Profitability in Roasting

RoastOnCoast

New member
Jan 24, 2017
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Greetings fellow dreamers and doers! This is our first post, so it is only fair to give our story, with a little mystery, but it is our intention to initiate a discussion on the realities of profitability within the Roaster community.

We are in the beginning phase of a new roastery, to be located in a town imbued with a sense of discovery and a taste for quality. Currently, there is no local roaster, so, as we researched the market, it appeared to be a wonderful place to fire up some excitement about quality crafted coffee. We can't share where it is yet, as we feel this is a special opportunity for us and don't want someone else to take it...that's the mystery part. Thank you, gentle reader, for your patience with this.

Dream to bean:

Like all new light industrial manufacturing plants, the "wonderfulness" can quickly become overshadowed by the regulatory requirements, location feasibility issues and sheer cost of purchasing the necessary equipment. As ours is a pursuit attempting to adhere to Lean Startup Principles, we have spent a good deal of time analyzing different models, researching pricing structures and trying to find a way to keep our costs as low as possible while, at the same time, creating a roastery that can survive the ups and downs of business. Our greatest hope is to contribute to our community non-profits and the coffee grower's communities, while being able to sustain ourselves, our employees and our supply chain friends.


Specifics of our business:

We are able to self fund our startup (good news), but we are not able to invest in anything larger than a 3Kg roaster (bad-ish news) due the other expenses surrounding buildout, delivery vehicle, etc. Based on our model, we believe we will be able to produce enough coffee to meet demand.

As an example, roasting 8 hours per day, two days per week, will provide us with 384 250g bags per week (2 batches per hour, for 8 hours) with a gross profit of $3840*.
This will allow us time to work with potential customers and accomplish all the other tasks surrounding a small business.

*(
Based on the research of our market, selling at $10 per 250g bag is probably pushing the upper limit of what people will pay. Our cost for Bourbon is $6 per Kg).

We expect to sell 50 bags per week initially, so we will break this down into our weekly estimated costs:

Factoring in production, we have arrived at a cost of $161/week (beans, delivery, gas, electricity, bags, etc). This does not include Income taxes to be paid, sales tax, or salaries of our employees.

Factoring those in, we have approximated additional costs of $243/week for salaries (including necessary taxes) $169/week for business income taxes (State, Fed and Sales). Hence, with a gross profit of $500, we've ended up with a Net Profit of -$73/week in the initial startup phase...not exactly the result one would hope to have.

Our cash flow model predicts positive results after month 12, however, the bean cost creates a negative cash flow every time we have to reorder stock. Our cummulative cash flows are so small that we are challenged to find a way to pay back our initial seed money, let alone expand our manufacturing plant in the future. Additionally, we imagine it will take some time (24 months in our model) to reach a sales goal of 384 bags per week. That may be too conservative, but we don't want to overestimate the market.


We are curious to start a discussion around the business of Roasting, how different models have succeeded or failed/taught the owners, and the best means are to achieve profitability to sustain the supply chain while following the principles of Lean Manufacturing. In other words, we currently can't see the forest through the trees and don't understand how anyone makes a living roasting coffee as a full time business without starting off with a massive bank roll to fund it for the first 3 years.

In our case, we hope that some of the Master Roasters here might give us insight into the untapped power of the roaster force and keep us away from the dark side, so that we may find our way to the light...er, roast.

We have been lurkers for some time and are finally sharing our thanks to all of the contributors and moderators of coffee forums.com. We have learned so much already and look forward to any and all ideas to spur our collective wheels of creativity.

---RoastOnCoast (ROC)
 

Jayzoll

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Jan 15, 2017
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without knowing your intended batch size and expected mass loss...i quickly hit a few numbers based on 15% and 18% loss of mass. depending on the quality of coffee and desired control of the roast, your batches could very well be as low as 60-70% stated capacity.

if you sell 50bags/day 5 days/wk you need 62.5kg roasted coffee.

at 15% weight loss and 80% batch sizes you are right at max the max planned 2 day capacity.

at 18% weight loss and 80% batch size, you are only at 60.8kg

now if i assume you want to roast up to current '3rd wave' trends of pretty light roasts, the batch size will likely drop to 60-70% stated capacity (or even 50-55%.) at those levels and 15% weight loss, you are now at 48kg and 54.4kg

sounds too small of a machine to me. there is no mention of wholesale, is the plan purely 250g retail bags?





