Why a Busy Café Can Still Lose Money | ERICA ESCALANTE!

IT’S JUST COFFEE!

In this episode of It's Just Coffee!, hosts Rowan Cook and Ben Bicknell sit down with café consultant Erica Escalante to discuss the dangerous gap

Key takeaways

• Erica Escalante emphasizes that knowing your COGS (Cost of Goods Sold) is fundamental to café survival.
• A critical metric for profitability is keeping labor costs under 30% of total sales.

Main topics

• Café profitability vs. busyness
• Financial literacy in hospitality

Notable quotes

Busy and profitable get talked about like the same thing. But I think... they're not always the same thing.

Conclusion

The episode serves as both a cautionary tale and a practical guide for

Transcript preview

Speaker 1 (0:00) Ron, picture, if you will, for me, a cafe. It's got a queue out the door every morning. There's three staff on, they're flat out, and there's barely a seat free before nine in the morning. It's pumping. But the owner still isn't sure whether they're going to be able to pay the rent this month. Speaker 2 (0:15) Busy and profitable get talked about like the same thing. But I think over our time doing this podcast, we're really realizing they're not always the same thing. I guess the same as kind of saying slow and unprofitable need to be the same thing. Speaker 1 (0:26) Yeah. Yeah, exactly. We've definitely had people giving examples of how both of those models are working or not working. And today's guest has sat on both sides of the ledger. It's going to be an amazing insight here. They've sat there as the owner looking down the barrel at their own numbers. And now they're the person that other owners call in when those numbers just stop making any sense. Speaker 2 (0:48) Welcome back to the show. I'm your host, Rowan Cook. I make coffee on the internet. And I'm Ben Bicknell. I judge people who make coffee, Speaker 1 (0:55) but only at competitions. And together we are It's Just Coffee! The podcast of people who know it's never just coffee. We are going to be joined by none other than Erica Escalante. Speaker 1 (1:09) Escalante. This Speaker 3 (1:09) is very good, guys. I'm already entertained. So thank you. Speaker 1 (1:13) You're welcome. That's what we're here for. Today's episode is sponsored by our friends at Apex Lab. If you listen to this podcast, you know Apex Lab Mineral Concentrates. Yeah, these are the products that are used by world champions to unlock the full potential of their coffees. But they've actually just Speaker 2 (1:27) released a new... crazy product called Speaker 1 (1:29) Conflux. This is water that's been hit with ultra low frequency electromagnetic waves. It does sound crazy, but I actually saw some competitors use this technology at the World Barista Championships. Speaker 2 (1:41) Look, I thought it sounded ridiculous, but till we did some tests here in the office, I could actually taste the difference. There was more body, there was more sweetness. And hey, if you're a critic or you're skeptical, I dare you to try Speaker 1 (1:52) it. See if there's a difference or not. Yep. Visit ApexLab.com and you be the judge. Erica has spent close to a decade building Cafe Rainer in Portland. She did do that and she's since sold that and moved into new and exciting things. But it was a multi-revenue business model there. It had a full bakery, wholesale accounts, a commissary kitchen. And now she's taken that experience and applying it inside other coffee companies' operations teams as a full-time consultant. And excitingly, I think we can release the news of the newly branded and encapsulated The Cafe Operator. Oh, we get to announce this? Speaker 2 (2:32) Hot off the press. Hot off Speaker 1 (2:34) the Speaker 2 (2:34) press. Announcing the new coffee operator group. Welcome to the show, Erica. Speaker 3 (2:40) Yay. Thank you. Thank you so much for Speaker 2 (2:44) joining us. Look, we're Speaker 3 (2:46) going Speaker 2 (2:46) to be talking a little bit today about profitability, about making money, how to run a business, all of those things. Your great new venture. But the first thing I want to start off with is what's the most you've ever paid for a cup of coffee? And was it worth it? I Speaker 3 (3:01) paid about, I think I paid $16 for a pour over. It's always worth it. I would literally give coffee all of my money in my bank account and probably kind of do. Speaker 2 (3:13) How high do you reckon you'd go for a pour over? Yeah. That's a good question. Speaker 1 (3:17) Well, Speaker 3 (3:17) how much money do I make, right? It's Speaker 1 (3:19) all Speaker 3 (3:19) relative. Like if I'm, you know, Martha Stewart, I'll pay thousands of dollars. I don't care. Like it's Speaker 1 (3:26) just money. Speaker 3 (3:27) But if I need to buy a new pair of pants, I have to kind of balance how much I'm going to spend on my coffee. Speaker 2 (3:33) Well, I mean, you're speaking to two people