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Quality Vs Scale

Tags: scale coffee

The thinking in specialty Coffee has long been: quality doesn’t Scale. There’s plenty of evidence that this is true but I’ve become increasingly interested in the why, because there is evidence to the contrary. I’m going to look at an aspect of the industry that is closest to home for me, and probably the area in which this is generally held to be true: coffee roasting.

In a technology obsessed world, scale has been something of a buzzword but I think it is important to differentiate business that are reliant on scale, where scale is baked into the financial model from the beginning. These are businesses with high fixed costs, but the cost of a new customer or sale is very low or effectively zero. The classic modern day example is Facebook. The people and the servers are there, and adding one more account costs nothing. Aside from a potential spend on marketing, there is no cost of goods. In addition the labour involved doesn’t scale with customers in a linear way. A business like this can lose money, and lots of it, at the start but once it reaches a critical mass it becomes incredibly profitable.

A coffee bar is different. Not only does each drink have a fixed cost of ingredients, the busier a coffee shop gets the more staff it needs. The ideal theoretical model for coffee shops would be to find the maximum number of drinks a fixed staff could serve, and then balance price and quality to be as busy and expensive as possible for that fixed labour cost. However, any additional growth would have to come from additional coffee shops – a whole other challenge of decentralised scale.

This is a roundabout way of discussing why scale is often talked about as good or necessary. Coffee roasting is one area of the coffee value chain where some scaling is possible relatively easily: buying a bigger roaster allows the same team to scale, or a new roaster plus packaging equipment does if there is a desire to not have to scale production labour at all.

So, if we are to consider why quality doesn’t scale then we should consider the aspects of coffee roasting that may be the barrier to retained quality. I’m going to ignore the practices used by business that intentionally compromise quality to grow new markets or opportunities. Those are just strategic decisions and not limits to quality’s growth.

Quality Doesn’t Scale

1. Raw materials

An area that many would point to, when looking at the decrease in quality when a company scales, is in its raw materials. This constraint is almost always self imposed – it isn’t that there isn’t enough coffee of a sufficient quality, it is more likely that the decision has been made to leverage some form of capitalist growth, and to leverage volume for lower prices. This has likely led to decreasing sale pricing to gain growth, which the company feels the need to continue to feed. Thus they spend less on their green coffee, to make their product increasingly inexpensive and able to gain the growth.

However, this is a strategic decision and not a barrier to quality. At some point the decision could have been made not to compromise quality to retain gross margins at lower price points, leadership in the company could have insulated the buyers from the pressures of the sales team. The implication is that perhaps there isn’t a sufficient market at the higher price point and that you can only grow at lower price points. I’m not convinced this is true, and the growth of speciality as a whole indicates that there is significant growth left at higher price points as long as the value of the product matches the price.

2. Manufacturing

There are two ways in which I can see scale impacting roasting negatively, though one remains more theoretical. If a roaster grows and has to run more batches per week then this is going to introduce some level of inconsistency. (My recent complaints about roasting machines seem relevant here.) Time constraints on a team mean less time to QC, and increased workloads take a physical tole –  a more fatigued team is likely to make more mistakes, or let more mistakes through a QC process.

This problem should be alleviated by capital expenditure: buying a bigger roaster. There is likely a sweet spot when it comes to the size of a production team, the number of machines, and the number of batches. Busy enough that profiles are developed and have time to be well refined (for additional learning and understanding of future profiles) but not so busy they are stretched. a

The theoretical second challenge is the idea that a larger capacity roaster is not able to achieve the same results as a smaller batch roaster. It isn’t uncommon to see the words “small batch” used across industries to denote the handmade, careful quality of something. However, I think too many small batches is likely a bad thing. As for whether or not larger roasters can achieve the same level of quality – I believe it is possible, but difficult. There’s also the challenge of the expense of a learning curve. Throwing away a bad 10kg roast is annoying, but throwing away 69kg of a failed batch is far more painful – especially when there may be very limited amounts of a coffee. This can all be factored in, but it would likely drive sale prices up (marginally of course, but they’d certainly make reducing prices as a route to grow… challenging). I may be proven wrong, but I believe this is a challenge and not an absolute barrier.

3. The Human Factor

Coffee roasting remains an extremely human affair. There are certainly those who will always relish that, and those who would be delighted to replace humans with automation – especially if it improved coffee. For now, we need people who care about the results to roast coffee, and it isn’t possible to build external systems that relibaly control quality. (Or, if it is – I haven’t seen it). In a competitve market the human resource becomes extremely scarce. Lots of roasting companies would like to find great people, but currently demand outstrips supply.