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RoastOnCoast

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Jan 24, 2017
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Hi Jayzoll,

Thanks for your thoughts! We have built in 16% shrinkage into our model, so we plan to roast full batches of 3 Kg (after profiling and cupping are completed for the beans). We expect to produce 40Kg-50Kg per day, so yes, you are correct, we should have said 8-ish hours! That said, we are faced with the real possibility of 50 bags per week (YIKES) sold, during the beginning months. Our location has a small population, so it will take some time to reach 50 bags per day...oh how we cross our fingers for that time!

Our plan is only to sell 250g bags. We have looked into wholesale, but so as to not undercut our own business, we intend to sell them for the same price to retailers and other businesses. If we offer a lower price point for the wholesale channel, it doesn't appear to add anything to the financial bottom line. However, we can not dismiss the importance of brand penetration and brand awareness in the wholesale market.

Do you have experience with wholesale? If so, may we ask how you structure your pricing?

Thanks again for your thoughts and pushing us on the refinement of our numbers! And yes, we prefer light and bright to dark and dull!

---ROC
 

JohnD18

New member
Jan 5, 2015
145
0
New York
Greetings fellow dreamers and doers! This is our first post, so it is only fair to give our story, with a little mystery, but it is our intention to initiate a discussion on the realities of profitability within the Roaster community.

We are in the beginning phase of a new roastery, to be located in a town imbued with a sense of discovery and a taste for quality. Currently, there is no local roaster, so, as we researched the market, it appeared to be a wonderful place to fire up some excitement about quality crafted coffee. We can't share where it is yet, as we feel this is a special opportunity for us and don't want someone else to take it...that's the mystery part. Thank you, gentle reader, for your patience with this.

Dream to bean:

Like all new light industrial manufacturing plants, the "wonderfulness" can quickly become overshadowed by the regulatory requirements, location feasibility issues and sheer cost of purchasing the necessary equipment. As ours is a pursuit attempting to adhere to Lean Startup Principles, we have spent a good deal of time analyzing different models, researching pricing structures and trying to find a way to keep our costs as low as possible while, at the same time, creating a roastery that can survive the ups and downs of business. Our greatest hope is to contribute to our community non-profits and the coffee grower's communities, while being able to sustain ourselves, our employees and our supply chain friends.


Specifics of our business:

We are able to self fund our startup (good news), but we are not able to invest in anything larger than a 3Kg roaster (bad-ish news) due the other expenses surrounding buildout, delivery vehicle, etc. Based on our model, we believe we will be able to produce enough coffee to meet demand.

As an example, roasting 8 hours per day, two days per week, will provide us with 384 250g bags per week (2 batches per hour, for 8 hours) with a gross profit of $3840*.
This will allow us time to work with potential customers and accomplish all the other tasks surrounding a small business.

*(
Based on the research of our market, selling at $10 per 250g bag is probably pushing the upper limit of what people will pay. Our cost for Bourbon is $6 per Kg).

We expect to sell 50 bags per week initially, so we will break this down into our weekly estimated costs:

Factoring in production, we have arrived at a cost of $161/week (beans, delivery, gas, electricity, bags, etc). This does not include Income taxes to be paid, sales tax, or salaries of our employees.

Factoring those in, we have approximated additional costs of $243/week for salaries (including necessary taxes) $169/week for business income taxes (State, Fed and Sales). Hence, with a gross profit of $500, we've ended up with a Net Profit of -$73/week in the initial startup phase...not exactly the result one would hope to have.

Our cash flow model predicts positive results after month 12, however, the bean cost creates a negative cash flow every time we have to reorder stock. Our cummulative cash flows are so small that we are challenged to find a way to pay back our initial seed money, let alone expand our manufacturing plant in the future. Additionally, we imagine it will take some time (24 months in our model) to reach a sales goal of 384 bags per week. That may be too conservative, but we don't want to overestimate the market.


We are curious to start a discussion around the business of Roasting, how different models have succeeded or failed/taught the owners, and the best means are to achieve profitability to sustain the supply chain while following the principles of Lean Manufacturing. In other words, we currently can't see the forest through the trees and don't understand how anyone makes a living roasting coffee as a full time business without starting off with a massive bank roll to fund it for the first 3 years.

