactions will really covered by the extra £10? It seems hardly worth the fuss unless you’re going to introduce a step change in acceptance such as paying for your weekly shop, a family meal or retail-therapy-satisfying splurge.

I suspect the bigger challenge here is consumer confidence in contactless on larger transactions, and also how you reliably communicate with the UK population that the limit has gone up. That said, Visa’s new mandate that all cards issued from December 2016 must be contactless seems to be at odds with lower confidence.

Copyright © 2006 - 2019 Kester Dobson