who probably don't make that much money and have spent $1,000 on a cup of coffee in Dubai. So, you know. We did that and I was Speaker 1 (3:42) sweating a little bit while we did that. Speaker 3 (3:44) Well, that's why I brought you here today, guys. I'm here with Dave Ramsey. No, I'm just kidding. We Speaker 1 (3:50) have the investors Speaker 2 (3:51) ready to go. Your wives Speaker 3 (3:52) asked me here today to talk with you about your... Speaker 2 (3:55) About where we're actually depositing our cash. I wondered why we kept on getting these emails demanding Speaker 1 (4:00) for you to be on our show. Speaker 2 (4:01) Yeah, yeah. Speaker 1 (4:03) This is actually an intervention. All right. Like talking about the coffee, Speaker 2 (4:07) coffee story for a second. Can you take us back? You started coffee as a teenager before you were even an adult working your way up through a barista and baking roles before eventually taking over the business that became Cafe Raina. What was that jump from working to ownership like? Speaker 3 (4:23) I talk about this a lot about like it was the worst decision I've ever made. You know, I was 20 years old when I was approached to buy the coffee shop that I was working at at the time. I had the, I've always wanted to own a coffee shop, which meant, you know, the equivalent of two to three years when you're that age. I'm always wanting to do something. It was... Completely shocking because I was the most responsible person in that business. I ran it every day behind the bar. I was excellent at it. And then handed the keys to the business and just not knowing a single thing. It's like playing house with money and realizing I don't have any. Speaker 2 (5:03) I Speaker 3 (5:04) also don't come from any financial literacy background whatsoever. So every day, I'd be like, okay... How much money did I make? I had a piece of paper. How much money did I make? Okay, I should put this much aside for rent every day. And I had an envelope and an oatmeal box and I'd put that money aside for rent. And I'd be like, okay, I have $27 to buy supplies today. What am I about to run out of? And then I would go to the store and buy a new sleeve of cups. And then I would run the next day. And that was probably like the first year of my business owning journey. I had no capital, no actual capital. whatsoever. And the shop was making maybe $200 to $400 a day. It was shocking. Yeah. How Speaker 2 (5:44) extremely stressful as a 20-year-old. Like that must have just like driven you to the edge. That would have been tough. Speaker 3 (5:51) You don't realize it. Like as an entrepreneur, right? You're an entrepreneur when you believe the delusion. that you can create something different than everyone else. And it's a great delusion. It's how we come up with all the best ideas. But it's like that delusion runs out after about like a year or so, like you get past the newborn phase and then you're like, oh my God, like I am so tired. This is so stressful. And I think even now, like 10 years plus later, I'm still looking back being like, whoa, I think I was traumatized a little bit in those years and I'm just now recovering. Speaker 2 (6:26) It is very- hard. Now you're an expert on the matter of doing this and running businesses. If you could go back to yourself then as a 20 year old buying that business, what would be the one piece of advice you'd give that isn't... Don't do it. Speaker 3 (6:41) Darn. You know, honestly, I didn't even know what cogs were. Like, I didn't know what cogs were. I didn't know how to price things. I thought you just like made it up. Oh, that sounds good. Even my pastries, I had bought them for $1.50. I would sell them for like $1.75, two bucks. And I thought that was a good idea. You know, I just knew nothing about the financial literacy part of it. And that's, I think, why I'm so passionate about it now is I could have saved my... myself a lot of heartache just actually charging the right prices for my goods. So Speaker 2 (7:13) for any of the young baristas that are listening that have no idea what COGS are, give them that piece of advice. What is it? Know the COGS. Speaker 3 (7:20) And I mean, that's what I do now, right? Like I am a consultant, but really, I'm an educator. And that's where... I love to shine is I want to teach every single barista should know what cogs are 100%. And we don't teach them, you know, and then we kind of blame them for not being responsible or helpful in the business. And it's like, well, did you even teach them how this works? Like, I don't think so. Speaker 1 (7:44) Yeah. And I think that kind of brings us back to this idea of like, we're trying to talk about here of this. how to make a healthy and successful cafe, not just from the coffee front, right? Which is where a lot of people in coffee start from. I think we've got so many cafes around the world. You've got some cafes on every corner