12 Weeks into Buying Cre8ive Coffee, an Update

3 months ago after 17 years of always starting businesses from scratch, I decided to buy a business. It was by far the riskiest business move I’d ever made. Prior to that the most I’d ever personally put into a business was $100,000. This was ten times that amount, and it was at the lowest point I’ve ever had.

Here’s an update on how things are going.

Why I bought a business

I’ve only ever started businesses from scratch and out of all of the things I’ve done, only 1 really was a success in the end. And I’ve started a LOT of businesses and ideas and projects.

When I finished up at my previous company Black Hops, throughout a very difficult period, I tried again to start a few things from scratch.

Related: There is no ‘bouncing back’.

I started a software app for building SOPs, which I couldn’t get funding for, and I also started a small WordPress support service, WP Master (which I’m still doing). Failing with the SOP app was a very familiar feeling. Pouring time and money into something and it ultimately failing is something I’ve done many many times.

I started to think about what I could do where I could utilise some skills I’d developed during running the brewery. I started the brewery from scratch and ran it as CEO from $0 to $16m in annual sales, building one of Australia’s top craft beer brands and fastest growing companies. But highlights aside, the actual work and the experience of what I did day to day contained a hell of a lot of lessons. My previous business was a fully online business. I had 1,000 customers that I never spoke to or saw in person. I had 30 remote developers who I never spoke to or met. I went from that to a manufacturing business with thousands of customers, hundreds of suppliers, 80 staff and 4 locations. Some things went incredibly well, and some things didn’t, but I definitely learned a lot. I figured if I was going to get off my arse and do anything, I should do something that would utilise some of the skills I learned.

But I was burnt out starting ideas from scratch and having them fail, plus I couldn’t really do anything in beer. I love coffee and I contemplated the idea of starting a coffee brand from scratch. But I knew absolutely nothing about coffee. Then I found a coffee business for sale and thought “fuck it” why not just buy it.

It wasn’t cheap, the best part of $1m once it was all said and done. The business, Cre8ive Coffee has a long history on the Gold Coast, originally starting as Queensland’s first ever coffee cart over 24 years ago at Griffith Uni. These days, the business is part cafe supplies distribution and part coffee roasting, wholesale to cafe’s on the Gold Coast and retail via our own little shop in Nerang and online. It turns over around $2.5m / year so it’s not super small, although it’s a lot smaller than Black Hops was when I left.

First 12 weeks

The business was a family business with half of the team comprised of family members. I didn’t want to change too much, it’s running well and I didn’t want the whole team to quit and be scared of new ownership.

But I did think there were opportunities for improvement in the business, which is partly why I bought it.

Most of the first few weeks were spent learning the ropes, learning a new accounting system (MYOB), filling in loads of supplier forms, learning what all the team did, meeting customers etc. Not much time for making improvements.

But I gradually worked on a bit of a plan of things to change over time. It’s a 12 month plan and I’ve started on some of these changes already.

Here’s the plan and the progress so far.

What’s working well

First off I wanted to make sure I had a good handle on what was working well and what I didn’t want to change.

The business has a solid consistent trade. I like that. It’s a lot less variation each month than the beer business and financial stress is the worst stress.
The business is profitable. It’s very hard to know the real number. When you buy a business that’s a family business the books are a challenge to understand. My initial best guess was the net profit was somewhere around 10%. The cafe supplies business is low margin and ticks over, the coffee has a decent amount of money in it, the business is pretty damn efficient, there’s not a lot of fat in there.
The business was growing organically around 15-20% year on year. This is no small feat, I know a lot of companies in the last 12 months have gone backwards, so to be growing, without much of a marketing push and no paid ads, is pretty great.
The product is great. The first thing I did when I saw that a coffee roaster business was for sale was figure out which one it was (they never tell you), and turned up there and bought some coffee. I bought a takeaway coffee and beans to make at home. I had just bought an Espresso machine at home and was using a big bag of Aldi beans. The Cre8ive coffee blew me away, it was so fresh and smooth and delicious, I really noticed the upgrade. Product is really everything, so this was a big plus for me.

