127-C04 A-U
Arthur M. Blank Center
for Entrepreneurship
05/12/04
Babson Park, MA
Phone: 781-239-4420
02457-0310
Fax: 781-239-4178
URL: http://www.babson.edu/entrep
Nancy’s Coffee
As the busy president of the $7 million Nancy’s Coffee Café chain, Beth WoodLeidt wasn’t able to visit each of their thirty suburban coffee shops as much as she would
have liked. Whenever she did journey out as she was doing today, it was with a passion
for building brand and enhancing profitability.
Beth approached one of her more challenging locations—in a mall in central New
York—and surveyed the space with a practiced eye.
…that front table needs a wipe… the display shelves are dusty…the
OneCard holder is hidden behind the tip jar…isn’t it too early in the day
to be out of plain bagels?…
She warmly greeted the staff she knew, introduced herself to new faces, and ordered a
cappuccino from a slightly nervous young hire at the counter. As the teenager set about to
whip up the best coffee drink of her brief career, Beth took the manager aside to offer a
quick rundown on areas for improvement.
Beth was just finishing up with her quality assessment when her cell phone buzzed with a
call from a former corporate colleague in whom she had often confided about the
challenges of running a retail business. Beth took a sip of her frothy brew, winked her
approval to the relieved girl who had brewed it, and headed out into the mall to chat.
When her friend noted that Beth sounded tired, the forty-year-old CEO closed her eyes
and nodded into the phone:
Gosh, I am tired! Remember about a year ago I started saying that I
wanted to figure out where this business was going? Well, I’m still asking
the same questions like, how can we attract the capital we would need to
grow faster; what is the best exit strategy to shoot for; and what is the best
way to enhance the value of what we are building?
Sure, we’ll add another two more stores this year, but that’s just not doing
it for me. It’s early winter, 2003—and that means I’ve been running this
thing now for over ten years. And, as you know, the story hasn’t really
changed; we’re still too small to be acquired, not valuable enough to be
worth selling outright, and yet the business is large enough to need
someone thinking about it almost all the time; yes, that would be me.
We’ve hit a long plateau here; it’s past time to make some critical
decisions.
From Nuts to Beans
In 1973, Nancy Wood—then a 36-year-old mother of three and married to Sandy
Wood—founded a mall-kiosk business to sell dried fruit and nuts. When demand for that
fare appeared to be softening, she began the search for a more viable product line. After
connecting with master coffee roaster Irwin White at a fancy-food trade show in 1978,
she decided to turn her lifelong passion for great coffee into a new business. Nancy’s
eldest daughter, Beth, recalled that the concept was a bit ahead of its time:
My mother took her kiosks and slowly began to convert them over to
coffee bars she had named the Coffee Collection. She started introducing
Kenyan and Columbian coffees, but people responded ‘no way; there is
Folgers, and there's Maxwell House, and Dunkin’ Donuts.’ It was a very
strange thing to many people who were being asked to pay a whole dollar
for a single cup of coffee—or told they could grind their own fresh-roasted
beans at home. They looked at my Mom like she was nuts. In those days it
was very much about educating the consumer.
By the late 1980s, Nancy’s son Carter and her daughter Roxanne had joined the venture
full-time. While Beth had been contributing to the effort by periodically reviewing the
aggregate financials for her mother, she had never taken much interest in the enterprise.
So it was, with her mother’s blessing and encouragement, that Beth earned her BS at
Babson College in Wellesley, Massachusetts, and soon began a rewarding management
career in consumer product marketing. Newly married, Beth happily immersed herself in
the busy corporate world of high-profile projects and after-hours brainstorming
sessions—first with Pepsico, and later, with Johnson & Johnson:
I loved the work. I had a good salary, a 401(k), stock options, bonus
check, company car, great suits; I was loving life.
Then suddenly, everything changed! Nancy died of cancer at the age of 56.
Beth Enters the Family Business
In 1993, Beth took a leave of absence from J&J to return home and help sort
through the heartache and turmoil that followed her mother’s death. Sandy Wood had
inherited his wife’s business, but made it clear that if his kids were not interested in
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keeping the small chain going, then he would either try to sell the sites or liquidate the
assets.
Operating on the assumption that Beth would be returning to her corporate job once they
had closed the doors on her mother’s enterprise, Beth carefully examined the financials
and visited each of the seven locations to estimate what they might be worth. In the
course of that investigation, Beth realized that her mother had developed a solid business
model within a largely untapped niche—suburban shopping malls—and she was drawn to
the possibilities. Beth’s husband Bill recalled that when Beth asked him to join her in the
venture, it didn’t take much convincing:
I was running a division of Bell Atlantic in Pennsylvania at the time. Beth
and I had worked together much earlier in our lives; I had really enjoyed
that. I have always figured that if two married people were meant to work
together, it was Beth and I. We get along very well, and we both know our
own place in the sandbox.
One of the issues that we discussed was that one of our egos would have
to get checked at the door. I was a leader where I was working before, but
I understood that this was Beth’s family’s business, and that she was now
going to be the face of The Coffee Collection, now named Nancy’s Coffee.
With equal amounts of sadness, trepidation and excitement, Beth informed J&J that she
would not be returning. Her father was pleased, and said that he would divest his interest
in the business by annually gifting equal shares to his three children. It was understood
by all that Beth would be the new CEO of Nancy’s Coffee.
The Specialty Coffee Industry
The Green Dragon, a Boston coffeehouse founded in 1697, became the
clandestine headquarters of the American Revolution. It was there, in 1773, that the
Boston Tea Party was planned as a protest against the tea taxes being levied by King
George on his colonies. By the time the British and the colonists had settled accounts,
coffee had become the hot beverage of choice in America.
Throughout the 19th century in the United States, neighborhood coffeehouses
proliferated, and home-roasting coffee became a common practice. The industrial
revolution, however, fostered a demand for quicker, cheaper, and easier caffeine
solutions. With the advent of vacuum packaging and modern transportation, it became
possible for a roaster on one side of the country to sell to a retailer on the other side. As
with many other food products, quality was compromised to accommodate mass
production and efficient distribution. By the 1940s, the coffeehouses had disappeared,
and Americans had been sold on the idea that fresh coffee went ‘woosh’ when the can
was opened. In 1950, William Rosenberg founded Dunkin’ Donuts in Quincy,
Massachusetts. While his donut shop took pride in serving what they called the “World’s
Best Coffee”, it would be twenty more years before U.S. consumers could purchase a
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truly high-end cup.
In the early 1970s, a small cadre of coffee aficionados began to offer a unique brew made
from hand-picked beans; fresh-roasted in small batches. Peets, founded on the West
Coast by legendary coffee idealist Alfred Peet, quickly set the standard for superb coffee.
In Seattle, Gordon Bowker, Jerry Baldwin, and Zev Siegl, named their coffee shop
business Starbucks, after the coffee-loving first mate in Moby Dick. On the East Coast,
George Howell was building his chain of Coffee Connection shops in the Boston area.
New Yorker Irwin White began making a name for himself supplying fresh-roasted
grounds to some of the finest restaurants in Manhattan. San Franciscan coffee broker
Erna Knutsen coined the term Specialty Coffee, and in 1985, helped to found the SCAA
(Specialty Coffee Association of America).
SCAA membership grew steadily as these coffee pioneers—Nancy Wood included—
developed dynamic, profitable business models by proactively educating American
consumers about fine coffee. By the time Beth took the helm of her mother’s business in
1993—the same year that Starbucks had gone public—upscale consumers had developed
a real taste for an excellent brew.
Growth under the Radar Screen
Beth and her management team undertook an aggressive search for retail space.
