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And finance Allah shmoop How do product choice decisions work

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I cast my brass off is the best purveyor of

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fine coffee in the world at least according to them

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So they essentially offered three sets of products retail coffee

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roasting equipment and coffee beans Last year they did two

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million bucks of sales from their coffee bar outside the

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store In warehouse they sold fourteen million dollars worth of

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roasting equipment and nine million dollars worth of beans is

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either is Kona Shmona Whatever But on a total of

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twenty five million dollars in sales they lost a million

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dollars and their credit lines are tapped and well they

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have to start making money They just aren't sure how

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to do it Luckily they're all watching this video The

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backstory Most companies sell more than one product and each

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product carries different profit margins or contribution margins of dough

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back to the company Each product also carries more needs

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for resource is like in order to sell the roasting

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equipment the company has to employ super smart people who

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really know their stuff and are selling to coffee aficionados

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who really know their stuff So hiring those people is

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well expensive versus the simple baristas who don't even need

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a high school education outside you know serving coffee to

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retail customers who barely need to be literate and will

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someday you know have those Maurice does basically be replaced

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by robots totally different resource needs for those two very

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different products And the presumption here is that well maybe

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resource is should be allocated away from the very expensive

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to service and probably lower margin coffee roasting materials And

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instead a serve more coffee outside with cheap labor you

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know that eventually be replaced by robots That case maybe

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maybe not all rights Let's turn the lens here On

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another example if you have a stationary store like one

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that sells high quality papers for weddings funerals bar mitzvahs

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and pet birthdays you know that kind of stationery store

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not one that just stands Still it wouldn't be crazy

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to have that business self three million dollars worth of

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paper and contribute only one hundred grand in pre tax

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profits because paper sales are highly competitive and very low

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profit margin And well there's Amazon And then there's the

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mom and pop stationery biz with three little old ladies

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in the back room happy to make minimum wage as

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they draw calligraphy all day Well that biz might only

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have three hundred grand of sales but contributes a one

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hundred twenty thousand in profits only one tenth of the

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revenue it contributes Maurin profits so profit margins matter and

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the character or style or structure of the business that

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product lines are in matters a whole lot Okay back

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to coffee I cast my brass off has similar dynamics

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First think about the retail store because it's serving food

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It has to hold certain standards of cleanliness You know

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city ratings and payoff To inspect a contributions Teo inspections

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and something like that they have to offer parking and

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have various benefits to employees It takes ten employees to

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serve two million dollars in coffee at average load to

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the company of sixty grand each or six hundred thousand

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dollars a year In employee costs that is each employee

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makes forty five grand a year and then cost to

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the company Another fifteen grand in pension benefits insurance over

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time Another cost To keep mall employees Well then it

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has to rent the extra finished non warehouse space Another

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hundred grand a year city inspections and that whole cleanliness

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thing Then add another hundred grand a year in cost

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And then there's the coffee itself and cups and washing

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and breakage and product things that add another two hundred

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Well it's reasonably profitable as a unit It contributes about

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a million dollars to the bottom line is pretty good

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and the owner's love it because the people who drink

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there are coffee snobs and give almost free market research

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in describing what they like or don't like about a

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given roast Then there's the roasting equipment business flew high

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end people high end product The owner's complain all the

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time about the high salaries of the people who sell

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the equipment The company doesn't make each roasting been theyjust

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assemble it and then titrate it so that it can

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chemically optimize whatever customer grind that the other coffee shops

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want to build and serve on their own will The

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network of coffee shops is amazing and they all respect

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I cast my brass off because the PhDs in coffee

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who make the equipment are also awesome on fourteen million

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dollars or revenues The company when inspecting everything as a

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standalone business meaning if they shut down the coffee retail

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biz and the bean distribution biz well they'd have eight

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million dollars in hardware product cost two million in assembly

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cost and another two million in well everything else from

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insurance toe warehousing shipping the website management so on So

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this is odd The retail coffee biz pours a million

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bucks in profits to eye CalFed and this business on

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fourteen million in revenues pours in another two million So

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the beans biz must be where the problem is At

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nine million in revenues it's losing over four million bucks

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Why spoilage Bad marketing campaigns high import taxes or duties

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Ah highly competitive marketplace with everyone from grocery stores toe

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Amazon being better at selling beans while the process was

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the business love child of the idiot son of the

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founder a common problem in American business But here the

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process of selling mass beans into the consumer marketplace requires

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a different skill versus selling high end coffee to snobs

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The disconnect shined a light on the resource constraints in

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human capital Not enough cos focus on this element the

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brains of their employees and the ability to collectively contribute

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to good or optimal answers in resource allocation You know

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that's what it's all about Huge amounts of resource is

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were being poured into growing a being distribution business which

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is a low margin Almost anyone could do this thing

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kind of business Instead of taking the nicely profitable retail

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store in high end roasting business and being just nicely

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profitably happy well the constraint here was the capital deployed

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into the money losing commodity business of being selling and

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sacrificing the ability to integrate even further backward in the

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Assembly of the roasting hardware like they could have maybe

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made a lot of profit over time and began building

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their own Rose Sing hardware which they're also good at

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Well the optimal resource allocation then takes the scarce resource

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of human knowledge and making coffee roasters for small snooty

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cafes And it spends more on that process shutting down

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the mail order beans Direct marketing biz Well the change

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makes the company go from losing a mil a year

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so to making a few mil in cash profits which

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it can then deploy Leveraging the genius coffee roasting brains

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It already has to become more powerful in that smaller

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but way higher margin business So that's one view or

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one lens on how product choice decisions work in a

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nutshell or well in a coffee bean shelf maybe something 00:06:43.058 --> [endTime] like that No

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