Things to improve

But there were also quite a few things I was interested in changing. Here I’ll list the things I think need improving, and further down I’ll note down my plan for the first 12 months – along with the progress to date.

The company is sitting at about 10% profitability, but realistically if everyone was being properly paid for their hours including my time etc, it would be a fair bit lower. I would like this to be a little bit higher to be comfortable.
I worked out quickly that the business could not survive without the GM working basically non stop all day. She literally couldn’t leave her desk without the place falling apart. She couldn’t take sick leave, if she was sick she’d just turn up to work because if she didn’t the business wouldn’t run. I also discovered she’s pregnant! No one would do her job as it currently stands for what she’s paid. Needs urgent resolution.
Efficiency:
1. There was quite a bit of confusion around the roles of the technician (who is also the original founder of the business), and the sales person. This needed to be cleared up.
2. Lots of last minute deliveries happen because we can’t say no and customers never order on the right day. Needs to be improved somehow or I’ll just be delivering cafe supplies full time (I did a lot of this in the first few months).
3. There are lots of very small dollar value deliveries where we probably aren’t making much or any money.
Processes – there are no processes for anything. This is a huge problem and the problem grew when I realised the GM was pregnant and would leave at the end of the year, and the Coffee Roaster was also stepping away. We need processes stat! Lucky I love writing processes haha.
Brand
1. The name / brand is outdated and seen as a lower cost brand. It doesn’t really stand for anything, the name doesn’t really make sense for what we do. The 8 in cre8ive bugs me. I knew this going in. I love building brands and I want to build a great brand with this business, based around the Gold Coast and being locally roasted. I always planned to re-brand the company, which of course carries some risk, given it’s quite well known and liked and has been around for many years.
2. We don’t focus on the brand enough. Only half of our top 20 customers use our brand, the rest white label our product and use their own brands. I want to build a strong brand for ourselves.
3. The head office is quite old and dated, it’s an office / cafe combined and needs a freshen up. If we want to present as a quality brand, it needs to look like it.
Quality – There’s not much of a focus on quality. Coming from the beer industry we had a massive focus on quality. I haven’t seen that same focus here. It’s quite mechanical, there’s not much innovation, it’s treated like more of a commodity than a craft product. Customers and staff don’t talk about our product the same way we did in beer. I’d like to change that.
Margins
1. Not enough rigour in understanding financials when we make new deals. This is contributing to our low OP %. Currently we just make a deal and kind of hope we make money. Part of this is just the style and intuition of the owner, and the past owner was pretty switched on with this stuff. So I needed to hit the ground running and make sure the team understood these numbers. In the past there wasn’t much transparency with financials, but I’d rather the team understand the numbers, as opposed to relying on me.
2. No ongoing analysis of current customer profitability or culling / increasing margin on poor customers. This will creep up on us and become a problem if we don’t look at this regularly.
3. We need some clear rules around minimum margins for deals so we don’t compromise so much on price that we don’t make any money.
4. We offer free delivery for a minimum of 2 milk cartons which I think is way too generous, this will be hurting our margins for sure.
5. Currently the sales rep gets paid a fixed bonus for new deals regardless of how profitable they are. This gives them the incentive to discount, which will be hurting our margin.
We’re doing about $65,000-$80,000 / month in coffee (29.6% of the business). I believe we can increase this, although it will take time. Coffee is a hard product to sell, most cafes only have one blend of coffee and they don’t like to change it. Not like beer, there are often a few taps where you can get a product on if you get everything else right.
No sales activity is tracked and as far as I can tell very close to 100% of sales time is spent on management of existing accounts. There is no CRM, there is not much in relation to outbound sales prospecting. This needs to change.
There isn’t much inbound, perhaps 1 or 2 leads per month. We need to build a great brand and people will come to us.
We don’t do any paid advertising, it’s hard when we have no budget for it, but I think there could be some opportunities here once we have something compelling to present to people.
I believe there’s a big opportunity to sell more at the cafe at head office and increase overall margin. Currently about $10,000 / month. $7,000 in beans and $3,000 in coffee and basically $0 in food. I think we can potentially 3X or 4X that number, it’s in a great location in the Nerang industrial estate, the service is friendly, the vibe is good and the product is awesome.
Online sales are generally around $1,500 of which around $1,000 is coffee sales. There is no subscriptions, no online deals, no marketing. I think we can increase this to $5,000 / month in online sales. It won’t happen overnight but everyone loves coffee, there’s a lot of opportunity here.