To facilitate that process, they worked almost exclusively with the regional mall
management companies that had been doing business with their mother for years. Beth
explained they chose this path partly as a way of dodging a direct confrontation with the
powerhouse sweeping in from the west:
Starbucks had clearly stated that as they came east they were going to do
cities like Philadelphia, Boston, DC and Manhattan in a big way. We
really didn't know how to play in that kind of shark tank, so we figured
that we’d let Starbucks have that, and play the suburban card. And at the
time, that was low-hanging fruit.
Even so, Beth was up against Starbucks almost immediately. One of her first meetings
after coming on board concerned a regional mall lease that Starbucks had been
considering for awhile. During that meeting Beth suddenly realized how happy she was
to be free of the inefficient, multilayered bureaucracies that characterized much of
corporate America:
There were two leases on the table; a Starbucks lease, and one for
Nancy’s Coffee. The mall representative said that the Starbucks lawyers
had had the lease for six months—but she was willing to wait. I said,
‘Look, do you want Starbucks, or do you want a leased space?’ When she
said, ‘A leased space’, I said, ‘Give me the pen.’ That lease is up next
year, and I still haven’t gotten around to reading it.
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Beth noted that Starbucks wasn’t the only coffee vendor shying away from space in
enclosed malls:
Establishing your brand in mall locations is not, quite frankly, a strategy
for the faint of heart. Managing a mall shop is a difficult business, and it
costs a lot of money. That worked for us in a way, since newcomers would
get scared off by the idea of paying something like $100,000 a year in
rent, when they could be paying $2,000 a month for a Main Street space in
‘Anytown, USA’.
The team had learned through their mother’s experience, however, that these pricey mall
locations offered an advantage that few suburban in-town settings could match; a captive
base.
The Captive Audience
Throughout the 1990s, Nancy’s Coffee and its suburban-model competitors like
Peets and Caribou had the luxury of being able to choose locations where no other
specialty coffee shops were operating. Beth explained that this monopolistic positioning
was especially advantageous in a setting with high overhead and two distinct customer
groups:
Our bread-and-butter customer is the mall employee—the three to five
hundred people who come to the mall every day to work. If you can get
them to try, you can get them to repeat.
Then, obviously, we have our transient customers; the shoppers. We have
squarely positioned ourselves to cater to stroller moms; mothers with time
on their hands, and kids to entertain. They come to the mall for something
to do; they may not always buy, but they always have to eat. So we have
lots of cookies, apple juice, and bagels on hand for the little ones, which
helps us get the mom for her cappuccino.
In January 2002, in a move to foster a loyal base of customers, Nancy’s contracted with
Paytronix—a nascent venture that had developed a swipe-card with both payment and
loyalty program capabilities. Beth noted that the OneCard system (See Exhibit 1) went
well beyond the paper cards used by a variety of food-retailers to encourage repeat
business:
This is like an electronic punch card that also functions as a debit card—
either by putting in a cash balance or by prepaying for product. For
example, we have this one guy—an eyeglass store manager at a mall in
New Hampshire—who shells out $150 on the first of each month to buy
the 85 cappuccinos he knows he’s going to drink over the next thirty days.
We get his money up front, and he gets our $3 drink for less than $2.
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If you can get mall employees to buy a OneCard membership for a dollar
a year, they’re going to come to you every day, since for every nine drinks
they get one free—they can even get a jumbo mocha in exchange for nine
basic coffees. That’s a drink that we sell for four dollars; free to them, and
my cost is about seventy-five cents.
The OneCard is really a nice competitive advantage. We just had a
Starbucks open in Buffalo, one floor below us. Our staff was nervous, but I
didn’t understand why. I told them that with the OneCard, you already
have all of your mall employees in your pocket. It worked; that Starbucks
kiosk is struggling.
By late 2003, Nancy’s Coffee shops could be found in over thirty locations from Boston,
west to Niagara Falls, and from Nashua, New Hampshire, south to New Jersey (See
Exhibit 2). Three of the stores had been acquired from the owner of a four-chain
enterprise who had come to the stark realization that running coffee shops was not going
to be the road to riches that he had once imagined it would be. Beth recalled that they
were able to make significant improvements in the stores they took under management:
When we acquired Café Coffee, their gross margins were running in the
low thirties. They had been managing the business from Wellesley,
Massachusetts, and no one was going out to visit the stores. From a
financial standpoint, we controlled the employee hours and monitored the
food costs. That helped to drive their gross margins closer to 50 percent.
Operationally, we kept some of their people, but not all. We put some of
our own people in who had much different operational standards than the
Café Coffee people. At one store, we saw an increase in customer count,
and in six months that store went from being in the red to being in the
black.
Just as Starbucks and Dunkin’ Donuts never said ‘never’ with regard to mall locations,
Beth followed through on an opportunity to develop a street-front location. She was
excited about the challenge and the possibilities:
There are so many locations that are still looking for high-end coffee bars.
The question is; are we as a high-end coffee bar looking for that location?
We just opened a store on the street in Manchester, Vermont. My rent
there is $1,800 a month. I think it will work, but it will take some time to
attract a customer base. If we can find some more good towns like that, I
suspect that we will probably do more like that versus more mall
expansions.
While Beth was happy with the performance of the majority of their stores, she sought to
close the weakest locations in their portfolio as soon as possible. She commented that the
timetable for divesting those shops was not entirely in her control:
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You need to be making 15 to 20 percent operating income. If a store can’t
make 15 percent in operating income after its fixed and variable costs are
covered—then the store needs to be closed. But in our business, you can’t
just close a store that isn’t performing—even one that is losing money—
and that’s because of the leases we have to sign.
These management companies finance their malls using not only the
building as collateral, but the leases as proof of cash flow and their ability
to repay the debt. If they were to give their tenants a kick-out clause, it
makes their business model more risky and harder to leverage for
borrowing. That’s why they insist on five, seven and ten year leases.
I have a couple of locations I’d like to close tomorrow, but it would mean
paying a termination fee—and leaving all my investment behind in terms
of property, plant, and equipment. You can be sure that the day those
leases expire—those stores will be gone.
Managing the Organization
Before his death in 1999, Sandy Wood completed the gifting of the business to his
children—all as shares, except for the first distribution, when Roxanne and Carter had
received a cash equivalent in lieu of stock. Beth now had a slightly larger stock position
which left her to direct the company’s future:
My brother said that after 15 years, it was time for him to go work for
somebody else. So I suggested that Roxanne and I buy his stock and split
it evenly. I own 51 percent of the business and my sister owns 49 percent.
Our bylaws are very clear that control rests with the majority ownership, It
is now my responsibility to set the business on a strategic path for growth.
Beth had discovered that ‘living and dying by every single decision every single day’
fired her up in ways that her corporate job could not. Now a mother of an eight- and a
five-year-old, she reflected that running the show had given her the freedom to craft a
working environment that was far more responsive to the rhythm of life:
I know that I never would have had children if I had stayed in corporate
America. Now my time is much more my own than it ever was. I may work
longer hours than I did in corporate, but if I want to leave at two o’clock
to go watch my daughter in a French play, I can do that. This path has
helped me to get more balance.
I take the position that as long as you get your work done, it makes no
difference to me how you configure those hours. When I had my first child,
my book keeper’s baby was due three months later. So we set up a nursery
in my office and hired someone to watch over the babies.
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Right now I have four key people out on maternity leave! The other day
one of my managers said to me that these are people who watched me
have two children without skipping a beat—that I have allowed them to be
moms and to be professionals at the same time. It's great to have that kind
of impact.