with lines out the door, like we said, or some that are just ticking over pretty regularly. But in all of these different cases, I think you could ask a lot of those operators and they still can't tell you if they're making any money. What would you say the actual difference is between a cafe that's just really busy and one that's financially healthy? Because I know you make that distinction a lot. To Speaker 3 (8:24) be honest, I think like after talking to hundreds of, you know, cafe owners here in the US, they all feel like they're very busy. It is a chaotic place to be. There's so much stuff going in and out. There's so many people involved. There's so many products involved. It feels Speaker 2 (8:39) busy. Speaker 3 (8:40) You know, and that word busy is really determined on the person and where they live and what city they live. You know, I work with... companies that are in like tiny suburban towns in middle America and ones in New York City and in LA, you know, it's vastly different how we describe this word busy. And most of the time, most baristas and operators feel like, oh, I'm so busy. This is so overwhelming. And I think that's one of the issues in the industry is like the financial ins and outs happen so fast. I remember the first time I actually had like... $10,000 in my bank account. Like I was like, no way, $10,000. And literally the next day I had negative $200. Speaker 3 (9:25) And I was like, what? I feel like whiplash with the money coming in and out. Like you're getting deposits every single day and expenses every single day. It is a lot of transactions to keep track of. And so, you know, the people who have a handle on profitability have some sort of handle, mental handle on that in and out. Like you meet people who can do math in their head very well. And so they kind of generally know, oh, I know this much sales, this much expenses. We're fine. We're good. We have cash. And then I have other clients who are actually doing really, really well. And they are constantly stressed about money all the time because they cannot handle those numbers in their brain. You know, so it really is dependent on their just... mental capacity and skill set with math a lot of the time or with whatever resources and support they've set up, which is why I exist and why I'm here. Speaker 1 (10:15) Yeah. Do you think there is a lot of that? Do you agree? I guess that there's a lot of that visibility gap between like, oh, we feel really busy. We're active. We're doing a lot of things. There's customers coming in and out. But again, they don't have that understanding of are we healthy from a financial perspective? Speaker 3 (10:31) Yes. 100 % of the people I talk to have this problem, you know, and they will feel busy. And they also part of feeding into the delusion is seeing the bright side, seeing the positive side, like we're doing really good. We're doing all these good things. And that's what you have to tell yourself to keep going. even when the financial reality is not quite the same. But I've even worked with like brilliant business people in other industries who open up a coffee shop for fun or because, you know, it sounds like a good idea. And they'll be like, I lost $100,000 last year on this cafe and I don't understand why. Speaker 2 (11:03) Yeah. And Speaker 3 (11:04) you're like... Well, I'll explain to you why. You don't realize that here in the US, which I'm curious to hear about other countries, but it is really hard to get your labor under 30 % of your sales. So all of your sales, 30%, if not 40%, is instantly gone already. Almost half. Plus the rent, half is gone. And then you haven't even bought supplies yet. Plus all the other things. they don't even realize that maximum, if you're doing a good job, you're going to make 10 % profit. They have no idea. They have no idea that that's the case. And so then money is tight. It's just tight. You have to have a handle on it. They have no idea. So Speaker 2 (11:40) when you look at running a business, who is it important for to know the cost of operations? Are we talking... big multi-site venues, just the owners, who should be in on this information? Speaker 3 (11:53) I personally think every single person in the business should know some part of it. They're part of Speaker 2 (11:58) it, Speaker 3 (11:58) right? In my company, when I actually figured out all of the math of the business and actually figured out how these businesses are supposed to run, I sat down my entire team and I was like, I just learned this. You'll never guess. We're supposed to keep our labor under 30 % and right now it's at 50%. And so we have to figure this out. I need your help to help me figure this out. out. We have to cut back on waste. We have to do this. If you want to be a part of this company and love this company, I need your help to do this. And it spiraled something like from then on out, every new employee