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Coffee Trends: The Risk Factor

The Risk Factor


June 13, 2008
By Brian Martell

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“Son I’ve made a life out of readin’ people’s faces, knowin’ what
the cards were by the way they held their eyes.  Now, if you don’t mind
me sayin’, I can see you’re out of aces, for a taste of your whisky
I’ll give you some advice.”  Kenny Rogers – The Gambler

“Son I’ve made a life out of readin’ people’s faces, knowin’ what the cards were by the way they held their eyes.  Now, if you don’t mind me sayin’, I can see you’re out of aces, for a taste of your whisky I’ll give you some advice.”  Kenny Rogers – The Gambler

I  happen to know a successful gambler who has figured out a relatively simple system that puts him in a better than 50/50 position when he goes to the casinos. His method uses a bit of probability, mixed with cluster theory, to give him the edge in an arena where the odds are definitely not in your favour.
 
Gaming and gambling has a great appeal because of the promise of great pay-off in spite of even greater risk. As the stakes are (or at least should be) not critical to your financial health, the enjoyment derived out of playing the wheel, dice or tables makes the risk palatable. If you win, the payouts are great, because the chances of winning are pretty slim.
 
The house always has an advantage, and therefore is on the lookout for those who can “even” or “better” the odds through such methods as counting (a counter is someone with an incredible mind for recollection and calculation, who will memorize the cards that have gone through the deck, then using probability, determine what the next card turned over will be). Counters are personae non grata in casinos and are unceremoniously shown the door as soon as they are exposed.

As business people, we often look at the risks we take with an eye to improve our overall profitability while minimizing the downside. Sometimes the payoffs are great, while ill-conceived risks prove to be disastrous. Like in gambling, when the payoffs are great, so are the risks. And like the counters, the best way to mitigate the risks is to have a good handle on the odds.
 
There is a term used in academic circles to make theoretical models make sense; it’s called perfect information. Perfect information makes the absurd assumption that all the relevant information needed to make a decision for the businessperson is known, and all he has to do is plug the data into a formula and the resulting output will tell him what to do.
 
We all know that perfect information is unattainable and that any model based on this assumption has no relevance in the real world. But herein lies the risk factor we must face constantly when making decisions on what’s best for our companies. We don’t have perfect information, the information we have may be dated or even false, and the cost of getting close-to-perfect information may be too much to bear in real money or in time.

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In the vending and OCS industry, there are usually three main decisions that have to be made that involve risk: the investment in a new customer; the investment in new tools to help run the company; and the human investment in hiring new people when there is too much work for one, but not enough for two.
 
The information available in each case can mitigate some of the risk, but you can also stack the deck in your favour by employing certain measures at your disposal. Taking on a new customer, which could cost in the tens of thousands of dollars for a good vending account, has to take into account the volume of the business, the gross margin, the requirement for supplemental service, etc.
 
The tools you employ to mitigate the risks can help ease the risk of an iffy account. The biggest fear in buying new equipment for an account is the possibility that they may not stay with you long enough to defray the cost. For this reason, many vending firms employ contracts of fixed terms that extend up-to or past the pay-off date of the equipment. Further, if commissions are part of the mix, a sliding scale based on volume can be negotiated to remove the specter of a higher break.

Trying to get to the next level of growth in a company is probably the most angst-ridden process an operator will ever go through. The unknown ramifications of taking on new software or moving to a new location, to name a few, can be risks that need careful consideration. Expensive technology will be much more complex than a transactional analysis and therefore is so critical to the continuing success of the company.

The search for the right information to make the right choice is trickier than just getting a lot of information on the subject. Asking the right questions means being honest with yourself and trying to be as objective as possible. Often, there may be a bias to do or not to do a certain project.

Asking yourself what are the true and total costs (time, capital, human resources, as well as opportunity costs) and what are the realistic benefits of the project is a good start. Being a little pessimistic, or as someone I know put it “aggressively cautious,” can prevent the starry-eyed visions of huge pay offs with no regard for the downside.
 
In short, developing good pro-forma analysis skills, being objective and paying attention to the pertinent information around you are all part of becoming a good counter in the business casino.

Questions or comments?  Reach Brian at Brian@heritage-coffee.com


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