The Nancy’s Coffee business was supported by a six-person staff at the home office in
Madison, Connecticut. Roxanne oversaw the purchase and delivery of goods like freshroasted coffee, display-shelf merchandise, and branded paper supplies—all drop-shipped
to the individual stores by the various vendors. Perishables such as dairy, breads and
confections were procured at the store level.
In addition to the administrative team, the organization fielded a number of experienced
supervisors to oversee training, quality, and recruitment. While the company had enjoyed
years of loyal service from many of these senior managers (See Exhibit 3), Beth had
discovered early-on that it wasn’t long-term staff that she had to worry about:
The retail employee population is the reason that a lot of people
franchise—they don't want to manage those headaches. And you will hear
me say every week that, boy, if I didn't have employees, I'd have no
problems!
The Revolving Door
In 1997, as Beth prepared to file over 1,500 W-2 forms for 250 positions at the
company, she realized that the company needed to make a fundamental change:
Our employee turnover that year was 700 percent. It was staggering. We
did some analysis and saw that the under-eighteen kids were just a
revolving door. I had this kid Chaz leave his keys on the register and walk
out—he left the store wide open with nobody there. I held his final pay
check because I wanted to find out why he did that. When he finally did
call, he swore up and down at me for not mailing his check to him right
away. At that point I’d had enough; we were done with those people.
So we stopped hiring under-18 workers by taking advantage of a
Department of Labor crackdown on minors working in food service
operations. An espresso machine, for example, is considered highpressure steam equipment—and minors were not permitted to operate it—
so we started saying that because of that and other restrictions, we could
only hire people over the age of 18.
Last year my turnover was 200 percent—all of it at the 18 to 24-year-old
range. By lowering that churn, we were doing less training and hiring.
That cut our labor cost a full point; it’s now running about 28 percent of
sales (See Exhibit 4).
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Although Beth acknowledged that employee challenges were inherent in the
retailing business, she pointed out that the considerable challenge and expense of
hiring, training, managing, and retaining viable workers was lessened when
employees got involved:
We have found some families who were interested in working for us, and
we hired their kids, and their kids’ husbands and their friends and
cousins, and that has sort of helped us create an employee population that
has, in some locations, been relatively loyal.
Beth added that the motivations of new-hires seemed to correlate with age:
With young people, it's always, ‘what are you gonna pay me?’
They don't really care about the job security. But once people hit
their 30s and early 40s, they want to know that they will have some
job security, for example, ‘What role position can I play, and if I
perform, will you give me job security? Nothing is for certain, of
course, but I do think that we have created a culture where
employees know I won’t walk in, demand their keys, and tell them
to get out. That sort of thing happens a lot in retail.
In order to compete with starting salaries in the range of $10 per hour being offered by
upscale mall vendors like Old Navy and The Gap, in 2001 Nancy’s Coffee began to
allow its workforce to accept tips. While this was a way of adding dollars per hour to the
base pay—as well as providing an incentive for friendly and efficient service—Beth
remained concerned that it was a very difficult practice to oversee:
If a customer hands over a couple of dollars and says ‘keep the change,’
it's just too easy to drop everything in the tip cup and not ring up the sale.
That happens a lot, and there are very few point-of-sale systems for cashbased businesses that can keep theft to a minimum. I wish everybody could
pay with plastic, because even though I’d be paying 3 percent to the card
companies, I would know the money is coming to me at the end of the day.
Beth concluded that the primary advantage of the tip program was that it pushed up
wages by as much as $10 per hour over the base salary during the frenzied winter
shopping season. The prospect of that extra compensation was enough to virtually
eliminate employee turnover during the fiscal quarter that had the largest impact on the
bottom line.
Financial Management
In the early days, Beth used to review the company financials with the aim of
providing her mother with a general assessment of aggregate performance. As CEO, Beth
was shocked at the lax financial management that she uncovered when she attended to
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the details. At the same time, she was thrilled about how fast she’d be able to make a real
difference:
When I first arrived at Nancy's, nobody in the organization could read a
financial statement. Store managers were spending like crazy drunks—
buying bagels for a dollar and selling them for 99 cents. I have brought
about a complete shift from my Mom’s approach—from thinking that
financials were something that accountants (and daughters) took care of—
to running this thing like a real business.
Store managers are now accountable for their bottom line, and they are
very cost conscious because of it. I had to educate them on how to read a
profit and loss statement, and I made that skill part of their review. They
know that they need to negotiate the price on everything they buy, and
they understand that their cost of goods can’t exceed 30 percent. That
means that if they are planning to sell a napoleon for $1.99, then they
know that can’t pay more than 60 cents for it.
The company had attempted to design a program that would link these required skills to a
performance reward, but Beth noted that it had not worked out:
We tried to do a performance bonus that was based on our three key
numbers for evaluation; sales, labor and net operating income. Almost
nobody received the bonus because in order for the curve to work, we had
to set the bar really high. Those people who did earn bonuses didn’t seem
to value it very much; they still wanted their raise at the end of the year as
part of their performance evaluation. The mindset wasn’t right the first
time we tried it; we will regularly revisit that opportunity.
With regard to justifying her passion for developing stringent systems and standards,
Beth referred to the ominous weather forecast:
It’s the beginning of the Christmas season, and if we get the twenty inches
of snow throughout the Northeast like they’re predicting, our overall sales
this weekend will be cut by at least a third; just because of one poorly
timed snow storm! There are so many factors—like the weather—that I’ve
discovered I just can’t control, so as a result you have to over-control the
things you can have an influence over.
Pointing out a significant decrease in accounts payable in her cash flow statement (See
Exhibit 5), Beth explained that she had recently initiated a move designed to lower
prices, generate more volume, and become more competitive:
When we were smaller I was buying the very top-end of the six grades of
coffee that our roaster offers. The people we attracted years ago were
extremely discerning, but we had so few of them. As the market has
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matured, and more players have come into the marketplace, people’s
perception of coffee quality had been diluted. I decided that it would be
okay to dial back a little on our quality a bit, and I think that is working
out for us.
Beth was now satisfied that she had created the financial and managerial groundwork that
could support an aggressive expansion. The challenge was that despite the great strides
the company had made towards sustainable profitability, Nancy’s current funding source
was highly reluctant to fuel the aggressive expansion effort that Beth was anxious to
undertake.
Fueling Growth
Cash flow from operations, plus long-term debt borrowings, generated an annual
investment pool of between $400,000 and $500,000 (See Exhibit 5). Maintenance and
upgrade expenses on existing stores were running about $200,000, leaving enough capital
to open two new stores at an average build-out cost of $150,000 each. While this
dynamic had enabled Nancy’s to grow to nearly thirty stores, Beth explained that from a
financial standpoint, the business was not ready for sale:
There's not enough money in it for me to give this up right now. At this
point we’d be looking at a million and a half, maybe two million for the
whole thing. I've got a $350,000 bank debt, and a bit more than that in
outstanding payables. At the end of the day my sister and I might split
about a million dollars. I just think that I've worked too hard for nearly
eleven years for a half a million bucks.
Beth figured that to reach a size worthy of harvest, they would need to add fifteen to
twenty more stores to the chain—at a growth clip of five to seven stores per year. Beth
referred to recent balance sheets (Exhibit 6) as she discussed the weaknesses of their
existing leverage arrangements:
My bank has been great to me. I have a million-dollar line-of-credit, but
because I’m a cash flow customer—without some big building to give
them as collateral—they keep me on short leash. We sign ten-year leases
at our locations, but the bank is unwilling to go beyond 36 months on debt
repayment. That doesn’t work for us. What we need to do is raise a million
dollars, pay off our bank debt, and use the remaining capital either to
open new stores or acquire some more independent shops that are in good
locations but are struggling financially. If our bank will give us the terms
we need, then we’d love to continue to pass our millions through them—if
not, we’ll have to go elsewhere.
