Cheap Coffee is Hurting Business Value

Today’s Coffee shops and restaurants are more popular and busier than ever. To see evidence of this just walk down any of the popular eating places in Sydney’s Inner west, Eastern Suburbs or any other popular eating area in Sydney and you will hardly be able to find a place without reservations. 

Both supply and demand for these types of businesses are high yet the prices they sell for are very disappointing for the owners that have put in many hard working years of their life building them. 

So why is this the case?  Because, the price of coffee and restaurant food hasn’t followed the inflation rate, increase in rents and labour cost. 

Over the last decade the rise in commercial property value has pushed commercial rents up, especially retail rents, not only in the shopping centres but also on the street. The increase in rents together with increase in labour cost has made margins for the small retailer much lower than a decade ago. 

Nowhere is this squeeze more obvious than in the family owned restaurants and coffee shops. Goodwill of these businesses is tightly connected to the location, which makes rent negotiation very hard for the tenant when the lease comes up for review. They are also highly labour intensive. 

The logical step to combat shrinking margins would be to increase the prices to compensate for the increasing costs. However, because of the personal connection felt between the business owner and their customers and the unfounded fear of losing them to the competition if the price of coffee is lifted by a few cents has made many owners absorb this cost over the years. 

To compensate, operators are working longer hours and increasing services that they are offering. Restaurants and coffee shops that in the past have never offered takeaway food or space for functions are doing so now. Establishments that have been operating with one or two days off during the week are now open seven days. Yet you still in Sydney can find coffee for the same price that you could ten years ago. So when the owner decides to sell their business, they receive a rude shock when they realise that their business is worth less than what it did when they bought it 10 years ago.

A decade ago they were working normal hours and making good money. Today they are burned out by the hard work and long hours and still making the same amount of money, except that the average wage is much higher today than what it was when they started so their good earnings then are not so good now. This directly affects the business sale price and pushes it downwards. 

So in order to achieve a good price for your food business, good margins must exist. Good margins will ensure that the owners work reasonable hours and achieve good financial reward for the hard work they put into running their business. It is inevitable that the price of food and coffee in restaurants and coffee lounges have to go up. Even if this may prompt the Australian Reserve Bank Chairman to raises the interest rates again to stop inflation from getting out of control.

Zoran Sarabaca

Principal

Xcllusive

Sydney Business Brokers

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Buying a Business – Fear and Desire

The business-buying-decision is heavily biased towards perception of risk as well as understanding the benefits of a business. This means that you must help buyers understand the real risks in your business – you must try to minimise their fear of the unknown. The more they understand the real business risks the easier it is for them to appreciate the benefits. 

The benefits for buyers are not only financial. Benefits may include personal success, independence, or self-fulfillment. They are looking for a particular type and size of business that fits their needs, skills and experience as well as their future plans. 

A buyer will be concerned about a range of issues. They may be concerned that goodwill and intellectual property are linked to the owner and won’t transfer after a sale – or perhaps the business has a bad reputation in the market. The buyer may perceive the cost of acquiring goodwill as too high. 

Then there are human resources issues: what if there is a large turnover in staff after the sale; what if the managers leave; what are the staff’s long service leave, superannuation and workers compensation liabilities. 

Xcllusive uses a model to explain how the two opposing thoughts compete. The overemphasis on risk due to the fear of the unknown creates mistrust. The feelings of mistrust dominate the buyers understanding of the business and their desire to achieve its benefits.

Over the sale period we seek to reduce the buyers’ mistrust and increase their understanding of the benefits. This should help them to make a balanced decision to buy your business.

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