After a testing year for a UK café sector now planning its re-opening, Café Life caught up with Lincoln and York’s CEO, James Sweeting (pictured), on a range of topics, the company having recently unveiled their investment in a new packaging line, while, like most other enterprises large and small, negotiating the effects of Brexit and Covid.
Timely investment
Earlier this year, Lincoln and York (www.lincolnandyork.com), a UK-based coffee roaster that services many of the high streets most popular coffee brands, unveiled its £2million investment in its market leading roastery at its base in Brigg, North Lincolnshire. As the QSR market collapsed with lockdowns, the company say that they saw an opportunity to grow and become more innovative, having in the process also given themselves a competitive advantage, they feel.
For one thing, the innovative automation packing process increases efficiency and effectiveness, meaning coffee can be shelf-ready in less than an hour. They have now also increased the business’s capacity to supply the retail coffee market, reinforcing itself as a market leader with longer-term growth potential, they propose, as well as helping to support the foodservice market as it stabilises in 2021.
While the out of home sector suffered, retail and web sales for coffee have risen significantly and the new machine means Lincoln and York are well placed to drive growth and innovation in this important channel, they point out.
They worked with Brambati, who supplied the coffee grinding machinery for in-line grinding, degassing silos and the coffee management software. The packing machine itself, was constructed by Goglio SpA, and provides top-tie and reseal capability with an ultrasonic valve sealer to give a cleaner, faster application. The end of line robotics were supplied by IMA and feature an auto carton labeller and robot palletisation to enable quicker and more efficient packing. The new line, standing at over 10m tall, took over 400 hours to construct and means that Lincoln and York can now boast having one of the fastest coffee packing lines in Europe.
The innovation automates the packing process for retail clients, meaning coffee can go from green bean to being shelf-ready in less than an hour, increasing the business’s capacity to serve its retail clients, as well as be an investment and a positive indication of the longer-term growth potential in the retail coffee market.
Brexit problems and/or opportunities to be had?
The Brexit difficulties are still there, they haven’t gone away, but I’m optimistic. Our own experience is that goods are taking twice as long as normal to move in and out of the UK, but particularly out, and it’s costing 50% more, so it’s a real issue, and it’s not going away any time soon.
It’s settled down, but it’s not frictionless by any means. Moving through the French ports, particularly, is very difficult. It’s childish really, and Brexit or not, none of this needs to happen - the issues that are going on at ports - because they’re so petty (taking their time, being pedantic with paperwork, for example). They call it paperwork, but a lot of it is supposed to be digitised, but it isn’t. It’s a hybrid of paper and forms. You might have 10 forms, and get nine right, and they’ll pull you up for comma on one of them… Things are smoothing out, but I think the issues are permanent for a while, until the politicians tell everyone to stop messing about!
As a business, we are set up better than most to do it. We’ve heard all the stories of people setting up businesses at home, exporting whatever, and of course, they’ve never had to worry about duties, and suddenly a carrier like DPD or the Royal Mail lands them with a bill on the door for duty, and a lot of small traders are just not geared up for that. So that’s an opportunity for us… I’d rather it wasn’t, but it is because we’re geared up more. So, in a way, we should benefit, but it’s a bit of a zero-sum game in that sense. Really you want the market to be better for everybody, not just for us. I like to keep my small customer hat on, because we were there once, and I know what the issues are.
Will there be more direct, end consumer business for Lincoln and York as a result of Covid?
I think there will be an element of that. There is a lot of disruption generally in the food market, in terms of the manufacturers, or brand owners, trying to get direct to consumers, and using the internet, obviously, and social media and all those things as a means of missing out the middlemen.
The thing about coffee is, to drink it, you’ve got to have water, and we can’t send hot water through the post! There are examples of people like Deliveroo being able to deliver coffee – Pret Coffee by Deliveroo, I think. There’s a place for that, and home delivery overall, that sector’s growing massively, and I think coffee inevitably will be pulled along by the waves. However, us as a manufacturer and roaster of roasted coffee products, it would only ever be niche. We will still have, and want to deal with, a network of retailers and distributors who can get our products either on shelf or into cafés, restaurants and hotels, and I don’t see that changing massively.