Beth was working with an advisor to develop a proposal for a million-dollar loan with a
ten-year term. They planned to give her current institution a one-month lead-time on the
idea. If those bankers wouldn’t offer more liberal terms, then the plan was to find a
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lender—or an individual—who would. While she preferred to raise the funds as longterm debt rather than give up equity, Beth was open to the idea of bringing on board a
moneyed partner in exchange for a piece of the business—as long as she could maintain
her majority position. Failing that course, Beth reflected on what seemed to her as a
viable, but less attractive, option:
I figure that I could always cut back to ten stores and three million dollars
in sales. In that case we’d have no headquarters—bookkeeping,
purchasing, tech support—all of that goes away and I’d run the thing from
my home with some senior people to cover the stores. But I think if I did
that, I would probably open another business and do something else in
addition to that. That's why I want to explore the growth path first. If we
can’t grow or get acquired, then the ten-store idea is a retrenching
position that I could fall back to.
Ever since her business management initiatives had begun to yield sustained profitability,
Beth had been considering franchising as a way to leverage those systems, along with the
Nancy’s brand name and the interesting story behind it:
I have thought about the franchise route a lot, and I have considered
bringing someone on board to help me explore that opportunity. You can
certainly get growth faster and cheaper by franchising, but there are
tradeoffs. Franchising for me is a struggle between control and lack of
control; influence and lack of influence.
One aspect that I’m not too excited about, for example, is that as a
franchise organization, all of my personal and business finances would be
out there for all to see. Right now, as a small business owner with
everything privately held, I have a lot of flexibility. If I stepped into the
role of managing franchisees, they would hold me financial accountable
for every step that I made; I’m not so sure that is a stress that I need right
now.
I also like the culture that we have been able to create. From Niagara
Falls to Boston, we have built a culture that feels like the same company.
That is often not the case with franchises.
In an effort to leave no stone unturned, Beth had arranged a meeting with senior
managers at Starbucks. She explained that while her instincts had probably been correct,
she probably should have guessed the outcome:
Strategically my idea to have them acquire us made a lot of sense. They
are not in enclosed shopping malls, they are really not having great
success in New England because their coffee is too dark-roasted for most
people, and they don't sell flavored coffee—which is 65 percent of what
we sell. Their response was, ‘we like your business and we think it's
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interesting, but we don't do malls’. As one of my business advisors said,
you can't force an acquisition down somebody's throat; when they have a
board meeting and they decide that they are going to go out and buy a
small chain in our region, then we’ll probably be the one they call first.
Moving Target
Beth took another sip of her warm cappuccino, thinking that it was about time to
wrap up her cell chat and get back to the tasks at hand. Thanking her friend for the call
and encouraging words, Beth added:
Don’t get me wrong—you know I love this business. I just think that I have
to make some fundamental decisions about where we should go—either an
exit strategy, or a more aggressive growth strategy. Should we cut back to
ten of our best stores and run it as a side venture? Or maybe franchise, or
locate some equity partner and open new stores until we become a more
attractive acquisition target? I don’t have the answers, but I can tell you
that the questions are sure keeping me up at night! Good thing I know
where to get a great cup of coffee, huh?
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Exhibit 1: The OneCard
The OneCard Concept
The OneCard is a true technological innovation never before utilized in a restaurant/retail
environment. You can use the card to gather "loyalty points" toward free purchases, or, by storing
money on the card, you can enjoy fast and easy payments—like having a Mobil SpeedPass® for
the best coffee products anywhere! The OneCard, which is activated at the time of purchase, can
be used for instant discounts on the web, or at our fine cafes.
Two Membership Levels
Standard
•
Nancy's Bonus Program (In Store): Beverages (Buy 9/1 Free), Lite Fare (Buy 5/1 Free),
Bulk Coffee (Buy 9lbs/1lb Free)
•
Free beverage of your choice with OneCard Web Registration
•
OneCard Standard Annual Membership: $1.00
Premium
•
Nancy's Bonus Program (In Store): Beverages (Buy 9/1 Free), Lite Fare (Buy 5/1 Free),
Bulk Coffee (Buy 9lbs/1lb Free)
•
Free beverage of your choice with OneCard Web Registration
•
Free beverage of your choice every month for 1 year ($60.00 Value)
•
Nancy's SpeedPay® (Stored Value)
•
Monthly Discounts & Promotions
•
OneCard Premium Annual Membership: $15.00
15
Exhibit 2: Locations
New York
Connecticut
Albany
1 Crossgates Mall
Poughkeepsie
10 Poughkeepsie Galleria
Buffalo
2 Walden Galleria
Queensbury
11 Aviation Mall
Clay (to be closed 01/04)
3 Great Northern Mall
DeWitt
4 Shoppingtown Mall
Rochester (4)
12 Frontier Field (Seasonal)
13 Irondequoit Mall
14 Marketplace Mall
15 Eastview Mall
Middletown
5 Galleria @ Crystal Run
Saratoga Springs
16 Wilton Mall
New Hartford
6 Sangertown Square Mall
Syracuse (3)
17 Carousel Center
Niagara Falls
7 Niagara Factory Outlet
Madison
21 RJ Café; RJ Julia Bookstore
Massachusetts
Boston
22 Copley Place (to be closed 02/04)
Dartmouth
23 Dartmouth Mall
Holyoke (2)
24 Holyoke Mall @ Ingleside
25 1st & 2nd Level
Lanesboro
26 Berkshire Mall
18 Carousel Center (Kiosk)
19 Center Armory
New Hampshire
Nashua
27 Pheasant Lane Mall
Watertown
West Nyack
8 Palisades Center Mall
20 Salmon Run Mall
New Jersey
Freehold
28 Freehold Raceway Mall
Plattsburgh
Vermont
9 Champlain Centré North
Manchster
29 4943 Main Street
16
Exhibit 3: Management Structure; Years of Service
*Multiple Unit Manager
17
Exhibit 5: Cash Flow Statements (Fiscal Year Ending 09/30)
2003
Cash Flows from Operating Activities
Net Loss
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities
Amortization and Depreciation
Deferred Income Taxes
Loss on Disposal of Property, Plant and Equipment
Changes in Operating Assets and Liabilities
Increase in Inventory
Decrease in Prepaid Expenses
Decrease in Accounts Payable, Accrued Expenses
2002
2001
(6,389)
(106,546)
(30,333)
204,589
(4,000)
253,828
258,294
(14,000)
272,286
245,366
(12,000)
133,541
(26,264)
15,347
(13,277)
5,621
(142,673)
(33,316)
26,086
(100,290)
437,111
259,705
229,054
Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment
Increase in Deposits
Increase in Intangible Assets
(274,539)
(289)
783
(144,918)
(1,322)
(1,724)
(196,796)
(4,790)
(2,950)
Net Cash Used by Investing Activities
(274,045)
(147,964)
(204,536)
Cash Flows from Financing Activities
Principal Payments on Long-Term Borrowings
Proceeds from Long-Term Debt
Principal Payments Under Capital Lease Obligations
Proceeds from Loans Payable; Officers and Related Party
Payment on Loans Payable; Officers and Related Party
(291,023)
239,857
(59,567)
(188,781)
(314,760)
236,000
(48,503)
223,100
(162,002)
(473,161)
292,996
(32,879)
476,780
(290,778)
Net Cash Used by Financing Activities
(299,514)
(66,165)
(27,042)
(66,448)
45,576
(2,524)
Cash; Beginning
91,053
45,477
48,001
Cash; Ending
24,605
91,053
45,477
Net Cash Provided by Operating Activities
Net Increase (Decrease) in Cash
19
127-C04 A-U
Arthur M. Blank Center
for Entrepreneurship
05/12/04
Babson Park, MA
Phone: 781-239-4420
02457-0310
Fax: 781-239-4178
URL: http://www.babson.edu/entrep
Nancy’s Coffee
As the busy president of the $7 million Nancy’s Coffee Café chain, Beth WoodLeidt wasn’t able to visit each of their thirty suburban coffee shops as much as she would
have liked. Whenever she did journey out as she was doing today, it was with a passion
for building brand and enhancing profitability.