In our case, we hope that some of the Master Roasters here might give us insight into the untapped power of the roaster force and keep us away from the dark side, so that we may find our way to the light...er, roast.

We have been lurkers for some time and are finally sharing our thanks to all of the contributors and moderators of coffee forums.com. We have learned so much already and look forward to any and all ideas to spur our collective wheels of creativity.

---RoastOnCoast (ROC)

You need a bigger machine. If not, you'll be in serious trouble trying to scale up. And then you'll go through all that regulatory BS again when you realize that and purchase a larger machine in the next year. More money on engineers, building depts, city/town, etc.
I was in your shoes two years ago and I debated the same thing; save money on a smaller machine so I can invest in other stuff. This is what you do, and what I did which is painful, but helpful to get you to that bigger machine:
Go through your equipment list, and cross off anything you absolutely do not NEED. Ask yourself, is this something I absolutely need? Off the bat, you mentioned a delivery vehicle, that should go right out the window. Invest that extra money in the larger machine and deliver in your current vehicle. You can get business insurance that covers third party vehicles (your own) and slap a nice decal on it. You'll also save on your fixed expenses every month without a payment and insurance.
I didn't even consider buying an official vehicle when I started, and I am glad I didn't. You need to stretch your cash so you can get at the very least a 10-12K machine. You do not want to be roasting 8 hours per day, twice a week to turn out relatively low volume. It seems like not a lot of time, but it is. Also, up that 8 hours to at least 9 to allow for the roaster to warm up and cool down.

Hope that helps a bit.
 

Jayzoll

New member
Jan 15, 2017
23
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just to get started, have you considered outsourcing roasting with another roaster do a private label for you? this would give you the opportunity to test the market/concept without much risk. sure sourcing roasted wholesale has less margin, but there is also significantly less risk. or co-share/pay for time on their machine to roast your coffee? this option might be a little more difficult to find, but there are definitely people out there that would do this - plus you would get some hands on machine(s) experience prior to purchasing your machine.

if i were a retailer, offering shelf space that xxx number of customers see daily - why do i buy your $10/250g bags when that is the same as your retail price? they are competing against you with a cost disadvantage while offering visibility. a consumer is faced with the decision - why buy from the store when they can buy from you directly at a lesser price? it has to be worth the retailers time and shelf space. so they mark your cost up 20% which puts your product in the same price category ($0.05/g) as nationally, well known 3rd wave roasters - as a consumer, if i do choose your coffee over one of those brands, will i repeat?

pricing is unique. though general manufacturing costing principals are a good referential starting point.


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topher

Super Moderator
Staff member
Aug 14, 2003
3,736
13
Boca Raton
You do not want to be roasting 8 hours per day, twice a week to turn out relatively low volume. It seems like not a lot of time, but it is. Also, up that 8 hours to at least 9 to allow for the roaster to warm up and cool down.
I had a 30 kilo that we were using before we upgraded to a 60k. I had to shut it down every 10 batches because the chaff collector would be full. If the 3 kilo doesn't have an external chaff collector you will have to shut it down more than every 10 batches to clean out the chaff or you could have a fire. You will have to cool the roaster down before you shut it down or you might warp your drum. This will add to your roast time.
 
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RoastOnCoast

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Hi Jayzoll,

Thanks for your brainstorm...great ideas! Yes, we have considered all avenues of co-packing and unfortunately, it isn't an option for us. It is, in theory and practice, a viable starting point for some roasters to test the market at a minimal cost. Also, many roasters would be happy to have the extra business...all very valid points and certainly a path that we would recommend for others. We simply don't have the access to anyone to create this "channel of opportunity" for ourselves and our roaster friends.

Our delivery vehicle is a requirement and although not ideal, is not something we can change. That's ok, as we're considering it part of our marketing strategy as well.

We absolutely agree with your well written thoughts about wholesale. We just don't see the financial benefit and as you wrote, we would need to lower our price to $8 per bag for the wholesale market. Our opinion may change once we analyze our sales and market penetration data. We are trying to create a market rather than being forced to chase the lower pricing of consumer alternatives (read: cheap commodity coffee!). None of this is ideal and has given us a few sleepless nights, but we continue to press on.

