3 It’s All Margins

Back in 2016 when the UK public voted to leave the EU, a shockwave went through the supply chains. The pound sterling had come crashing down in the currency markets and importers that settled their bills in other currencies (i.e. exchange to sterling) suddenly had to rethink their pricing. Many of them tried to absorb added costs but eventually started charging the difference to their customers, lest they became unprofitable. Coffee was only one of many products impacted by that sudden price rise: avocados, foreign grains, spices, they all got more expensive overnight.

As a café space we had long tried to stay as affordable as we could. Cafés already had a bad reputation in the neighbourhood as gentrifying forces, and fancy breakfasts at £12+ didn’t help that image. With coffee being such a high margin item, we felt that our drinks sales could subsidise our food sales while maintaining a tight profit. We felt it important to remain accessible to all, and we were willing to eat into our own profits for it. We made the choice to sell products almost at cost as a social exercise. I guess one could say we were eating our cake and having it too.

While that worked when London’s specialty scene was still booming, we felt pressure increasing slowly over the years. Earlier in 2016 a new café had opened up a block down the road and takings were still good, but dropping. That downward trend alone was worrying but not a disaster: in a later post I’ll talk about how competition can help grow the market and is not a bad thing. However, with the sudden supplier price increases, we were caught red handed: we’d been eating our cake for too long.

We had two options: either we searched for new suppliers and cheaper ingredients, either we raised our prices across the board. We did not want to commit to a lower quality product so a price rise it was going to be. Our challenge was then this: how to communicate to our customers that we had been subsidising their lifestyle and that things were going to change, without riling them against us.

This is where we made mistakes that would take a while to recover from. People are not of the opinion that they ought to empathise with your bottom line. And honestly, they are right. We’d made the mistake of not communicating clearly how we kept prices artificially long, so when we did move them up, we’d failed to create an appropriate context for that move.

The takeaway from this anecdote is twofold:

Never assume

What might be obvious to you is not necessarily obvious to others. People don’t have access to your P&L sheets and they shouldn’t need to either to appreciate what you’re doing. Think about how you can include people in your mission before you have to pierce a bubble and confront with cold hard facts.

Keep your margins reasonable

We wouldn’t have been impacted as hard by the pound’s crash if we’d built in better buffers in our pricing, absorbing less of the food cost. There are other ways to keep your space as a genuine third space than implicit subsidies. Efforts such as paying-it-forward, food waste programs or donations can have a similar impact on the community as a whole, while being easier to calculate into your accounting and thus your bottom line.