Beth approached one of her more challenging locations—in a mall in central New
York—and surveyed the space with a practiced eye.
…that front table needs a wipe… the display shelves are dusty…the
OneCard holder is hidden behind the tip jar…isn’t it too early in the day
to be out of plain bagels?…
She warmly greeted the staff she knew, introduced herself to new faces, and ordered a
cappuccino from a slightly nervous young hire at the counter. As the teenager set about to
whip up the best coffee drink of her brief career, Beth took the manager aside to offer a
quick rundown on areas for improvement.
Beth was just finishing up with her quality assessment when her cell phone buzzed with a
call from a former corporate colleague in whom she had often confided about the
challenges of running a retail business. Beth took a sip of her frothy brew, winked her
approval to the relieved girl who had brewed it, and headed out into the mall to chat.
When her friend noted that Beth sounded tired, the forty-year-old CEO closed her eyes
and nodded into the phone:
Gosh, I am tired! Remember about a year ago I started saying that I
wanted to figure out where this business was going? Well, I’m still asking
the same questions like, how can we attract the capital we would need to
grow faster; what is the best exit strategy to shoot for; and what is the best
way to enhance the value of what we are building?
Sure, we’ll add another two more stores this year, but that’s just not doing
it for me. It’s early winter, 2003—and that means I’ve been running this
thing now for over ten years. And, as you know, the story hasn’t really
changed; we’re still too small to be acquired, not valuable enough to be
worth selling outright, and yet the business is large enough to need
someone thinking about it almost all the time; yes, that would be me.
We’ve hit a long plateau here; it’s past time to make some critical
decisions.
From Nuts to Beans
In 1973, Nancy Wood—then a 36-year-old mother of three and married to Sandy
Wood—founded a mall-kiosk business to sell dried fruit and nuts. When demand for that
fare appeared to be softening, she began the search for a more viable product line. After
connecting with master coffee roaster Irwin White at a fancy-food trade show in 1978,
she decided to turn her lifelong passion for great coffee into a new business. Nancy’s
eldest daughter, Beth, recalled that the concept was a bit ahead of its time:
My mother took her kiosks and slowly began to convert them over to
coffee bars she had named the Coffee Collection. She started introducing
Kenyan and Columbian coffees, but people responded ‘no way; there is
Folgers, and there's Maxwell House, and Dunkin’ Donuts.’ It was a very
strange thing to many people who were being asked to pay a whole dollar
for a single cup of coffee—or told they could grind their own fresh-roasted
beans at home. They looked at my Mom like she was nuts. In those days it
was very much about educating the consumer.
By the late 1980s, Nancy’s son Carter and her daughter Roxanne had joined the venture
full-time. While Beth had been contributing to the effort by periodically reviewing the
aggregate financials for her mother, she had never taken much interest in the enterprise.
So it was, with her mother’s blessing and encouragement, that Beth earned her BS at
Babson College in Wellesley, Massachusetts, and soon began a rewarding management
career in consumer product marketing. Newly married, Beth happily immersed herself in
the busy corporate world of high-profile projects and after-hours brainstorming
sessions—first with Pepsico, and later, with Johnson & Johnson:
I loved the work. I had a good salary, a 401(k), stock options, bonus
check, company car, great suits; I was loving life.
Then suddenly, everything changed! Nancy died of cancer at the age of 56.
Beth Enters the Family Business
In 1993, Beth took a leave of absence from J&J to return home and help sort
through the heartache and turmoil that followed her mother’s death. Sandy Wood had
inherited his wife’s business, but made it clear that if his kids were not interested in
2
keeping the small chain going, then he would either try to sell the sites or liquidate the
assets.
Operating on the assumption that Beth would be returning to her corporate job once they
had closed the doors on her mother’s enterprise, Beth carefully examined the financials
and visited each of the seven locations to estimate what they might be worth. In the
course of that investigation, Beth realized that her mother had developed a solid business
model within a largely untapped niche—suburban shopping malls—and she was drawn to
the possibilities. Beth’s husband Bill recalled that when Beth asked him to join her in the
venture, it didn’t take much convincing:
I was running a division of Bell Atlantic in Pennsylvania at the time. Beth
and I had worked together much earlier in our lives; I had really enjoyed
that. I have always figured that if two married people were meant to work
together, it was Beth and I. We get along very well, and we both know our
own place in the sandbox.
One of the issues that we discussed was that one of our egos would have
to get checked at the door. I was a leader where I was working before, but
I understood that this was Beth’s family’s business, and that she was now
going to be the face of The Coffee Collection, now named Nancy’s Coffee.
With equal amounts of sadness, trepidation and excitement, Beth informed J&J that she
would not be returning. Her father was pleased, and said that he would divest his interest
in the business by annually gifting equal shares to his three children. It was understood
by all that Beth would be the new CEO of Nancy’s Coffee.
The Specialty Coffee Industry
The Green Dragon, a Boston coffeehouse founded in 1697, became the
clandestine headquarters of the American Revolution. It was there, in 1773, that the
Boston Tea Party was planned as a protest against the tea taxes being levied by King
George on his colonies. By the time the British and the colonists had settled accounts,
coffee had become the hot beverage of choice in America.
Throughout the 19th century in the United States, neighborhood coffeehouses
proliferated, and home-roasting coffee became a common practice. The industrial
revolution, however, fostered a demand for quicker, cheaper, and easier caffeine
solutions. With the advent of vacuum packaging and modern transportation, it became
possible for a roaster on one side of the country to sell to a retailer on the other side. As
with many other food products, quality was compromised to accommodate mass
production and efficient distribution. By the 1940s, the coffeehouses had disappeared,
and Americans had been sold on the idea that fresh coffee went ‘woosh’ when the can
was opened. In 1950, William Rosenberg founded Dunkin’ Donuts in Quincy,
Massachusetts. While his donut shop took pride in serving what they called the “World’s
Best Coffee”, it would be twenty more years before U.S. consumers could purchase a
3
truly high-end cup.
In the early 1970s, a small cadre of coffee aficionados began to offer a unique brew made
from hand-picked beans; fresh-roasted in small batches. Peets, founded on the West
Coast by legendary coffee idealist Alfred Peet, quickly set the standard for superb coffee.
In Seattle, Gordon Bowker, Jerry Baldwin, and Zev Siegl, named their coffee shop
business Starbucks, after the coffee-loving first mate in Moby Dick. On the East Coast,
George Howell was building his chain of Coffee Connection shops in the Boston area.
New Yorker Irwin White began making a name for himself supplying fresh-roasted
grounds to some of the finest restaurants in Manhattan. San Franciscan coffee broker
Erna Knutsen coined the term Specialty Coffee, and in 1985, helped to found the SCAA
(Specialty Coffee Association of America).
SCAA membership grew steadily as these coffee pioneers—Nancy Wood included—
developed dynamic, profitable business models by proactively educating American
consumers about fine coffee. By the time Beth took the helm of her mother’s business in
1993—the same year that Starbucks had gone public—upscale consumers had developed
a real taste for an excellent brew.
Growth under the Radar Screen
Beth and her management team undertook an aggressive search for retail space.