The coffee sector is an international business, but in reality we import a lot, so it’s been quite one-sided. We import Italian coffee machines and coffee from abroad, and a lot of ancillary products, so it’s always been a one-way trip, but if you’re exporting it’s a different matter. I think the opportunity for the coffee sector - or at least the suppliers into the coffee industry – is to have manufacturing locally.
There are some serious supply chain issues around the world. Containers are all over the place, often in the wrong parts of the world. Container rates have quadrupled in price, so the opportunity is for suppliers into the industry to have bases nearer home so that they are not having to wait on extended lead times, and also to cut out the costs. And also, you’ve got significant cash flow difficulties if you’ve bought something in China, even in Europe for that matter, and it’s taking you twice as long to get it here as it was before, that’s a big cash flow issue. Are we well set up for this an industry? No, because we’re mainly an importer, but businesses are going to have to work out ways of getting around that, and I think l local supply is the answer.
Another opportunity for us, of course, is to take the place of all the imported coffee products that come in. That has always been our challenge, our objective, and that is playing into that narrative to some extent, which is not a bad thing.
Your view on ‘lockdown’?
I come from a point of view where I completely disagree with the government’s policy of protecting the elderly and the vulnerable, and sacrificing the young and the fit. I think it’s completely the wrong way around.
For me, personally, it’s been a disaster from that point of view because I think we’ve just got it completely wrong. We’ve spent £300 billion, and counting, and we’re no better off, we’re no further on. However, they have tried to protect the hospitality industry in a sense by the furlough scheme, but unfortunately again, that’s not allowed the market to do what it needs to do, which is sort out the wheat from the chaff.
So what we have now is a whole host of zombie businesses, and fair enough, it’s not their fault that they are being shut down – I get that completely – but I think what furlough’s done (this sort of never-ending furlough) is, it’s stopping you seeing what the opportunities are because everyone’s in a state of limbo all the time. Businesses are literally able to hibernate. If they are not paying rent, and they’re not paying their staff, and they’ve got grants and all sorts of things, it’s very hard to see where the opportunities are because nobody’s actually forced to do anything, and as a free marketeer, I would prefer to see the market being allowed to do what it needs to do.
What that means is, we have to wait. The government has, again, sacrificed the hospitality industry, and the public appears to be in sync with that, or at least appears to be being duped into that.
Have people’s behaviours changed as a result, and become too entrenched to be able to go back readily to ‘old habits’?
I think there’s a big pent-up demand to get out and about, and back to pubs and restaurants, I’m sure. Yes, they’ll be a section of people who are slow to come back - there’ll be a few who’ll be terrified for years... But in the main, I think people will be desperate to get back, and there’s a big section of middle England, middle UK, that is actually financially better off than they were - at least they’ve built up savings – because they haven’t been able to spend it on going out and going on holidays. I think quite a few people have been able to save a few quid, and they’re ready to spend it when the time’s right.
I think when the market opens up, it’s going to be a bonanza, which is great. That’s going to be a bit of a sugar rush, but of course, there could be a more longer-term change in people working from home more, although I question whether that will ultimately be the case… But there will, inevitably, be a bit more flexible working, I think, because technology allows it to a point. An insurance company, for example, can virtually do everything online. The likes of Aviva, for example, will just shut and entire office building, and they might convert It into apartments, living accommodation or co-working spaces. In the short-term, that will mean less people in places where they used to drink coffee, but in the longer-term, it might mean a different mix of living and working, and lifestyle, and in all of which coffee will play its part. There will be a whole range of different scenarios playing out and clashing with each other all over the place, but only when we open up. So we wait to see how April goes…
Have you been surprised by the government’s extension of the measures, particularly the furlough scheme?
