The Underdog
An entrepreneur once told me that the easiest way to own a failing business is to open a coffee shop. This comment got me thinking – why would running a hip café that sells sustainable coffee beans be such a terrible investment? Wouldn’t the caffeine practically sell itself? Well, let’s break down the business. Coffee Shop A opens early in the morning and continues to remain open late into the evening. This means several shifts, and a reliable staff is expensive. These baristas sell products such as cappuccinos and blueberry scones at $3-$5 price points. A patron then enters and indulges in a $3 cup of Joe and spends the next 3 hours studying for a Chemistry exam. At that rate, you earn $1/per customer/hour while spending $8/per barista/per hour (not including actual food costs). Not exactly a winning business model. This is not to say that no coffee shop can be successful. This is New York after all—where anything is possible, dreams come true, and even small, local coffee shops can turn extremely profitable returns. Let’s now break down an actual business, a coffee shop that has seen great success since its inception in 1996, The Grey Dog’s Coffee.
- Specialization: The creation of the assembly line highlighted the cost-cutting profitability of specialization, where people or machines would be responsible for a single part in the process of making the whole. Those with a comparative advantage in one thing – making latte’s for instance, would be solely responsible for producing drinks, and those with superior customer service but underwhelming culinary skills would only take food or drink orders. This division of labor allows each person to be the expert at one component of the operational flow. When each person is enacting a task they have the comparative advantage in, the establishment will not only increase production, but will increase output at more efficient rate yielding a lower cost. Through this division of labor and specialization, management can exploit their staff’s strengths in such a way that each worker maximizes the efficiency of each component in the operational process whether it is in a production plant or a restaurant dining area.
- Ordering: Grey Dog takes this basic economic concept and applies it towards their own seamless ordering process. Customers are initially introduced by a greeter, who secures a table using a unique placeholder, such a bright bandana or chain, but does not actually escort the party to their seats. This saves time for the host who does not have to wait for a party to gather to their seats. Instead, he can quickly scan the establishment for more empty seats for the next party. The diners then proceed to the coffee bar where they place an order with the cashier instead of generically waiting for a waiter to take their order. The cashier electronically transmits food orders to the kitchen and drink orders to the baristas behind the bar. After only a few minutes, customers have a table and a warm drink in hand, just as they sign the check for their order. This operational flow saves the customer time because they need not wait for a waiter, and more importantly, it saves the restaurant money. During peak hours, Grey Dog only needs one cashier to takes orders and one or two baristas to make drinks instead of a team of waiters, cashiers, and baristas. This specialization from greeter, to cashier, to coffee maker makes the entire ordering process a tight operational production. There is no need for a massive staff in order to facilitate movement, as the specialization process optimizes the efficiency of each staff member to the point of maximum utility. The efficiency means lower costs and happier clientele both of which add significant $$$ to a coffee shop’s profit margins.
- Self-Service Dining: Another unique way Grey Dog cuts costs and increases profitability is through the restaurant’s self-service type dining experience, at least in part. After diners place their order, they seat themselves based on the system of placeholders explained above and obtain their own set of silver wear, napkins, and condiments while they wait for food runners to bring their freshly prepared food. These “extras” that waiter would normally provide at a sit down establishment is left to the diners own discretion. Maybe one patron is content with a cup of coffee and chooses not to get water, and maybe one patron is especially thirsty and pours a large glass. Either way, these personal preferences are left to the person. In this way, Grey Dog can provide a menu, which offers both coffee and pricier café type entrees such as sandwiches and soups while applying an ordering scheme similar to a coffee shop that simply offers drinks and simple, inexpensive pastries. This operational scheme saves the restaurant a lot of money in terms of resources, as the owner need not pay staff to wait on tables. Instead, they can invest in kitchen resources, foodstuffs, or simply rake in the profit margins.
Grey Dog has proved Adam Smith’s division of labor true through their own operational process and they have the profit to prove it. Since the coffee shop opened 15 years ago, Grey Dog opened two more busy and successful establishments in the village and SoHo. Through the restaurant’s ability to exploit their staff’s strengths, the management of Grey Dog has optimized the efficiency and profitability of their restaurant to appeal to both the thirsty consumer and the profit hungry investor.