Progress to date

Here’s a rough plan of what I want to do over the next 12 months and the progress so far. Progress has been a little slower than I hoped. You forget how much just general operations bogs you down in business. We have to deal with the daily challenges of the business first, and then start thinking about changing things.

Aim to get from 10% to 15% profitability. So far no improvements here, if anything I worked out if everyone gets paid properly for their hours we’d be a fair bit under 10%. I still believe we can do this, but it will be towards the end of 12 months, no time soon.
Reduce the pressure on the GM’s role, less hours, ability to leave desk, people relying on her less than currently. This was critical and this is being done. My partner Erin has come into the business and we’ve employed someone part time to help too. Obviously that has hurt margins but it was essential. The GM is dropping back to part time soon in prep for the baby’s arrival, and I’m hoping she comes back part time some time next year and ideally full time in the future if she wants to.
Efficiency:
1. The technician and sales rep roles have been cleared up. All sales go through the sales rep now.
2. We’ve made some improvements to last minute deliveries, we’ve began to set the expectations that people have to pay if they order out of cycle. This will take a bit longer because we don’t want to piss people off too much – especially when customers know there is new ownership, and things have operated the same way for a long time. But things are improving there with the new rules.
Processes – I’ve done a lot of work on processes. We have a huge long accounting processes doc, processes for deliveries, for roasting, for the CRM etc. One of the bigger ones is the end of month finances where we have a process for really digging into the finances and doing things like comparing them to the target, and looking at individual customers’ profit levels. That is all documented and was done for October without my involvement. We are also in the process of changing the way we do accounting for inventory, which will give us even more clarity on what’s going on in the business. Quite a lot of time has been spent on this stuff.
Brand
1. Re-brand. I’ve designed a whole new brand which we will roll out soon. It won’t be cheap. We have bags, umbrellas, barriers, flags etc all with the current branding at our customers’ venues. All the extra cost will hurt margins, and will be annoying for some customers. But I’m excited about it, and I think longer term it will elevate the company into being a brand of choice as opposed to a low cost provider. Watch this space (follow our Instagram @cre8ivecoffee to see what we’re up to). I’ve shown the new brand to the team here and they love it, which is a nice start.
2. We don’t focus on the brand enough. I have changed the sales incentives so branded deals are rewarded higher than non branded deals. I hope that over time this will help us get our new brand to a point where more than half of our top 20 customers are using our brand. Let’s look back a year from now and see where we are at.
3. I’ve worked on a design to re-build the cafe at HQ. I haven’t started yet, but we will start in the next few months, in line with the re-brand of the company. Exciting times. It will be done in 2 phases, phase 1 we’ll re-design the space but still only offer drinks. Phase 2 we’ll start offering food as well and me and Erin have brainstormed a nice idea to make that happen.
Quality – Bring in a new focus on quality:
1. This week we sent our beans off to a coffee judging competition. That’s going to become normal. I want to get some external feedback on what we do.
2. The roaster was one of the family members and decided to step away from the business. So I found someone who is a keen coffee lover who used to have a roasting business, and we are going to work on some more experimental blends. I’m also in the process of buying a smaller pilot roaster which will serve 2 purposes. It will sit in the refurbished shop and look cool, but more importantly it will enable us to do some small batch stuff – much like we used to do with beer. It also gives us a bit of redundancy if the big machine goes down.
3. I think the team and customers need to know our product is quality, and once they see the new look cafe, the new brand, some more experimental and higher end blends, and hopefully some good results from external validation, we will start to view what we do as a high quality product.
