Deliveries – Are they worthwhile for a Specialty Coffee shop? Part 3

The Marginal Cup

The “Marginal Cup” makes delivery attractive. However, we find that owners have two main concerns with the idea of joining a delivery platform. The first is the practical problem of delivering coffee without spills as they can damage your brand. The second, biggest concern always is the cost of joining the platform.

Delivery platforms want a share of the sales value of the product.

This ranges from 30% to 35%. It looks high. If your profit margin is 30%, how can it ever make sense?

The answer lies in the “Marginal Cup” and its impact on your sales and overall profitability.

What is this Marginal Cup?

Let’s look at an example of selling a small cappuccino. Here’s a simplified calculation of your profit margin.

Your variable cost might differ. It‘s the principle that matters. Owners wants to protect this margin. They are always finding ways to improve it. But sometimes they may protect it at the cost of new business. Let’s see why that’s the case.

After paying the fixed and variable costs, the profit margin is R10 – a 40% ROS.

UberEats wants 30% of the sales value, excluding VAT. That’s R7.50. They are the more expensive choice. After paying this, the final profit margin will be a meagre R2.50. If your drinks carry a higher variable cost, you might end up with a loss. Who in his right mind would do this? It’s crazy!

In my wanderings around Cape Town, I met an interesting business owner. Let’s call him John. I was busy selling the idea of our delivery platform when he stopped me in my tracks with his first remark… “I don’t deal with parasites!”

Though I burst out laughing, John wasn’t joking. His view was that delivery platforms make money on the backs of hard-working restaurateurs. They make the money and not the restaurant. I enjoyed the discussion and learned a lot from him. If you do the calculation in the way he did, and it’s how we’ve done it here, then delivery can’t make sense.

Why then are franchises delivering coffee?

Even if they want growth, why do business that doesn’t make money?

There are two big reasons and if you know what you’re doing, you won’t lose money.

The first task of a business is to create customers. Once you create them, you must keep them. People’s behaviour is constantly changing. They are always on the lookout for more convenience. Your customers will be no different. Deliveries will not only help you grow, but also help you keep the customers you have won … and at a profit!

Let’s look at our model again. Sales is on both sides of the measure. Increasing sales sounds good. Always? It depends.

The ROAM Model

First, do you need more assets to make the delivery?

To use available service providers, you might want a new tablet to receive orders, but you won’t need any new machines, people or space.

The ATO# number asks the question, “For every Rand of assets how many Rands of sales do we generate?”

If we don’t have to add assets, then the increased sales from deliveries makes the ATO number go up. That’s a big plus.

The second part of our model is the ROS%. What’s the cost of the sale? Even if sales rise, will our profit do the same? This is where the marginal cup comes in. Cash profit is the money left after we have paid all our costs. True costs. Not accounting stuff. We first pay our variable cost. Then our fixed cost. The delivery platform works on a percentage fee. We only pay them if there’s a sale. Their cost is variable.

I need no extra machines, space, or people. The sale carries no new fixed cost. The current sit-down and walk-in customers already pay for it. So, what will the profit be on the delivered Cappuccino?

In this calculation we add the delivery cost. The fixed costs are zero. The profit margin of the delivery is the same.

The typical coffee shop serves walk-in and sit-down customers only.

In our model we improve our ATO#, while keeping our ROS% the same. This will mean our ROAM% will go up. Good news for any owner.

We achieve this using the higher cost of UberEATS. We also did not make use of the option to increase our sales price by 5-15% for delivery. Yes, you can do this because people will pay for convenience.

It off-sets the cost of the delivery. Doing this, the profit of the same sale will improve to R12.62.

If you calculate it using the original sales price, it gives you a tasty 50% profit margin!

See the calculation below.

Choose your service provider carefully and there will not be any fixed monthly fee and you control when your store is available on the network.

You can prevent having to appoint more staff. Just optimize the slow periods during every day with the staff and equipment you already have. That way you tap into the hidden potential of your business.