To facilitate that process, they worked almost exclusively with the regional mall
management companies that had been doing business with their mother for years. Beth
explained they chose this path partly as a way of dodging a direct confrontation with the
powerhouse sweeping in from the west:
Starbucks had clearly stated that as they came east they were going to do
cities like Philadelphia, Boston, DC and Manhattan in a big way. We
really didn't know how to play in that kind of shark tank, so we figured
that we’d let Starbucks have that, and play the suburban card. And at the
time, that was low-hanging fruit.
Even so, Beth was up against Starbucks almost immediately. One of her first meetings
after coming on board concerned a regional mall lease that Starbucks had been
considering for awhile. During that meeting Beth suddenly realized how happy she was
to be free of the inefficient, multilayered bureaucracies that characterized much of
corporate America:
There were two leases on the table; a Starbucks lease, and one for
Nancy’s Coffee. The mall representative said that the Starbucks lawyers
had had the lease for six months—but she was willing to wait. I said,
‘Look, do you want Starbucks, or do you want a leased space?’ When she
said, ‘A leased space’, I said, ‘Give me the pen.’ That lease is up next
year, and I still haven’t gotten around to reading it.
4
Beth noted that Starbucks wasn’t the only coffee vendor shying away from space in
enclosed malls:
Establishing your brand in mall locations is not, quite frankly, a strategy
for the faint of heart. Managing a mall shop is a difficult business, and it
costs a lot of money. That worked for us in a way, since newcomers would
get scared off by the idea of paying something like $100,000 a year in
rent, when they could be paying $2,000 a month for a Main Street space in
‘Anytown, USA’.
The team had learned through their mother’s experience, however, that these pricey mall
locations offered an advantage that few suburban in-town settings could match; a captive
base.
The Captive Audience
Throughout the 1990s, Nancy’s Coffee and its suburban-model competitors like
Peets and Caribou had the luxury of being able to choose locations where no other
specialty coffee shops were operating. Beth explained that this monopolistic positioning
was especially advantageous in a setting with high overhead and two distinct customer
groups:
Our bread-and-butter customer is the mall employee—the three to five
hundred people who come to the mall every day to work. If you can get
them to try, you can get them to repeat.
Then, obviously, we have our transient customers; the shoppers. We have
squarely positioned ourselves to cater to stroller moms; mothers with time
on their hands, and kids to entertain. They come to the mall for something
to do; they may not always buy, but they always have to eat. So we have
lots of cookies, apple juice, and bagels on hand for the little ones, which
helps us get the mom for her cappuccino.
In January 2002, in a move to foster a loyal base of customers, Nancy’s contracted with
Paytronix—a nascent venture that had developed a swipe-card with both payment and
loyalty program capabilities. Beth noted that the OneCard system (See Exhibit 1) went
well beyond the paper cards used by a variety of food-retailers to encourage repeat
business:
This is like an electronic punch card that also functions as a debit card—
either by putting in a cash balance or by prepaying for product. For
example, we have this one guy—an eyeglass store manager at a mall in
New Hampshire—who shells out $150 on the first of each month to buy
the 85 cappuccinos he knows he’s going to drink over the next thirty days.
We get his money up front, and he gets our $3 drink for less than $2.
5
If you can get mall employees to buy a OneCard membership for a dollar
a year, they’re going to come to you every day, since for every nine drinks
they get one free—they can even get a jumbo mocha in exchange for nine
basic coffees. That’s a drink that we sell for four dollars; free to them, and
my cost is about seventy-five cents.
The OneCard is really a nice competitive advantage. We just had a
Starbucks open in Buffalo, one floor below us. Our staff was nervous, but I
didn’t understand why. I told them that with the OneCard, you already
have all of your mall employees in your pocket. It worked; that Starbucks
kiosk is struggling.
By late 2003, Nancy’s Coffee shops could be found in over thirty locations from Boston,
west to Niagara Falls, and from Nashua, New Hampshire, south to New Jersey (See
Exhibit 2). Three of the stores had been acquired from the owner of a four-chain
enterprise who had come to the stark realization that running coffee shops was not going
to be the road to riches that he had once imagined it would be. Beth recalled that they
were able to make significant improvements in the stores they took under management:
When we acquired Café Coffee, their gross margins were running in the
low thirties. They had been managing the business from Wellesley,
Massachusetts, and no one was going out to visit the stores. From a
financial standpoint, we controlled the employee hours and monitored the
food costs. That helped to drive their gross margins closer to 50 percent.
Operationally, we kept some of their people, but not all. We put some of
our own people in who had much different operational standards than the
Café Coffee people. At one store, we saw an increase in customer count,
and in six months that store went from being in the red to being in the
black.
Just as Starbucks and Dunkin’ Donuts never said ‘never’ with regard to mall locations,
Beth followed through on an opportunity to develop a street-front location. She was
excited about the challenge and the possibilities:
There are so many locations that are still looking for high-end coffee bars.
The question is; are we as a high-end coffee bar looking for that location?
We just opened a store on the street in Manchester, Vermont. My rent
there is $1,800 a month. I think it will work, but it will take some time to
attract a customer base. If we can find some more good towns like that, I
suspect that we will probably do more like that versus more mall
expansions.
While Beth was happy with the performance of the majority of their stores, she sought to
close the weakest locations in their portfolio as soon as possible. She commented that the
timetable for divesting those shops was not entirely in her control:
6
You need to be making 15 to 20 percent operating income. If a store can’t
make 15 percent in operating income after its fixed and variable costs are
covered—then the store needs to be closed. But in our business, you can’t
just close a store that isn’t performing—even one that is losing money—
and that’s because of the leases we have to sign.
These management companies finance their malls using not only the
building as collateral, but the leases as proof of cash flow and their ability
to repay the debt. If they were to give their tenants a kick-out clause, it
makes their business model more risky and harder to leverage for
borrowing. That’s why they insist on five, seven and ten year leases.
I have a couple of locations I’d like to close tomorrow, but it would mean
paying a termination fee—and leaving all my investment behind in terms
of property, plant, and equipment. You can be sure that the day those
leases expire—those stores will be gone.
Managing the Organization
Before his death in 1999, Sandy Wood completed the gifting of the business to his
children—all as shares, except for the first distribution, when Roxanne and Carter had
received a cash equivalent in lieu of stock. Beth now had a slightly larger stock position
which left her to direct the company’s future:
My brother said that after 15 years, it was time for him to go work for
somebody else. So I suggested that Roxanne and I buy his stock and split
it evenly. I own 51 percent of the business and my sister owns 49 percent.
Our bylaws are very clear that control rests with the majority ownership, It
is now my responsibility to set the business on a strategic path for growth.
Beth had discovered that ‘living and dying by every single decision every single day’
fired her up in ways that her corporate job could not. Now a mother of an eight- and a
five-year-old, she reflected that running the show had given her the freedom to craft a
working environment that was far more responsive to the rhythm of life:
I know that I never would have had children if I had stayed in corporate
America. Now my time is much more my own than it ever was. I may work
longer hours than I did in corporate, but if I want to leave at two o’clock
to go watch my daughter in a French play, I can do that. This path has
helped me to get more balance.
I take the position that as long as you get your work done, it makes no
difference to me how you configure those hours. When I had my first child,
my book keeper’s baby was due three months later. So we set up a nursery
in my office and hired someone to watch over the babies.
7
Right now I have four key people out on maternity leave! The other day
one of my managers said to me that these are people who watched me
have two children without skipping a beat—that I have allowed them to be
moms and to be professionals at the same time. It's great to have that kind
of impact.
