Monday May 13 is the beginning of Season 2 of our podcast, The Exchange, presented by Olam Specialty Coffee, hosted by Mark Inman and Todd Mackey. To mark the start of this new season, we went to the archives for a topic we return to often on the podcast: Best practices around buying green coffee. This post, originally titled Disciplined Buying for Better Business Health, was written by Mark Inman in March, 2017.
Working on two sides of the specialty coffee industry since 1989—as a Coffee Roaster-Buyer, and now as a Green Coffee Trader —has provided me with a unique perspective into the finer points of buying and selling coffee. This perspective has also tempered my ego. Working with customers from all hues of the coffee spectrum, I’ve learned where my buying strategy as a former green coffee buyer was sound and where it was in woeful need of guidance.
A Heaping Helping
Working on the other side of the coffee transaction, I’ve learned what separates a skilled and disciplined buyer from an undisciplined buyer. We are all tempted to buy what we love rather than what we need, without strategy or discipline; or, allowing our ego and desire to be perceived as a “big buyer” drive our decision making. In my experience, this approach only drove up the cost of my coffee and forced me to constantly deal with an oversupply of fading coffee.
We have all made this mistake, regardless of the size of the company. We envy the buyer who purchases in volume, because we believe there are perks available to buyers of this size: Preferential treatment, more attention from the farmer or importer, access to better coffees, lower pricing. This belief drives many of us to seek access to this world by buying much more coffee than we actually need. Unfortunately, this strategy not only doesn’t offer access to perks, it puts buyers in a much worse place than they were before.
An early lesson is finding a way to use large volumes of coffee quickly. I have seen roasters radically change their blends to accommodate coffee they overbought. This usually takes the form of a hasty change to a blend or product that took a considerable amount of time to perfect, which almost always causes a noticeable change in the finished product, usually not for the better. Customers become accustomed to a blend or a product they buy each day and are usually quick to express displeasure with even minor changes. Google “New Coke” and you will see what I mean.
If a roaster is unwilling to incorporate their overage into other products, they will usually draw down their coffee purchase, extending the time the coffee sits in the importer’s warehouse. This strategy is disastrous in two ways. For one, you will be dealing with staling coffee, which will degrade the quality of your finished product over time. Secondly, you will actually pay much more for the coffee in the long run as you will accrue “carry” costs associated with the storage and finance of the coffee.
At some point, everyone deals with having old coffee in their positions. Once in a while it is understandable. We can’t always be perfect in our buying. But, if this is a constant issue, perhaps the real problem is the buying strategy. Most will say “We’ll just French Roast that off,” and then later make the argument that they have never tasted a good dark roast coffee. Ever wonder why that is? Your “French Roast” or dark roast offering should never be looked at as the garbage disposal of your coffee inventory. It makes far more sense to craft a better buying strategy, which would allow you to give your dark roast offering the same attention and care you put into your lighter roast coffees.
Room And Board Isn’t Free
Whether you realize it or not, someone is paying storage and finance for coffee from the minute it is purchased. If you are looking at a spot offering list, the importer is paying those charges as long as they own it and have been doing so since it set sail. The minute you contract a spot coffee, it is up to the terms of the sale to determine who pays for the storage and finance, at what rate and when. Traditionally, most importers will sell you coffee under the provision that they will offer you a set amount of “Free Storage” time. This time is shown in the terms of the contract. It will be shown as both a start date and an end date, usually around fourteen days. If you know you will need to store the coffee for a longer period of time, you can usually negotiate that time for a set price or allow Carry Charges to accrue per the rate stated in the contract on its own. What is the correct answer? That will depend on the rate of carry and what you can negotiate if you know exactly how long you need to store the coffee.
On average, you will be charged a rate of carry between 1% to 1.5% per per pound, per month. Using the rate of 1%, as an example; if you purchased a coffee for $3.00 a pound, after your free period, you will be charged an additional $0.03 per pounds per month you store the coffee. If you have overbought and took a year past the free period to draw down that coffee, you would end up paying an additional $0.36 per pound in Carry Charges on that last bag, pushing the cost of that coffee to $3.36 or 12% higher than you originally thought. This cost can jump dramatically with higher priced coffees. An excellent $5.00 a pound Kenya can be $0.05 a month, whereas a $20.00 Kona Fancy can run you $0.20. Remember, carry charges are a part of your Cost of Goods (COGS), so if you don’t take them into consideration, you may find that you are making much less profit than you believe.
If you know an exact time past the free period that you need to store your coffee, you can often negotiate a reduced rate of Carry if you know you will have the coffee completely released by the end of that negotiated time period. While this can seem like a great option on the surface, it can actually cost you more if you remove the coffee earlier than you negotiated as you will not receive a refund for the balance of the negotiated carry cost. Knowing your exact draw down time is key to knowing if this type of strategy makes sense to you.
Why would you store coffee for months on end? Well, aside from overbuying, you may need to look at this option if you are bringing in a coffee that is of limited supply and will run out, if you are buying direct from a farm or if you purchased coffee at an auction, for example.
In the end, an undisciplined buying strategy will often leave you with a supply of fading quality coffee that you are paying higher prices for than you originally contracted, jeopardizing the quality of your product line and the overall financial health of your business.
Certainly, There’s Got To Be A Better Way!
I look at the discipline of buying coffee the same way I look at the discipline of consuming food. Much like eating too much food can make you feel ill, buying too much coffee can have a similar effect on the health of your business. A long time ago, I heard a Japanese term that changed the way I ate. “Hara Hachi Bu,” which loosely translates to: “Eat until you are about 80% full.” This term is also a very wise strategy for buying coffee.
Forward contracting 80% of what you actually need makes more sense when buying coffee and gets you far closer to all the perks we believe the bigger buyers receive. You will always work with fresher coffee, improving your quality. You will be paying far lower carry charges, resulting in lower prices and a lower Cost of Goods. You may even have the opportunity to buy better, unique coffees from time to time because you will have room in your coffee position to snap up deals that come along. You will be working more frequently with your importer as you will be buying more often, allowing the importer to get a much better idea of your overall needs related to quality and price, and become a stronger resource for you.
“But what about being short all the time? Won’t I constantly be scrambling for coffee to fill the 20% that I am always short?” In my six years of being a Green Coffee Trader, I have never seen this to be a significant issue. Good coffee can be found anytime you need it. Finding coffee to fill a need is a manageable challenge for both a buyer and an importer. Even so, this problem pales in comparison to those you encounter when you buy too much.
An Expensive Lesson Learned
I want to close with an example of this from my own experience. In 1997, when I had my roasting company, I wanted to impress a new Green Coffee Trader I had met by contracting 3 containers of a very expensive Organic Ethiopia Natural with him. I believe I paid close to $4.25 for this coffee when I bought it. Due to my growth projections being wildly ambitious, it ended up taking me 3 years to finally use all of this coffee, costing me an additional $1.51 per pound in Carry Charges, or an additional $92,250 for total carry of the three containers. I could have used that money to grow my business, travel to origin (a lot), hire employees or invest in marketing and branding. It was one of the most expensive lessons I’ve learned in business, and today that lesson is still tattooed on my brain.
I now work alongside that trader (Ian Kluse) here at Olam. He is kind enough to remind me of that story periodically, just in case I ever forget.