Coffee & Opportunity Cost

Coffee & Opportunity Cost

Opportunity costs are, perhaps, the most ignored costs in a busy business. That may be a coffee shop, coffee roastery, or a restaurant. In fact, they apply to every business and I think deserve more discussion.

Opportunity costs sneak under the radar because they don’t show themselves obviously in the profit and loss statement. An opportunity cost is the cost of a decision you made, the cost of the opportunity you didn’t take.

To make sense of this I’m going to use a busy coffee shop as an example, specifically one item on the menu:

Pourover Coffee & Opportunity Cost

The industry has clearly started to pay attention to the costs involved in a pourover. The price of a cup of coffee, brewed by hand, have steadily risen. I’d say, in London, the price is close to averaging £4 a cup. That’s pretty expensive. It makes sense; because there’s a good amount of focused manual labour involved. This in addition to higher costs of coffee and of materials and equipment, when considered against the number of drinks served.

So, on paper, brewing a cup of coffee this way makes sense. The gross margin is reasonable, and in the P&L things look ok once the labour is factored in. Let’s look at the opportunity cost: what else could this person have been doing instead of pouring water, carefully, over coffee?

Depending on the flow of your business, and the throughput it manages, the answer may vary. Let’s take both the best, and worst, case scenario: you’re very busy. In this situation, instead of pouring a single cup for 3-4 minutes (which is a fair estimation of the time involved) a barista could have helped process a reasonable number of transactions. While the pourover is an expensive item, in that the busy business could have processed 2-3 times as much revenue.

Perhaps, reading this, you think this scenario feels overly simplistic. Not everyone’s business is busy all the time. I believe it is important to optimise for the busiest moments, to maximise throughput and revenue. As the saying goes, “make hay while the sun shines”.

Opportunity costs are everywhere, some of those costs are material and some are ideological. By choosing to stamp a loyalty card you’re deciding to spend both time and a little of your interaction budget on discounting future cups of coffee. Have you considered what else could be achieved in that moment? If your goal is loyalty, are you convinced that you’ve found the optimal route?

By deciding to spend money on a small lot of coffee, auctioned online, a coffee roasting company has decided to allocate a certain amount of their financial resources. Is this the best use of that money, to grow their business, to grow their reputation, to deepen the relationship they have with their customers?

In writing about pastries, to some of my audience, I failed to communicate that this was really about opportunity costs. Pastries sell well, they make ok money, people like them, people buy them. However, by choosing to sell them what opportunity have you given up? Perhaps none, though the response from others readers of the post suggests that there are plenty of opportunities worth exploring.

Coffee is often conformist, businesses are born that are defined by inherited choices, their practices preordained. I am as guilty as anyone of doing things because that is how others do them, though as I start to reconsider the missed opportunities I’m inspired to start to explore new ideas or dig deeper into what are essentially the habits of the coffee industry. I encourage others to do the same, as it will not only strengthen their business but also diversify our approaches and accelerate the way we all move forward.