Mayorga: Brewing Profits Even As the Price of Coffee Goes Up

Since 1997, Mayorga Coffeehas taken pride in having stabilized our coffee supply by paying high prices for great coffee from Latin America. We developed fixed priced, multiyear contracts to give farmers a guaranteed level of income for long-term relationships. For years we expanded into new opportunities, including fulfilling market demand by also working with coffees from Africa, Indonesia, and India. We began to distribute syrups, sauces, teas, chocolates, and other items in demand by specialty retailers and foodservice operators.

Mayorga Coffee
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Mayorga Coffee

We offered wholesale programs wherein we loaned equipment to operators that served our coffee. We opened multiple coffee shops to showcase our brand. We were experiencing record growth with sales over $18,000,000 and aspirations to become a $200,000,000 company. Then, in 2010, the coffee marketbegan a remarkable climb that continued through 2011, changing the landscape of the industry and making us look inward through 13 years of incredible growth.

The first thing I realized was that our fixed price contracts were no longer as beneficial to our partners at a $2.50 market as they were in a $1.30 market. We worked with them to move to a differential based on quality with additional support for community projects. Our cost of goods for coffee was immediately impacted—along with costs of fuel, packaging materials, corrugated, milk, flavor sauces, teas, etc. Overall, costs were 40% higher. Instead of raising prices accordingly, we made the decision to slightly increase our wholesale prices and absorb most of the cost increases by looking inward.

In some countries, we were more exposed to the commodities market due to our reliance on brokers and exporters. We also recognized that the lion’s share of the premium from the increased market would go into the pockets of the exporters and financiers (major multinationals), not coffee farmers. We decided to stop buying from those countries and to focus on coffees from Latin America, where we can make the biggest impact through direct trade.

Once our supply decision was made, we looked at distribution. We decided to cut out customers that saw the highly publicized increase in coffee prices as an opportunity to find higher margins. These also proved to be our lowest income-producing customers through constant demands for free equipment, discounted product, promotional funds, and items that most roasters subsidize through inflated prices. Letting those customers go was painful at the time due to a fear in losing market share and a reduction in sales, yet it was one of the smartest things that we have done in years.

The next step was to take a look at our retail stores. There was a major operational difference between the stores that we owned and those operated independently at the airports. In all our growth, we had taken our eye off our own quality and service standards in retail to focus on growing distribution. Our shops were popular and well-located but we were not giving them the proper focus and in turn, they were marginally profitable. We quickly moved to close some locations and partner with great operators for the remaining stores. Service and profitability have improved and our focus on sourcing, roasting, and branding has strengthened.

Through an 18 month period, we saw our overall cost of goods increase 40% and we challenged ourselves to take on the brunt of the impact. We realized that the problem was that we had gotten caught up in operating a commodity business model while selling a specialty product. At $2/lb., the coffee market is at a great level for roasters to purchase Specialty coffee directly at origin and providing farmers a chance to profit from their endeavors.

It is an opportunity to break the model of the poor, struggling Latin American farmer, which has unfortunately been romanticized as the marketing premise of so many coffee companies. At $2/lb, the pressure is on the commodity grade coffee, as it should be. Those of us focusing on quality can still build a respectable business that we can be proud of. We may not reach $200,000,000 in sales, but we will make a difference in coffee growing communities and will continue to put smiles on American consumers’ faces through a rich, smooth cup of fresh coffee.

Tune In:

Watch CNBC’s “Power Lunch,” “Closing Bell,” and “Street Signs” on Friday, April 13th for “Food Fight” special reports on food inflation, focusing on products like beef and milk and the impact of China on the price of food.

Martin Mayorga is the President and Founder of Mayorga Coffee. Since its inception in 1997, Mayorga Coffee has been named one of the fastest-growing Hispanic-owned businesses in the United States by Hispanic Business magazine. The company continues to experience 25% to 40% annual growth. Today, Mayorga Coffee employs over 100 individuals and has a retail presence in the Washington, DC market, as well as wholesale distribution throughout the United States. Mayorga’s wholesale customers range from local cafés and gourmet stores to national chains and foodservice operators, such as Costco Wholesale , JR Cigars, Total Wine and More, Sam’s Club , Bloom, Giant Foods, Marvelous Market, Whole Foods , Balducci’s, Sodexo , Compass Group, Lockheed Martin , and Centerplate. In total, Mayorga Coffee is served or sold in more than 1,700 retail and foodservice locations.

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