Coffee prices are on the upswing at present for a variety of reasons. Increases have been announced for Folgers and Maxwell House, for example, and will be passed on to resellers by these two benchmark brands. Most other coffee roasters will now follow with price adjustments to their resellers.
Historically, many operators have been reluctant to raise the price of coffee to their customers for fear of losing them to another coffee service that keeps its pricing lower than its competitors.
But remember: If you sell by price, you lose by price when any competitor comes along and undersells you. The bottom line is, if you don't raise your prices when your cost of goods goes up, your gross profits will decrease, and staying profitable will become much harder, especially in these poor economic times.
In fact, now is the time to raise coffee prices and recoup some of the lost gross profits that you probably have endured. Your customers have been made aware of lower coffee production, mostly due to weather conditions, in some of the major coffee-producing countries. News of rising coffee prices is all over the radio and television, the Internet and newspapers. Colombia, Brazil, Central American countries and Vietnam are reporting much lower poundage from poor harvests.
Looking at the coffee commodity news and Internet blogs, green coffee buyers feel that the current price increases are not over. Some predict an additional 20% rise by the end of the year. Operators must make a decision about how much to charge customers.
If you only increase your prices by what you are being charged now by your roaster, you may have to make two more increases in the future. This could upset your accounts with multiple price increase letters and some could start looking for better pricing. My feeling is to make a larger increase now, covering your potential future costs of coffee. If coffee should go down in price and you want to reduce their costs later on, you will look wonderful in the eyes of the buyers. So, what is the best way to announce a price increase?
Over the years, I have notified my clients with a detailed letter that explained how the price of coffee had increased over a specific time. I referred to an enclosed coffee futures chart from The Wall Street Journal, showing how the cost had increased to date. I also enclosed few of the letters I had received from my roasters showing my price increases. All this was done on one sheet of stationery, by scaling down the price-increase letters to fit on the reverse side of my opening statement. Establishing credibility in the eyes of the buyer is paramount when implementing a price increase. You have now documented everything that you are doing.
Since pricing per case is not the same for all accounts, we then go on to explain that -- as of a specified date -- our inventories should be depleted at our old prices and orders placed after that date will reflect a 1/4¢, 1/2¢, 1¢ (etc.) increase per cup. Showing the new cost by the cup is much better than saying the price will increase by several dollars a case, or that it will reflect a percentage increase per case. If you initially sold your coffee to the decision-maker on the basis of price per cup, then you should show coffee price increases by the cup, as well. Describing cost per cup is easier for a buyer to swallow than stating it by the case, in dollars or percentages.
Finally, include a postscript at the end of your letter: "All orders placed prior to the date of the increase will be honored at your old price, provided that you do not increase your order by more than 20%." This gives your account time to place an order before the increase takes effect, and shows that you are a fair-minded company.
Overall, you will not have problems with most customers. However, customers who are resellers themselves, such as convenience stores, delis and restaurants, are more price-sensitive and may react more than traditional office coffee accounts.
How do you handle customers who call you and complain about the increases? This is up to you, but I suggest that you look at the customer's total purchases throughout the year and determine what percentage of them were coffee. If you are making a very high gross profit overall, then you can show some flexibility. You may ask the buyer what he or she regards as fair. Or you could postpone the increase for a month or two. Every customer is different, so you may have to be creative and decide.
We all have or had customers who are on the brink of having their equipment pulled due to minimal profitability, and this is a good time to make them profitable. The worst that can happen is that you pull your equipment and find a profitable home for it.
Most importantly, taking no action on price increases will hurt in the long run. I have seen several OCS operators flounder over the past couple of years and fall behind on their bills. Many are now forced to go under or sell their companies at very low prices. Buyers want companies that are making profits; a low gross profit makes it very hard for a potential buyer to purchase what is perceived as a failing company.
If any of my readers would like to discuss how to deal with coffee price increases or share with me their approaches to dealing with them, I can be reached at (516) 241-4883 or OCSconsultant@aol.com.
LEN RASHKIN is a pioneer in office coffee service. He founded Coffee Sip in 1968 and after 22 years merged it with Dell Coffee, of which he became president in 1991. Sales at Dell topped $7 million dollars. Rashkin is also a founder and officer of Eastern Coffee Service Association and National Beverage Products Association. His industry honors include NCSA’s (now NAMA) Silver Service Award and NBPA’s Lifetime Achievement Award; he was inducted into NBPA’s Hall of Fame in 1996. His marketing excellence earned him NBPA’s Crystal Bean Award and three NCSA Java Awards. He is a frequent speaker at national and local trade conferences, consults on OCS sales and marketing and has is the author of two OCS training programs.