The Nancy’s Coffee business was supported by a six-person staff at the home office in
Madison, Connecticut. Roxanne oversaw the purchase and delivery of goods like freshroasted coffee, display-shelf merchandise, and branded paper supplies—all drop-shipped
to the individual stores by the various vendors. Perishables such as dairy, breads and
confections were procured at the store level.
In addition to the administrative team, the organization fielded a number of experienced
supervisors to oversee training, quality, and recruitment. While the company had enjoyed
years of loyal service from many of these senior managers (See Exhibit 3), Beth had
discovered early-on that it wasn’t long-term staff that she had to worry about:
The retail employee population is the reason that a lot of people
franchise—they don't want to manage those headaches. And you will hear
me say every week that, boy, if I didn't have employees, I'd have no
problems!
The Revolving Door
In 1997, as Beth prepared to file over 1,500 W-2 forms for 250 positions at the
company, she realized that the company needed to make a fundamental change:
Our employee turnover that year was 700 percent. It was staggering. We
did some analysis and saw that the under-eighteen kids were just a
revolving door. I had this kid Chaz leave his keys on the register and walk
out—he left the store wide open with nobody there. I held his final pay
check because I wanted to find out why he did that. When he finally did
call, he swore up and down at me for not mailing his check to him right
away. At that point I’d had enough; we were done with those people.
So we stopped hiring under-18 workers by taking advantage of a
Department of Labor crackdown on minors working in food service
operations. An espresso machine, for example, is considered highpressure steam equipment—and minors were not permitted to operate it—
so we started saying that because of that and other restrictions, we could
only hire people over the age of 18.
Last year my turnover was 200 percent—all of it at the 18 to 24-year-old
range. By lowering that churn, we were doing less training and hiring.
That cut our labor cost a full point; it’s now running about 28 percent of
sales (See Exhibit 4).
8
Although Beth acknowledged that employee challenges were inherent in the
retailing business, she pointed out that the considerable challenge and expense of
hiring, training, managing, and retaining viable workers was lessened when
employees got involved:
We have found some families who were interested in working for us, and
we hired their kids, and their kids’ husbands and their friends and
cousins, and that has sort of helped us create an employee population that
has, in some locations, been relatively loyal.
Beth added that the motivations of new-hires seemed to correlate with age:
With young people, it's always, ‘what are you gonna pay me?’
They don't really care about the job security. But once people hit
their 30s and early 40s, they want to know that they will have some
job security, for example, ‘What role position can I play, and if I
perform, will you give me job security? Nothing is for certain, of
course, but I do think that we have created a culture where
employees know I won’t walk in, demand their keys, and tell them
to get out. That sort of thing happens a lot in retail.
In order to compete with starting salaries in the range of $10 per hour being offered by
upscale mall vendors like Old Navy and The Gap, in 2001 Nancy’s Coffee began to
allow its workforce to accept tips. While this was a way of adding dollars per hour to the
base pay—as well as providing an incentive for friendly and efficient service—Beth
remained concerned that it was a very difficult practice to oversee:
If a customer hands over a couple of dollars and says ‘keep the change,’
it's just too easy to drop everything in the tip cup and not ring up the sale.
That happens a lot, and there are very few point-of-sale systems for cashbased businesses that can keep theft to a minimum. I wish everybody could
pay with plastic, because even though I’d be paying 3 percent to the card
companies, I would know the money is coming to me at the end of the day.
Beth concluded that the primary advantage of the tip program was that it pushed up
wages by as much as $10 per hour over the base salary during the frenzied winter
shopping season. The prospect of that extra compensation was enough to virtually
eliminate employee turnover during the fiscal quarter that had the largest impact on the
bottom line.
Financial Management
In the early days, Beth used to review the company financials with the aim of
providing her mother with a general assessment of aggregate performance. As CEO, Beth
was shocked at the lax financial management that she uncovered when she attended to
9
the details. At the same time, she was thrilled about how fast she’d be able to make a real
difference:
When I first arrived at Nancy's, nobody in the organization could read a
financial statement. Store managers were spending like crazy drunks—
buying bagels for a dollar and selling them for 99 cents. I have brought
about a complete shift from my Mom’s approach—from thinking that
financials were something that accountants (and daughters) took care of—
to running this thing like a real business.
Store managers are now accountable for their bottom line, and they are
very cost conscious because of it. I had to educate them on how to read a
profit and loss statement, and I made that skill part of their review. They
know that they need to negotiate the price on everything they buy, and
they understand that their cost of goods can’t exceed 30 percent. That
means that if they are planning to sell a napoleon for $1.99, then they
know that can’t pay more than 60 cents for it.
The company had attempted to design a program that would link these required skills to a
performance reward, but Beth noted that it had not worked out:
We tried to do a performance bonus that was based on our three key
numbers for evaluation; sales, labor and net operating income. Almost
nobody received the bonus because in order for the curve to work, we had
to set the bar really high. Those people who did earn bonuses didn’t seem
to value it very much; they still wanted their raise at the end of the year as
part of their performance evaluation. The mindset wasn’t right the first
time we tried it; we will regularly revisit that opportunity.
With regard to justifying her passion for developing stringent systems and standards,
Beth referred to the ominous weather forecast:
It’s the beginning of the Christmas season, and if we get the twenty inches
of snow throughout the Northeast like they’re predicting, our overall sales
this weekend will be cut by at least a third; just because of one poorly
timed snow storm! There are so many factors—like the weather—that I’ve
discovered I just can’t control, so as a result you have to over-control the
things you can have an influence over.
Pointing out a significant decrease in accounts payable in her cash flow statement (See
Exhibit 5), Beth explained that she had recently initiated a move designed to lower
prices, generate more volume, and become more competitive:
When we were smaller I was buying the very top-end of the six grades of
coffee that our roaster offers. The people we attracted years ago were
extremely discerning, but we had so few of them. As the market has
10
matured, and more players have come into the marketplace, people’s
perception of coffee quality had been diluted. I decided that it would be
okay to dial back a little on our quality a bit, and I think that is working
out for us.
Beth was now satisfied that she had created the financial and managerial groundwork that
could support an aggressive expansion. The challenge was that despite the great strides
the company had made towards sustainable profitability, Nancy’s current funding source
was highly reluctant to fuel the aggressive expansion effort that Beth was anxious to
undertake.
Fueling Growth
Cash flow from operations, plus long-term debt borrowings, generated an annual
investment pool of between $400,000 and $500,000 (See Exhibit 5). Maintenance and
upgrade expenses on existing stores were running about $200,000, leaving enough capital
to open two new stores at an average build-out cost of $150,000 each. While this
dynamic had enabled Nancy’s to grow to nearly thirty stores, Beth explained that from a
financial standpoint, the business was not ready for sale:
There's not enough money in it for me to give this up right now. At this
point we’d be looking at a million and a half, maybe two million for the
whole thing. I've got a $350,000 bank debt, and a bit more than that in
outstanding payables. At the end of the day my sister and I might split
about a million dollars. I just think that I've worked too hard for nearly
eleven years for a half a million bucks.
Beth figured that to reach a size worthy of harvest, they would need to add fifteen to
twenty more stores to the chain—at a growth clip of five to seven stores per year. Beth
referred to recent balance sheets (Exhibit 6) as she discussed the weaknesses of their
existing leverage arrangements:
My bank has been great to me. I have a million-dollar line-of-credit, but
because I’m a cash flow customer—without some big building to give
them as collateral—they keep me on short leash. We sign ten-year leases
at our locations, but the bank is unwilling to go beyond 36 months on debt
repayment. That doesn’t work for us. What we need to do is raise a million
dollars, pay off our bank debt, and use the remaining capital either to
open new stores or acquire some more independent shops that are in good
locations but are struggling financially. If our bank will give us the terms
we need, then we’d love to continue to pass our millions through them—if
not, we’ll have to go elsewhere.
