Tough Love for the Coffee Industry

First... some quick bonafides and background. While I used to work in coffee, and still love coffee and the coffee industry, I now make my living doing business strategy consulting - primarily for some of the largest companies in the world. A lot of what I'm doing right now is providing advice to companies about how to adapt to, innovate within and (frankly) to survive the COVID-19 pandemic. 

Times are tough in the coffee industry.

And, frankly, that's an understatement. Many coffee businesses in the United States are unlikely to survive 2020. And almost all that do survive will enter 2021 diminished and damaged.

Coffee businesses are not alone. A significant percentage of large retailers are at risk. The pandemic could represent an extinction level event for the restaurant industry. Hospitality and travel are unlikely to ever be the same - and a large percentage of businesses in this sector are likely to fail in the next six months. From event management companies to temporary staffing firms and from malls to hair salons - the business losses are likely to be profound.

And we are never, ever going to return to the "Old Normal."

So it's time to reposition for a new Normal. In fact, it's past time to do so. If coffee companies fail to get this right, or fail to act, they will likely be out of business before the end of the year.

So how do coffee companies do this?
What is the strategy for surviving?

Below is a generic and generalized approach, based on my work for large global companies, that should be applicable to most if not all coffee businesses. A lot of what I'm going to say will be upsetting and you're likely to want to reject it. You're likely to hate me for saying it. But I'm sharing this out of love for coffee and the coffee industry. I'm saying it because I want you to survive.

So here is the approach:

  1. You need to massively trim your retail operations. Any retail cafe which can be repurposed for drive-through in a market when most of your customers are driving cars should be immediately repurposed. Any retail location which can be repurposed for take-out windows (and has sufficient density of people and foot traffic) should have a take-out window added. All retail locations should be shuttered immediately (with the exception of your drive-through and take-out). No customer should enter your stores. If none of your retail locations are suitable for drive-through or take-out, you should consider doing pop-up drive-throughs and pop-up take-out operations. You should then model out the viability of all your remaining retail locations. Take your existing business and apply Best, Base, Worst case adjustments to revenues on a per-location basis (I would suggest using 15%, 30% and 50% as the adjustments given likely reductions in consumer demand). Any retail location that doesn't model out to being able to be profitable in a new Normal should be permanently shut down. You need to reduce staff to the bare minimum to handle your drive-through and take-out. You should not, however, reduce your retail advertising. Advertising rates have plummeted, and you need to retain your customers. As part of your retention strategy, you should also introduce new and improved loyalty programs that span retail and e-commerce and which encourage the purchase of high-margin items. You should immediately ramp up your email marketing focusing most strongly on reactivation campaigns that drive subscriptions. You should also talk to your landlords and try to renegotiate your leases, and/or get your landlords to pay for part of the creation of drive-through or take-out operations.
  2. You must immediately pivot away from wholesale. As noted above, restaurants are facing an extinction level event, so you should assume $0 in potential revenues from these customers. Coffee bars (as you know) are equally vulnerable, and if they survive they are likely to be diminished (and are very likely to become cost-conscious buyers). The only grocery businesses that should get one iota of your attention are those that are already optimized for e-commerce and delivery, or for click to collect (online purchasing with pre-packed and pre-paid pickup). The vast majority of other grocery stores are unlikely to survive the coming year. As part of your pivot away from wholesale, you should reduce your wholesale staff to the absolute bare minimum. Basically, you should have enough staff to manage the very few grocery businesses who are likely to be okay. You should cancel any and all marketing and advertising efforts that support wholesale - and that includes all your custom packaging, custom blends, co-marketing, etc. Wholesale clients are likely to come to you to renegotiate your deals. Keep in mind that doing so to keep clients who are going to go out of business is just going to cost you long term (particularly in terms of your bad debt). And also that the stores that do survive will want to keep those new, lower, costs. And that your more desperate competitors will be happy to lose money on a per pound basis to generate some cash flow. Avoid this trap.
  3. You should focus all the energy you can on your Direct-to-Consumer (DTC) business in general and your e-commerce business in particular. This is the one area of your business that has growth potential in the short-term - and is sustainable in the long-term. In particular, given cash-flow issues, you should push hard on DTC subscription offers. You should put the majority of your marketing and advertising energy (and dollars) into supporting your DTC and online business efforts. You need to staff up to enable this. You're going to need to look at optimizing your production around supporting this business channel. Because your DTC channel is likely your highest margin channel, you can afford to invest in this area. You should cross-promote your DTC offerings through your retail (promotional cards with orders). You should have aggressive loyalty programs. You might want to consider a Membership model with exclusive coffee offerings that are only available to those who pay Membership. The more you can move to recurring revenues, the better. The more you can move to a direct selling relationship with your customers, the better. This is, for many of you, going to require learning new skills and new tools and new ideas. You're likely going to have to hire people who are experts in this area. If your website isn't currently a world-class e-commerce site (with a great mobile experience), you need to fix it. If you currently cannot handle 24hr turn-around from order to ship, you need to fix it. If you cannot guarantee timely delivery, you need to fix it. You should also double down on merchandise and gear. Anything that you can sell and fulfill from your website. You need to become expert in social media and online advertising - and you need to have the resources to manage these efforts professionally. You need to ramp up your customer communications, from your email marketing to your social media outreach to doing scrappy things like having retail workers who would otherwise be furloughed start direct calling DTC customers who are high value. In essence, you need to transition as quickly as you possibly can into a DTC-first business. This is required for survival.
  4. You need to look at your current contracts, inventory and assets and determine what is surplus. If you're carrying more green coffee than you can possibly sell at current volumes - cash it in. Resell it. Even if it's at a loss on what you paid for it. You need the cash. If you have roasters that you no longer need - cash them in. Sell them. Even if you love them and polished them by hand after your expert restoration guy brought them back from the dead. Even if you've given them names. Sell them. If you have contracts to buy green coffee that are multi-year, these are now liabilities on your books. Renegotiate them, sell them or cancel them. Even if it hurts, even if it costs. If you have a ton of branded promotional crap - put it online and ask your fans to buy it to help you through this time. Be scrappy, be aggressive. 
Restaurants are pivoting to pop-ups and grocery stores. They're selling off their wine cellars and their chefs are offering cooking classes via Instagram video. They are doing whatever it takes to survive.

You have to do the same.
Whatever it takes.
Swallow your pride. Do the painful things. Make the sacrifices.
Because otherwise you'll be gone in a year.

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