Margins:
1. Build new deal calculator and have profitability targets for each new deal. Consider only offering certain prices if customers commit to buying other items off us so we can hit better targets. This is all done. Every deal that the sales person puts through has profit calculated on the deal, and we know whether or not it meets minimum targets.
2. Introduce plan to analyse ongoing profitability of customers and tweak deals to make them more profitable. This is also done, every quarter we run a report on all customers and look at their profitability – if things are off, me and the sales person discuss a plan of attack.
3. Introduce some rules around margins so we don’t compromise too much. This is also done, we have minimum targets to hit on all deals.
4. Consider increasing minimums for free delivery. This is done. We’ve put in place a minimum $100 order for free delivery, which has resulted in some customers ordering less frequently, and some ordering more products. Both of these outcomes will slightly increase our margin.
5. Incentive sales based on margins and price per kg of beans. This is also done. The sales rep now gets paid a % of profit, not a fixed $ value of all new deals. This will incentivise him to focus on the profit on deals as opposed to discounting to get deals over the line.
Sell more coffee! Building the brand, story, content, focusing on quality etc should all contribute to this. This will be a longer term goal, but once it all comes together, I think we can sell a fair bit more coffee.
Sales
1. Start tracking all sales activity. This is now done. I’ve put a CRM in place (Tall Emu) and the sales person is now tracking all sales activity. This was a big change and it’s great to see it happening.
2. Sales person focusing more time on outbound sales prospecting. We track this every month thanks to the new CRM and it’s gone from around 0% to somewhere around 50%.
Inbound – Build a better brand, build up social media presence, start doing more content and get more press. Currently all of that is pretty close to zero. Not much has improved here but once we re-brand, I’ll get this stuff going more. The business has a great story, the product is solid, once we have a good brand I think there’s a lot we can do here.
Introduce paid advertising for both cafe supplies and coffee. Make sure we can track the results, reasonably small budget – maybe $5,000 per month. Do this after re-brand. Nothing progressed on this so far but later in the year I’ll look at this.
Plan for a Revamp of HQ. Move the office out of there, set it up for onsite consumption, indoor and outdoor / open up the front, re-design so it’s more high end and introduce food. This will increase overall margin and justify full time team members at the shop front. So far I’ve got a design done up for inside, but it’s looking like we can’t do anything outside which is a shame. This will come to life over the next few months – food will come later.
Focus more on online sales, more regular content, ecommerce improvements to increase sales, more regular emails, introduce a coffee subscription and consider limited blends, more packages and specials for occasions (mother’s day, xmas etc). Haven’t done much on this just yet, but this will come after the rebrand. I have made a few small tweaks to the website, put it on my weekly rotation of sites to update, made sure it’s all updated, I’ve sent a few emails, which I’ll ramp up a bit more when the rebrand comes.

Overall, while the first 3 months has been a lot of operational things, we’ve also achieved quite a lot. I hope this post has been useful in showing how I think about business and I hope it’s interesting to you to follow along on our journey. It’s a great company, with an awesome story and history and team, and I’m looking forward to building up the brand and the business more over the next little while.

By the way, I’ve turned comments back on on this blog. If you have any thoughts feel free to leave them in the comments.

The next post about the coffee business will be all about the rebrand.

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Photo by Battlecreek Coffee Roasters on Unsplash

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dan

Serial founder, owner of East Coast Roast, previously founded Black Hops Brewing, WP Curve, 6 books including The 7 Day Startup. I send a weekly email about startups, content marketing and entrepreneurship - join for free here.

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