got the same talk. And every employee that worked for me from that point on, got this same information of just like, as a barista, this is what is in your control. Cogs are half in the barista's control, how they handle the product. that cost is within their control. So they should know all the things within their power and control. Now, this is what I do. I teach baristas all day long. Like I want every single barista to understand what's within their realm of responsibility. And, you know, these financial things are a part of that. Speaker 2 (13:01) It's so interesting because I, you know, thinking back to when I was a baby barista, it's true. None of those things were kind of communicated where I know that if we got really quiet and Speaker 1 (13:11) the owner was like, is Speaker 2 (13:12) it all right if you finish your shift a few hours? I mean, I don't know what the legal, like, you know, as your casual employee, it Speaker 1 (13:17) was always like, oh, but I, you know, Speaker 2 (13:19) would need that money. And they would never ask you to leave. But if there was this mindset of like knowing. how what the cost of like employees had to be or knowing like the waste of the coffee when I was making it or Speaker 1 (13:29) how much each coffee was costing, like how many thrown out shots were hurting us. Maybe Speaker 2 (13:35) there would have been a different mentality or the milk wastage going down the sink, knowing those ideas and kind of being on top of it, making it almost like a challenge to make the business successful. So if the business isn't there and you don't have a job, you kind of screw it anyway, right? Speaker 3 (13:48) And I think for me, it's deeper than that, right? Like when I talk to, I talk to mostly Gen Z between the ages of 18 and 27. For me, none of this stuff is actually for the business or to please your boss, right? You could go work anywhere. You could always Speaker 2 (14:02) find a job as a barista anywhere. What Speaker 3 (14:04) I would want to know is what kind of citizen do you want to be? What kind of person do you want to be? Because although we hate capitalism, we hate the powers that be. We're still here. You're still here. You're not escaping it and neither am I. So you can utilize this information when to grow your realm of responsibility and income and also your impact on the environment, on the people around you. You know, I asked the baristas, how do you think the cows feel when we're dumping in excess of two to three ounces of milk every single drink down the drain? What do you think the environmental impact is? of that is. And so are you going to be a good citizen or not? This has nothing to do with your boss. But also, the financial reality is if you want to get paid more and you want a bonus at some point in your career, you should be able to handle this and you should be helping everyone else handle it because that's when the extra money is coming. I Speaker 1 (14:57) think it's almost this idea of there's personal responsibility, but there's also the level of ownership and engagement and fulfillment, I think. is that it feels like when you're talking about sharing those numbers with a staff, with a team, that there's this joint sense of ownership. And I know ownership is probably like an overblown term because it's like there is an owner who is taking the profitability. But I think the idea that like... hey, we're building this together. It's not just going through the steps. Like you're involved in something deeper in the sense of building and nurturing a business and you get to have more impact, which is, I feel like would be much more fulfilling than just turning up and like ticking the box. Speaker 2 (15:40) Well, I don't know. Do you even like, I mean, what you said is just kind of interesting. I feel like as like millennials. that maybe we had this idea of like work for the boss and the joint ownership and that, but you know, maybe I think Gen Z is a little different. I think they're like, screw them. What am I getting out of it? But there is this side of like, Hey, you are getting smarter and more career skills that will benefit you later in your role. If you want to be the Speaker 1 (16:03) boss and do Speaker 2 (16:04) that. And then also the side of like the bigger input of like the simple things of the environment of like, there are cows that are being milked. Like that's such an interesting way of. putting it for people to look at. Speaker 3 (16:14) Gen Z cares about being the boss. I don't think they ever want to. I think they're avoiding it at all costs. You know, they don't want to be the boss. They really don't want to be responsible. There's maybe like 6 Speaker 2 (16:23) % of them do. Speaker 3 (16:24) And they're the ones that are the managers and shift leads that we have. The rest of them, it's like they believe in karma. They believe in horoscope and vibes. And they believe that