I own a small coffee shop serving expresso drinks like cappuccinos and lattes, pastries and grilled sandwiches. The business started early this year and, since our opening, has been losing money. It can’t seem to break even. Our daily sales are barely enough to cover the rent, electricity (which I never expected to be so much), salaries and operating expenses.
My partners and I are thinking of cutting our losses and closing the business. What is making me think twice about shutting it down is the fact that we still have more than 30,000 cups in inventory. We are also using a top-of-the-line coffee machine on which we spent quite a lot, and it seems such a waste to let go.
Are we justified in thinking of closing shop after barely a year in business? I feel I want to go on and fight for it. This shop has come to mean something to me since I was the one who largely developed it after the manager left. (She was too expensive to maintain). I am still managing it on a day-to-day basis.
My biggest problem is our poor sales. Here in our city, the coffee shop business is dominated by a big local player who started the coffee shop boom several years ago. He had the vision and he set the stage. I guess we, and others like us, are just Johnnies-come-lately. Is there hope for secondary players like us?
Let me answer first the second issue. The answer will have more relevance to many entrepreneurs. The first issue is a more specific issue whose answer will be greatly influenced by the answer to the second issue.
I’m sure you will be able to classify what they are doing into three: 1) What are they doing right? 2) What are they doing wrong? 3) What are they doing that have no impact on success or failure?
An observant Johnny-come-lately should be able to improve on what the first entrants are doing right. An observant Johnny-come-lately can correct what the first mover is doing wrong. An observant Johnny-come-lately can avoid doing things that are irrelevant to either success or failure.
In this particular situation, I suggest the reader-entrepreneur observes what the first entrants and dominant players are doing. In the coffee (or food in general) business, there is a characteristic that has been often talked about.
First-time customers come to the place for ambiance and come back for the good food or, in this case, coffee. This is the classic difference between service differentiation and product differentiation. Ambiance can also be called the "experience" in the store – it is not the temperature of the air-conditioning.
The experience is akin to a stage play or a movie. The customer, just like the audience, experiences the place or the movie or play. In a play, the creation of the experience will be determined by the stage, the script and the actors.
In a restaurant, the creation of the ambiance will be determined by the physical set up of the place, the words and actions used by the waiters to relate to the customer and the kind of people the restaurant hires. Do not forget that the experience must be the one the target customers are looking for.
You must differentiate in a manner that your target customers will appreciate. Remember, they will come back for the good coffee. But also remember that it is the customer who will define what is good coffee, not you.
Therefore, if you want to attract the same customers as the early entrants have done and are still doing –observe and improve on what they are doing. Learn from their successes and mistakes.
However, you may find out that the same target customers do not exist in your area of operations. Then, this means that no matter what you do to emulate and improve on the early entrants’ practices, it will not help any. But this does not mean that it is better to close the business now and, therefore, cut the bleeding.
I’m sure there are customers who come in to your store. It is just that the volume isn’t enough to make money. I suggest that you talk to them and ask them a few questions. Ask them if they are first-timers or not. Ask them why they come to your store. You may be serving a customer need that you do not realize. If you have time, also ask people – who regularly pass in front of your place but do not come in –why they do not come in. You may find out that here is something fundamentally wrong with your set up.
The answers to the questions will help you reposition and/or revitalize the store. I do not think you are in a hopeless situation. You just have to know your customer more, so you can serve them in a differentiated way. I can see that you have the passion for the business. This is a fundamental requirement for an entrepreneur. You just have to observe, listen, focus and differentiate!
(Alejandrino Ferreria is the associate dean of the Asian Center for Entrepreneurship of the Asian Institute of Management. For further information/comments, you may mail him at: ace@aim.edu.ph. Published "Enterpreneur’s Helpline" columns can be viewed at www//:aim.edu.ph)