I could imagine one argument about why quality doesn’t scale is that people who care about what they make may be less engaged when producing larger volumes. It would feel less “craft”, less “intimate”. However, this implies that they couldn’t achieve great quality at scale and surely if you cared about great coffee then producing larger amounts of it at the highest level should be incredibly desirable – there would be undeniable positive impact on lots of people. Again, if you grow to the size where you have the largest viable machines and are still producing incredible numbers of batches – I could see that being dispiriting and frustrating and, when you have so many customers that they become faceless, a loss of intimacy with the customer would take away a pressure for excellence.

Scale Enables Quality

I also want to discuss the ways in which scale might increase or enable quality. What makes it all so confusing is that I believe scale is necessary to increase quality, and allows significant jumps in cup quality and consistency.

1. Raw Materials

Buying coffee is uttelry entwined with scale. There are endless stories from frustrated exporters, who have given up time to visiting buyers, toured them round farms and mills, only to have the buyer purchase a couple of pallets of coffee. I think there is a significant change in the buying process when you’re able to buy at least one full 40ft container from a single origin.

Scaling up buying can come with better access to what you need. Scaled up buying means buying with greater impact, which can be used positively (in terms of quality b).

I think many coffees buy better and better as they scale, until they reach a point when the requirement from sourcing changes. That isn’t a consequence of buy, but of a changing strategy. I think scale clearly enables better quality purchasing.

2. Manufacturing

The primary area I believe that scales enables quality in manufacturing is through improvements to equipment and to quality control. Colour readers are useful. Better probes and roast logging software is useful. Having the resource to train and upskill production team members all enable quality, and all have significant costs that scale can help overcome. Scale enables greater control of packaging – should you want to go down the route of modified atmosphere or different materials. It isn’t a requirement, but it helps.

There’s a bell curve in roasting, as mentioned before. I think getting roast more often makes one a better roaster, increases understanding of a coffee and makes it more likely that you’ll work through a lot before it begins to change or degrade.

Increased scale should also produce sufficient profit to invest in R&D (though so few speciality companies do), and in product development. Increased scale should also allow for the setting of tighter benchmarks of quality, because losing a single missed roast is less consequential (unless you’re going through the jump phase when you’ve scaled up equipment but throughput doesn’t yet match it).

3. The Human Factor

A form fill and seal machine, that takes a roll of foil, valves and coffee beans then spits out finished bags of coffee is a troubling thing. It forced me to contemplate a difficult question: Is it better for a company to create several low paying jobs, or fewer jobs that pay better and are more enjoyable? While we decided on the latter, I do concede that there are arguments for both sides.

As mentioned above, scale creates resources that can be invested into staff: better renumeration, better benefits, more training and education. This should lead to better retention and improved performance – and hopefully increased job satisfaction to go with it.

So why doesn’t quality scale?

I genuinely look forward to people refuting some of the ideas above, and arguing with me – this is the real point of sharing ideas on here. I am aware that I have argued absolutely that quality can scale, certainly to a very large size – larger than we have seen people scale in practice. So, how can I argue this in the face of what I see out in the world?

I’m going to make a counter argument: Quality can scale, but the financial models we’ve chosen prevent it doing so. At some point businesses make a decision about how to increase net profits, by choosing to decrease costs. Under these pressures quality very quickly falls by the wayside. This implies that there is no ceiling to the market, which is obviously not true. Growth certainly becomes more difficult as you scale up and a market feels saturated or fully mined for value, and many companies chase that tipping point of scale where the power of the brand becomes a multiplier of its own. Blue Bottle spring to mind as a business chasing this brand inflection point. There will be many pressures to get to this point as quickly as possible, and we haven’t really discussed the rate of growth. Many businesses may have pressure to grow quickly in order to return the investments that enabled that growth, i.e. an investor who wants a return within a certain timeframe.

This pressure of speed is another reason people alter their financial models. Quality can scale, but I think there are hard limits on how quickly it can scale once it is a mature business.

Disclosure: a large part of this thinking has come as the result of SQM buying a larger roaster. We’ve grown steadily over the years, and I genuinely believe that we’re roasting better than ever, and more consistently too. While I’m frustrated by the roasting process, I’m proud of what the team accomplish. I’m not really interested in scaling at the expense of quality, so it started me down the line of this thinking.

  1. The challenge of where that CapEx may come from, in a business growing rapidly that has its profits tied up in inventory or trade debts is a whole other conversation. I understand one route would be investment, and that may come with an expectation of scaling up to return on that investment. I agree this may add a pressure that makes growth difficult, but as a single example it didn’t seem enough to bring it into the main discussion.  (back)
  2. what defines ethically better is now extremely fuzzy and outside of the scope of this piece  (back)

This post first appeared on Jimseven - James Hoffmann's Writing On Coffee, please read the originial post: here

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Quality Vs Scale


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