Our list of required items include:
Roaster
Vehicle
Facilities
Cupping supplies
Storage containers
Telephone/Cell Phone
Beans (of course!)
Heat sealer
Refractometer
Scale
Burr Grinder
Full spectrum light
Timers
Hot water boiler
Drop in thermometer
Safety equipment (fire extinguisher, fire blanket, fire alarm, etc)
Bags
Labels
Pressure pots
RO filter
Licensure costs
Insurance
POS system
Bank account

Although not exhaustive, our list consists of, what we think are the "must haves". So, once we total everything, we are presented with substantial upfront costs, all of which appear to be necessary. So much for starting a business out of a small apartment and needing only a computer and some programming skills!

----RoastOnCoast (ROC)
 
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RoastOnCoast

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Hi JohnD18,

Thanks for your thoughts...we really appreciate it! While we would like to be able to start with a larger machine, after analyzing our startup costs and, more importantly, sales potential, we feel the risk is too great to start with a larger machine. If we are successful, then we will have a good shop roaster that we can keep, or, if we are a miserable failure, we will most likely be able to sell a smaller machine to recoup some of our investment. We see you are in NY and can tell you that the consumer base there is much larger than ours. We live in Mayberry;)

---RoastOnCoast (ROC)


 

Jayzoll

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Jan 15, 2017
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wholesale prices at $8-10/lb are definitely not cheap commodity prices. one can purchase some very high quality from nationally known '3rd wave' roasters in the upper end of that price range - delivered.

i wish you all the best. please share your journey along the way, or let us know where to follow on social media.


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Musicphan

Active member
May 11, 2014
1,508
2
Kansas City
ROC - one thing you don't mention is distribution model. Do you plan to sell out of your roasting facility? roaster/cafe? Delivering 100% of orders?

Regarding roaster size... really seriously look at jumping to a 5K at a minimum. If I did my math right that's 61% increase in capacity over a 3K. When you look at your labor costs you will quickly recoup the cost differences between the two models. Food for thought..
 

AndyP

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Jun 9, 2014
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Do not try to start a wholesale business with a roaster this small. I have a 1 person operation and a 5 Kilo machine was too small after 1 year. How many people do you have? 1 person and making this a part time hobby would be great for a 3 kilo machine. Do you need a delivery vehicle ? I cant imagine anyone ever saw a great coffee add on the side of ford van and thought it was cool - get a cheap old minivan to start and don't advertise on it. Your great coffee will speak for itself right? You don't need a lot of the stuff on your list to get started ( RO filter, refractometer, use your own cell phone and car). I started a roasting business on the cheap. PM me for more details. And to address the 'profitability' title of the thread - at any price point its tough to make any money at all unless you are cranking out tons of volume.
 
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RoastOnCoast

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Hi AndyP,

Thanks for sharing your experiences! Our current model will be testing in a locale with a small population base, so we are trying to enter and test the market without purchasing a massive machine that would be difficult to sell should we find out we overestimated the market potential. It is clear to us that economies of scale are the second most important aspect of roasting with the first being roasting/sourcing the best coffee we can.

Unfortunately, a delivery vehicle is a requirement:/

We are surprised you suggest not purchasing an RO Filter. Do you feel it is better to cup with the water our customers will be using in their homes and profile based on that? We'll PM for your thoughts.

---ROC
 
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RoastOnCoast

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Hi Musicphan,

We thank you, as we did Topher, on your wonderful posts shared across the forum...they have been most helpful! We plan on selling directly to customers first, as our financing most likely won't stretch far enough to combine a roastery/cafe model. It's funny, because we just made the mental, and cash flow jump, to consider the 3Kg machine, and now you want us to jump to a 5Kg?!?
We're joking of course realize the importance of importance of batch capacity versus labor inputs. They are certainly not ideal with a 3Kg machine. However, one must always have an exit strategy in business; ours is "What do we do if it doesn't work?". As there are so many variables to consider right now in the roastery world (green costs, rust, coffee boar, saturation etc.), if our business model doesn't work, what do we do? Hence, our choice of a 3 Kg machine. We feel we would be able to sell this size to almost anyone and recoup our losses. This is not to say we have the idea of setting up for failure. Our other exit strategy is to become so successful that we simply can't keep up and have to retire due to exhaustion!