Yes, the pragmatic, sensible side of me was/is surprised, but they are enthralled to the NHS and to the scientists, and are on this path, so it’s easier for them to just extend it and shut everybody up and kick the can down the road.
Are you concerned about the dates the government have set, and the staged approach to re-opening?
I am not confident about it all in the sense that the government hasn’t got many things right, so I don’t see why they are going to get many things right going forward. And they have been quite happy to sacrifice the hospitality industry, and they are ‘bribing’ people via furlough and other things to keep their mouths shut, so it’s quite possible that they might put one of the stages back. They’re obsessed with the NHS, we all have to worship at the altar of the NHS for some reason, so yes, hospitality may well get pushed back. However, we have to be hopeful.
There has been a groundswell in recent times with some businesses opening up anyway…
Yes, I think people should open up, they should push the boundary, and do as much as they can. I think it’s great that a lot of coffee shops have done really well through takeaway, but then you’ve got the state, if you like, coming along and breaking groups of four up because they’re standing in the street drinking takeaway coffee. These are the clashes we’ve got at the moment in society. Companies just wanting to get on with it and people wanting to get on with life, and then the local officials trying to stop you... So we’ve got to try and win it out, so I do think we should try and push it; everyone should try and push it, but it’s hard to get critical mass.
When you’ve got the government basically paying people to keep their mouths shut by constantly extending furlough, and making it easy for people to be compliant, I think it’s hard to generate this groundswell.
How quickly do we need to see the new coffee business landscape emerge to be able to judge its viability?
This will all be dependent on allowing people to move around and things opening up. Until that happens, it’s all conjecture, we’re just guessing and surmising where the future will be. But fine, come the date the government allow businesses to trade outside, let’s look at that, and see what that level of trade is… And if that level is approaching the level they would normally get, then it’ll give us a pointer, but you’d need to see a good few weeks of trading.
The advantage our industry, and the hospitality industry as a whole, has, is that it’s quite dynamic. It’s a short gestation period between the government saying you can open up to suddenly seeing pubs starting to take bookings, say. It’s not like building a new car, which takes years of development work. This is something that can happen from one day to another, so therefore we will get some pointers fairly quickly.
The industry has been able to hibernate itself because of government support, although some people are in worse positions than others because they can’t get out of rents and so on. But we will know within three months of opening what the future looks like, or have a very good idea of what it looks like.
There is a historical precedent for this, in the 1660s when London particularly was afflicted with the plague, people left it for two years, then they came back, and within a year or two the place was full again.
Is competition for existing coffee supply increasing?
No, there’s not going to be a shortage of coffee generally. As niche countries - for instance, Costa Rica - find it difficult to grow coffee at a profit, an enormous country like Brazil just takes up the slack, and you buy more coffee from Brazil, and it’s different, but it’s coffee, and in such a huge agricultural country, they can do that.
The other side to that is, though, we are not giving the choice of these niche, perhaps beautiful, very flavoursome coffees coming from other countries. The public potentially loses out that way. In a big industry, that doesn’t matter too much at the moment, as they can still get product. But what we are beginning to see is a disconnect between what coffee if bought for, and what people are paying. The cost of growing coffee and the farmer earning some form of a living out of it, is higher than the price the farmer is getting for it in many parts of the world. So they’ll put up with low prices for so long, and Fairtade’ll come in and help, and various NGO-type initiatives, but in the end, the farmer gets poorer and moves to the city, or grows some other crop. That’s been going on now for a year or two. What we are beginning to see is inflation feeding through because of the disconnect between the actual cost of growing versus what markets expect.
Any advice for the smaller, independent operators in navigating the likely future landscape coming up?
Stay nimble in the short-term and take advantage of every scheme that the government has got going. Have a plan for opening up. A café needs to make sure that it has as much outdoor seating as they possibly can have, as that seems to be coming first. Have all the health and safety plans in place.
