Loan for £100k. This, perhaps alongside an overdraft facility and the factoring arrangement, was considered sufficient to reach 200 stores trading in year one.
A letter from RBS landed on my desk on 11 March. It stated they could not take the proposal forward given “the unproven nature of the product.” They appreciated the progress I had made with Spar and Alldays, but wanted to see “firm orders in place from retailers before finance could be granted.” They also wanted to see my funding committed to establishing “a small number of machines producing realistic sales and profits and this micro market would give further credence to the assumptions in my business plan.”
Of course this was a blow, although Baker Tilly weren’t surprised. Nonetheless, I had to listen to RBS’ feedback, understand it and work out what to do to address these issues. I took every positive word as an indication I was on to something exciting. Given I had been able to secure exclusive pilots with two retailers representing over 3000 locations in the UK, I was confident it would only be a matter of time before we could be back at the bank doing the deal. That confidence was to be sorely tested many times in the coming months.
Fortunately, I was able to set up a business bank account with Barclays in Soho Square and secured a £30k overdraft with the help of an introduction from my accountants.
I spent time thinking about the structure of the business and decided I needed an operations manager to work alongside me. He or she would lead the day-to-day management of the business, overseeing each installation and working with each site to maximise sales. They would likely come from a fast moving retail background.
I decided to appoint a recruitment firm and do the job properly. I appointed Berkeley Scott Selection who were specialists in retail and food business recruitment. We ran a full page advertisement in The Grocer in March 1997. I went with their suggestion for the header “Magic Beans? Seriously! Coffee Nation has a bold objective; to make cappuccino an everyday drink in the UK by offering self-serve dispensers in the out of home marketplace.”
By late spring I had found my man. He had been an area operations manager with Holland & Barrett, the health food retailer. He was sharp, highly articulate and had a great track record. He also stood out as wanting to make a conscious decision to join an early-stage business. We negotiated a package and he joined me. His name was Lou. He would be on £30k with a bonus and company car. I was now starting to spend real money and was ultimately responsible for someone else’s livelihood.
Baker Tilly was setting me up with various business angel groups and wealthy individuals who invested in early-stage businesses. I met with Beer & Partners, a leading source of business angel investment in the UK for growing small businesses. I came close and several angels were interested, but I wasn’t able to close a deal.
I started to realise that one could spend a great deal of time with potential investors, many of whom very rarely invested in anything. Even if they did go on to invest, they may not be right for me and my business. Personal chemistry would be critical unless they were completely out of sight after investing. It seemed to make more sense to have someone on board who could add real value.
Trials begin at Spar and Alldays
By mid-year we had launched our first stores with Spar in Cardiff and with Alldays in Faversham, Kent. The Faversham site was opposite a railway station and Spar in Cardiff was a busy city centre convenience store with a good hot food to-go business.
By August we had nine sites trading, seven with Spar and two with Alldays. We had very few bright lights in an otherwise dull landscape of sales results. We were seeing anything from 20 to 100 or so sales per machine per week. One Spar store in the West Midlands had hit 174 in a single week and our second Alldays had reached 344 cups. These figures weren’t being sustained though so Lou and I were desperately trying to identify what made these stores different. Both had strong food to-go sales of sandwiches and pastries and both were large city centre stores.
I believed we were on to something. Even at 100 cups of coffee sold each week that meant on average someone was buying a drink every hour given typical store trading hours. We embarked on all forms of promotional activity. This included free coffee for the first week of trading for all customers, loyalty cards, a free Kit Kat (another Nestlé product) with each coffee, and a bundle offer of a coffee and a newspaper. We proactively targeted the local area with flyers to tell residents they could now buy coffee to go in their local store. We targeted offices, taxi ranks, railway staff at Faversham and even schools in the area.
No one was being forced to buy a drink, people were choosing to. But after 13 weeks of trading we were only selling 420 cups per week from nine stores, so not even 50 cups per week on average. It was true that most of our openings had been during a warm summer but this was an excuse, really.
There was a dawning realisation that pushing harder and finding that elusive breakthrough promotional activity to catapult sales forward just wasn’t the answer. I knew I needed pull not push but I didn’t know what I meant by that, it was almost just a feeling.
It seemed that whatever we did we couldn’t really move the needle. The CEO of Alldays had recently restated their commitment to having coffee in all of their stores to complement their in-store concessions of Dunkin’ Donuts, Domino’s Pizza, Movie Nights video rental, dry cleaning services and Post Office counters. I was staring down the barrel of a potential 700 site business with this customer alone, but I might as well have been trying to fly to Mars.
I worked hard to manage my relationships with Spar and Alldays, being sure to stand my ground. I knew the machines needed to be in high-visibility locations in each store and next to other snacking food offers. I had to decline some good sites as there simply wasn’t the right in-store location available without a costly re-jig of the store layout.
For the first time, cash was now starting to worry me. I had started with effectively £80k (my £50k investment and the £30k Barclays overdraft) but this was shrinking on a monthly basis. I had bought machines, cabinets, stocks of cups and other consumables. I also had rent to pay each month, Lou’s salary, travel costs and so on. What we’d got was promising but it wasn’t convincing.
In the search for more money we pitched to new potential investors with another business plan. A couple of friends came close to tipping money in, one of whom was Alistair from Dawes Ryan Consulting, but close was as far as he got.
Then Spar wrote me a nice letter:
“It seems that Americans have a strong coffee culture. Currently of course the UK is very much different, however we do see that the UK market will establish itself in the same way if the right offer is in place. Much of the opposition is due to the state of mind of the customer and availability of convenience coffee. Spar, with the help of Coffee Nation, hope to be the people who change this perception.”
They went on:
“Spar have chosen Coffee Nation because they have the best package for our stores. Also the backup and support far exceeds any competitors. At this stage we are both on a very steep learning curve, but by the time the market is ready to take off we will be the most experienced partnership in the market.”
Another compelling factor in our favour was our revenue share model. If Spar went elsewhere they would have to buy or rent the machines and pay this cost regardless of whether they sold a single cup of coffee.
All of this pointed to our business model being able to retain major retailers’ interest, which was great, but that wasn’t what investors were putting their money into. We had to sell more coffee for this to be an attractive proposition to the retailer and neither I nor Spar had any idea when the market would be ready to take off.
By August 1997 my latest business plan showed I needed to raise £250k. This would take us to 400 locations after two years. We were still selling drinks at 59p. Pret A Manger had introduced coffee at 69p and that was real espresso coffee with fresh milk, so I couldn’t easily put the price up.
My issue was one line in my Executive Summary, which read:
“Two