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Friday, August 04, 2006

100% Cost Percentage?

As I entered the professionally designed coffee shop on Madison and 49th Street, my first observation was the herd of Wall Street types sipping espresso. The grand opening was in full swing. The press had done a fantastic job of getting the word out. Sales were brisk and it was difficult for my clients to hide their emotions.

As the jubilation of the busy opening faded, the reports began to show a huge cost problem in the premium bottled drinks category. These refrigerated products were available on a help yourself basis. The general manager and the vice president asked me: "Is it possible to run a 100% cost of sales?" My answer was a simple yes. They looked at me incredulously and demanded to know how items priced to yield a 30% cost of sales could possibly have a 100% figure. My answer was "Massive theft!" They agreed there might be a bottle or two taken every day by "customers" but there's no way theft could explain this level of variance.

We continued to debate the theft issue and I explained the true yield was 100% which would rule out portion issues. The items were all shelf stable which would rule out spoilage. Breakage was possible but they explained the new store had yet to suffer a broken bottle incident. So where do we find the 70% variance? I held my ground with the massive theft theory.

The offices were upstairs and we took the elevator to continue our meeting away from the operation. During our meeting I asked for the complete path a bottle would take from delivery to sale. The deliveries were approved by the morning manager and full cases were stored in a first floor storeroom near the sandwich production area. Bottles were restocked three times a day by general helpers (morning, pre-lunch and post-lunch). As our meeting broke up, I asked to visit the first floor storage area to check for locks and other security features.

As we entered the sandwich area, I noticed the four prep workers were all drinking premium bottled beverages. I asked them how they account for employee beverage consumption. The general manager told me they were allowed unlimited coffee and fountain drinks. I asked for clarification on the premium bottled beverages. The answer was the employees would have to pay for these drinks.

Indeed we found the extra 70% cost. The specialty iced teas in assorted flavors were the most popular drinks for the workers in the hot production areas. The opening was in July and the weather was sweltering and the prep area had no air conditioning unit. These workers were drinking these bottles by the case while the paying customers out front barely noticed the premium drinks cooler. Everyone was drinking barista specialties.

For those who want to know how the cost percentage could be 100%: Take a $0.45 bottle and sell 3 at $1.50 each. That's $4.50 in sales. Now subtract 7 bottles due to employee thirst. That's 10 bottles (3 sold plus 7 unsold) at $0.45 or the very same $4.50.

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