Look after your cashflow at all times. There’s lots of talk about how cheap money is, but getting your hands on it is a different thing! If ever cashflow was important, it is now. In fact, as businesses open up, the challenges on cashflow will be bigger than when businesses have been shut down because you use more cash trading than when you’re not trading in some respects…
I would also say buy locally, because the supply lines around the world are going to be longer, with delays everywhere - not to do with Brexit necessarily, but Covid and containers being in the wrong places because of shutdowns. And there are going to be periodic shutdowns across the world which will affect logistics, so I would advise people to buy locally and make sure that their supplier has got plenty of stock.
Have some businesses changed their business models too much to be able to ‘get back’ quickly enough?
I think most people have done nothing and just hibernated, but we’ll see what happens. But even in our case, it’s a big risk to try and go and change a business model when you don’t really know what the landscape’s going to look like when the dust settles. In many ways, it’s been better to sit and do nothing. You hear the stories of people moving to online, and yes, there are some great examples of that, but in our case, even if went online, it wouldn’t turn a dial. It wouldn’t replace what we’ve lost, because stores have been closed.
If you’re a café operator with five to 10 coffee shops, what would you have done? The best thing was just to do as much takeaway as you possibly could, and the rest of it just hibernating. The budget has allowed for a super deduction on investment in plant and machinery (130%), and that is a big incentive potentially for somebody investing in a business, although the payback will be further down the track.
Having taken advantage of the various schemes, are businesses simply now at risk of more debt and takeovers?
The bigger businesses have all re-capitalised, they did that quite early on. We saw that with some of the listed operators and private equity operators, the restaurant and coffee shops chains and so on. They’ve all either gone to the City and had rights issues or capital arrangements, so they’re fine. They’ve got war chests, they can play it out… It’s the smaller guys, they haven’t been able to re-capitalise. They will have been able to access a CBILS loan, and various grants, but they will have eaten into a lot of that, and if they have borrowed money, they’ve got that to pay back – it’s not capital, that’s borrowing, and the interest element on it is fairly generous.
There have been some takeovers in the listed space (on the stock market), and there are quite a few private equity opportunities, but fortunately, or unfortunately, depending on which side of the coin you are, those businesses in the coffee industry haven’t been exposed as much as for instance, the pub chains. However, there could be some smaller coffee operators who will be vulnerable. It will depend on how trading pans out for them, but they will be vulnerable because they have more debt now than before. It depends how nimble they have been able to be. There will be some that are sitting ducks.
Got to say though that our research shows that there has been a net increase in the number of coffee roasters established in the UK in the last year. And how is that possible when most of their marketplace has been closed down? It could be that people have been on furlough, or made redundant even, and that now is their chance to do what they’ve always wanted to do and have a craft operation of some kind. I’m guessing they are very, very small, and don’t have many overheads.
A final word on Lincoln and York’s latest investment?
The decision to spend on our own new line was taken just as Covid started, even though we didn’t really know quite what was going to happen. We felt that the OOH (out of home) market had had a very good run over the last 20 years, and the coffee sector was growing with it, but that the growth was beginning to run out of steam, or at least go through a period of consolidation, which I think it would have done, had Covid not come.
We were already seeing this in the gourmet burger, and mid-market, chains such as Jamie’s Italian. There were just too many of them. And coffee looked like getting caught up in that, with the growth being less, so the argument we had was that we felt we were a bit too heavy in foodservice and out of home, and needed to get more into retail, partly because of online, but also because the retail sales of coffee had been holding up very well, particularly for roasted coffee beans, and capsules (which we don’t make), and we just weren’t playing a big enough part in that. So, we have been shifting our emphasis.
Covid has in fact turned out to be a ‘blessing’ because our share of retail has gone from less than 30% to more than 55% in the last year. As the foodservice dropped away, the retail side held up very strongly, and indeed the export side. I feel the UK foodservice market will come back, and it will be strong, but it has been on an upward slope for so long that there was an element of inevitability about consolidation, and we had already got to that point.
It’ll be interesting to see what happens now because of Covid. There might be a year or two of lull, but the UK will do very well in terms of coffee, and, as ever, as a business we have to be prepared.