Your "food for thought" is helping to sustain us. Keep it coming...we'll look forward to the second course!

---ROC
 

Musicphan

Active member
May 11, 2014
1,508
2
Kansas City
ROC -

I think you're exactly where I was about a 1.5 years ago... I feel your pain and struggle with these decisions. Looking at your salary projections I assume you are going to be a 1 man shop like myself - correct? Something to be aware of is your time... that's my biggest struggle to growth. If you're delivering every order keep that in mind.

I too would scrap the RO... its simply not necessary. I have a very simple dual filter system that costs a few hundred bucks. I would love a RO system at some point but it simply wasn't a budget priority. You won't be brewing the volume of a coffee shop so we don't have the same challenges with scale buildup, etc.

Regarding the hot water tower... I went on the 'cheap' and bought a Zojirushi hot water dispenser... works great and was $150ish dollars. When I'm doing a big cupping (say 8 coffees ~ 40+ cups) its pushing its boundaries. I've debated on buying a second one but overall doing just fine in 99% of the cases. I bit of a pain since its not plumbed in... but it works.

Refractometer... I have one... but I rarely use it unless I'm dialing in a brew. But realistically don't put it on your hot list. You would be much better buying a color meter for roasted coffee. I use the Tonino and its nice to be able to keep a consistent record of roast color. It really helped me understand if my roasts were consistently roasted (I am a bit analytical in nature). A moisture meter is a nice thing to have as well.. It's not something I use all the time but when evaluating new green its helpful. It saved my ass last month, had a green vendor trying to pass of last year crop as new. Thankfully when I couldn't get a moisture reading (it was too low to register).. he made me aware that he 'made a mistake and sent me last year on accident'.

Don't skimp on the sealer... the first one I bought simply was not powerful enough to seal 2/5 lb bags. I turned around and bought this one and its great... love the fact its foot operated as well. https://www.pack-secure.com/AIE-310FDV-12-inch-10mm-Vertical-Double-Impulse-Sealers-_p_988.html

Espresso machine? Are you going to develop an espresso blend? I have a Rocket R-58 in my lab that i use for dialing in espresso. Its certainly not a Slayer but does a nice job.

- Mike
 

JohnD18

New member
Jan 5, 2015
145
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New York
Hey ROC,
Don't go into it with the thought of testing the market. Go in knowing you're going to succeed and not thinking about reselling the roaster. No matter the size, roasters hold their value and there is always someone looking to buy one.

Looking at your list, if I were you, this would be the adjustments. Items in red would be eliminated.

Roaster
Vehicle
Facilities* Does this include the stack for the roaster and the necessary sinks?
Cupping supplies *cupping spoons, 8 oz. rock glasses. Don't go crazy with kits for sale.
Storage containers *5 gal food-safe buckets are great to start.
Telephone/Cell Phone - Use personal phone
Beans (of course!)
Heat sealer * don't go bonkers on a $500+ sealer. Hand sealers are about $100.
Refractometer -Unnecessary and you won't have the time to play around with it anyway.
Scale *need heavy duty for weighing raw beans and normal for packing.
Burr Grinder
Full spectrum light
Timers
Hot water boiler - If this is for cupping/brewing, you may want to get a couple of kettles instead. Less installation time, portable for sales and inexpensive.
Drop in thermometer
Safety equipment (fire extinguisher, fire blanket, fire alarm, etc) *Get 1 CO2, 1 water (for roaster), and 1 small ABC. Can not use ABC on roaster.
Bags
Labels *consider stamps too.
Pressure pots *? what's a pressure pot?
RO filter - get a simple commercial grade beverage filter from 3M. Much cheaper, less maintenance, tastes great.
Licensure costs
Insurance
POS system - if you don't have a café/retail, don't need this.
Bank account

Add:
Accounting software (quickbooks)
Sink (aside from the bathroom, health dept. will want one more sink for cleaning equipment/the facility, and one for your hands)
Hot water heater for sink and bathroom.
Small espresso machine and grinder (assuming you're developing espresso.)
Small refrigerator.
 
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