Beth was working with an advisor to develop a proposal for a million-dollar loan with a
ten-year term. They planned to give her current institution a one-month lead-time on the
idea. If those bankers wouldn’t offer more liberal terms, then the plan was to find a
11
lender—or an individual—who would. While she preferred to raise the funds as longterm debt rather than give up equity, Beth was open to the idea of bringing on board a
moneyed partner in exchange for a piece of the business—as long as she could maintain
her majority position. Failing that course, Beth reflected on what seemed to her as a
viable, but less attractive, option:
I figure that I could always cut back to ten stores and three million dollars
in sales. In that case we’d have no headquarters—bookkeeping,
purchasing, tech support—all of that goes away and I’d run the thing from
my home with some senior people to cover the stores. But I think if I did
that, I would probably open another business and do something else in
addition to that. That's why I want to explore the growth path first. If we
can’t grow or get acquired, then the ten-store idea is a retrenching
position that I could fall back to.
Ever since her business management initiatives had begun to yield sustained profitability,
Beth had been considering franchising as a way to leverage those systems, along with the
Nancy’s brand name and the interesting story behind it:
I have thought about the franchise route a lot, and I have considered
bringing someone on board to help me explore that opportunity. You can
certainly get growth faster and cheaper by franchising, but there are
tradeoffs. Franchising for me is a struggle between control and lack of
control; influence and lack of influence.
One aspect that I’m not too excited about, for example, is that as a
franchise organization, all of my personal and business finances would be
out there for all to see. Right now, as a small business owner with
everything privately held, I have a lot of flexibility. If I stepped into the
role of managing franchisees, they would hold me financial accountable
for every step that I made; I’m not so sure that is a stress that I need right
now.
I also like the culture that we have been able to create. From Niagara
Falls to Boston, we have built a culture that feels like the same company.
That is often not the case with franchises.
In an effort to leave no stone unturned, Beth had arranged a meeting with senior
managers at Starbucks. She explained that while her instincts had probably been correct,
she probably should have guessed the outcome:
Strategically my idea to have them acquire us made a lot of sense. They
are not in enclosed shopping malls, they are really not having great
success in New England because their coffee is too dark-roasted for most
people, and they don't sell flavored coffee—which is 65 percent of what
we sell. Their response was, ‘we like your business and we think it's
12
interesting, but we don't do malls’. As one of my business advisors said,
you can't force an acquisition down somebody's throat; when they have a
board meeting and they decide that they are going to go out and buy a
small chain in our region, then we’ll probably be the one they call first.
Moving Target
Beth took another sip of her warm cappuccino, thinking that it was about time to
wrap up her cell chat and get back to the tasks at hand. Thanking her friend for the call
and encouraging words, Beth added:
Don’t get me wrong—you know I love this business. I just think that I have
to make some fundamental decisions about where we should go—either an
exit strategy, or a more aggressive growth strategy. Should we cut back to
ten of our best stores and run it as a side venture? Or maybe franchise, or
locate some equity partner and open new stores until we become a more
attractive acquisition target? I don’t have the answers, but I can tell you
that the questions are sure keeping me up at night! Good thing I know
where to get a great cup of coffee, huh?
13
Exhibit 1: The OneCard
The OneCard Concept
The OneCard is a true technological innovation never before utilized in a restaurant/retail
environment. You can use the card to gather "loyalty points" toward free purchases, or, by storing
money on the card, you can enjoy fast and easy payments—like having a Mobil SpeedPass® for
the best coffee products anywhere! The OneCard, which is activated at the time of purchase, can
be used for instant discounts on the web, or at our fine cafes.
Two Membership Levels
Standard
•
Nancy's Bonus Program (In Store): Beverages (Buy 9/1 Free), Lite Fare (Buy 5/1 Free),
Bulk Coffee (Buy 9lbs/1lb Free)
•
Free beverage of your choice with OneCard Web Registration
•
OneCard Standard Annual Membership: $1.00
Premium
•
Nancy's Bonus Program (In Store): Beverages (Buy 9/1 Free), Lite Fare (Buy 5/1 Free),
Bulk Coffee (Buy 9lbs/1lb Free)
•
Free beverage of your choice with OneCard Web Registration
•
Free beverage of your choice every month for 1 year ($60.00 Value)
•
Nancy's SpeedPay® (Stored Value)
•
Monthly Discounts & Promotions
•
OneCard Premium Annual Membership: $15.00
15
Exhibit 2: Locations
New York
Connecticut
Albany
1 Crossgates Mall
Poughkeepsie
10 Poughkeepsie Galleria
Buffalo
2 Walden Galleria
Queensbury
11 Aviation Mall
Clay (to be closed 01/04)
3 Great Northern Mall
DeWitt
4 Shoppingtown Mall
Rochester (4)
12 Frontier Field (Seasonal)
13 Irondequoit Mall
14 Marketplace Mall
15 Eastview Mall
Middletown
5 Galleria @ Crystal Run
Saratoga Springs
16 Wilton Mall
New Hartford
6 Sangertown Square Mall
Syracuse (3)
17 Carousel Center
Niagara Falls
7 Niagara Factory Outlet
Madison
21 RJ Café; RJ Julia Bookstore
Massachusetts
Boston
22 Copley Place (to be closed 02/04)
Dartmouth
23 Dartmouth Mall
Holyoke (2)
24 Holyoke Mall @ Ingleside
25 1st & 2nd Level
Lanesboro
26 Berkshire Mall
18 Carousel Center (Kiosk)
19 Center Armory
New Hampshire
Nashua
27 Pheasant Lane Mall
Watertown
West Nyack
8 Palisades Center Mall
20 Salmon Run Mall
New Jersey
Freehold
28 Freehold Raceway Mall
Plattsburgh
Vermont
9 Champlain Centré North
Manchster
29 4943 Main Street
16
Exhibit 3: Management Structure; Years of Service
*Multiple Unit Manager
17
Exhibit 5: Cash Flow Statements (Fiscal Year Ending 09/30)
2003
Cash Flows from Operating Activities
Net Loss
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities
Amortization and Depreciation
Deferred Income Taxes
Loss on Disposal of Property, Plant and Equipment
Changes in Operating Assets and Liabilities
Increase in Inventory
Decrease in Prepaid Expenses
Decrease in Accounts Payable, Accrued Expenses
2002
2001
(6,389)
(106,546)
(30,333)
204,589
(4,000)
253,828
258,294
(14,000)
272,286
245,366
(12,000)
133,541
(26,264)
15,347
(13,277)
5,621
(142,673)
(33,316)
26,086
(100,290)
437,111
259,705
229,054
Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment
Increase in Deposits
Increase in Intangible Assets
(274,539)
(289)
783
(144,918)
(1,322)
(1,724)
(196,796)
(4,790)
(2,950)
Net Cash Used by Investing Activities
(274,045)
(147,964)
(204,536)
Cash Flows from Financing Activities
Principal Payments on Long-Term Borrowings
Proceeds from Long-Term Debt
Principal Payments Under Capital Lease Obligations
Proceeds from Loans Payable; Officers and Related Party
Payment on Loans Payable; Officers and Related Party
(291,023)
239,857
(59,567)
(188,781)
(314,760)
236,000
(48,503)
223,100
(162,002)
(473,161)
292,996
(32,879)
476,780
(290,778)
Net Cash Used by Financing Activities
(299,514)
(66,165)
(27,042)
(66,448)
45,576
(2,524)
Cash; Beginning
91,053
45,477
48,001
Cash; Ending
24,605
91,053
45,477
Net Cash Provided by Operating Activities
Net Increase (Decrease) in Cash
19
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