Linda Smithers scoots to the edge of the overstuffed sofa, competing to be heard above the dissonant whir of a cappuccino machine, the chatter of customers and the melancholy strains of Carole King’s “It’s too late.”
“I’m a firm believer that everything happens for a reason,” she says. “We made a decision to take a chance and it just didn’t work out. But then again, it did work out.”
The president and CEO of Susan’s Coffee & Tea Inc. refers to the decision to infuse her company with capital by selling it to Leviticus Group LLC, the Cleveland investment firm that agreed to buy it for $1.4 million last August. When that didn’t happen because Leviticus couldn’t raise the cash, Smithers was left holding the teabag.
Six months later, she cradles a cup of coffee at Crooked River Internet Caf in Munroe Falls — one of a dozen coffee shops she hopes to acquire by the end of 2001. Swallowing more caffeine than sorrow, Smithers says the turnabout from selling her business to buying more sites will raise her revenues from $2.2 million to $7.5 million, and bump her store count from six to 18.
But this time around, she vows, the principles of her company will not be compromised by the ambition to expand.
“We want to buy a few stores in Akron and surrounding areas, and we’re also looking at a six-store chain in Toledo,” Smithers reveals. “But if we don’t match philosophically, there’s no joining together.”
That doctrine, says Smithers, is the grounds for success upon which she and her husband Ted founded Susan’s in 1989: a blend of quality service, quality product and quality experience.
Unfortunately, the formula was ignored when Leviticus took control of Susan’s — with little more than a promise to raise $900,000 for the buyout within 120 days. In the interim, Smithers stayed on as a consultant but felt suspended in limbo when Leviticus started making consequential decisions, such as closing the Stow store and laying off four employees.
“They also wanted to get rid of our roasting facility, which we think is the core of our product,” says Smithers. “They focused entirely on the bottom line by cutting costs, rather than on how to maintain profits by prioritizing quality.”
As if tapped on the shoulder by a tacit question, Smithers rests her mug on a coaster and explains.
“Yes, it was strange to turn over control to them before they’d bought the company. But they felt it was important to show us they could operate the company successfully, and we had faith they could do that and also raise the cash.”
Michael Dealoia, a principal at Leviticus, agrees that it was an unusual proposition, but cites Susan’s financial standing as the reason Leviticus couldn’t follow through with the deal.
“Indeed, it was a hybrid transaction,” he says. “But the company [Susan’s] is in such a sad state financially that we thought our experience with turnarounds would help us raise the cash. We wanted to demonstrate to the banks and to our financial backers that we could turn the corner,” he says.
Even after a 30-day extension, however, Leviticus was unable to raise all the purchase money, claiming bankers were repelled by Susan’s negative cash flow problem.
“The banks wouldn’t even come to the table,” says Dealoia.
Smithers freely admits that Susan’s has lost money, but adds that she and her husband have invested more than $3 million into the chain over the last five years.
“Most of our losses over the past three to five years were from start-up operations,” she says. “Some ventures failed totally, as in the case of our kiosks and Massillon stores. We had two stores that never, up to the day we closed the doors, ever made any money. In fact, they depended on the success of the other stores to fund their losses.”
Smithers also adds that the Leviticus Group knew exactly what state the company was in financially before it made the offer.
“They had full disclosure of every detail of Susan’s operations for the last 10 years of operation. Obviously, Mr. Dealoia and his partner believed that Susan’s was a good venture as they signed a purchase agreement for the company,” she says.
Java jolt
Revisiting the wrinkle in time, Smithers recounts her reasons for seeking to sell. Primarily, it was because of the health status of her husband, Ted, who’d had heart surgery in 1998 and, at 75, was ready to retire as the company’s chairman.
Another concern was the escalating cash flow problem caused by an expansion program gone wrong.
“During our seventh, eighth and ninth years of operation, we tried several concepts that didn’t work, and our expansion program had chewed up all our capital,” she says, referring to locations Susan’s established in many domiciled businesses — Jo-Ann Fabrics & Crafts, Acme Supermarkets, and others.
By 1997, Susan’s had seven free-standing and nine domiciled locations. But low guest count at the domiciled businesses necessitated closing the unprofitable ventures. With the exception of one, all of the new sites closed within a year of their launch. (See sidebar.)
“Our downfall was that we were parasitic in our thinking. We thought they had such a strong customer draw and we were going to benefit from that draw. And since we didn’t know how to negotiate contracts so we could be in preferred locations, we agreed to be tucked away inside the stores.”
Smithers says she should have moved at a slower pace, using the experience at Jo-Ann’s to develop a plan for the Acme locations.
“If we had taken our time and planned more effectively, I believe our experience could have been positive,” she says.
Another reason for the decision to sell, says Smithers, was that during the expansion process, cash flow became “disastrous.”
“We had focused on quality but we didn’t focus enough on the bottom line and the profitable functioning of each store.”
Hence, the Leviticus proposal seemed appealing when it surfaced.
“We had always funded Susan’s ourselves and we did that to the point of $4 million,” she says. “This time, we felt the only way to get the capital we needed was to let Leviticus do what we thought they knew how to do, which was go out to the public, tell the right story and get money.”
The investment firm may have failed in one endeavor, but Leviticus did balance the bottom line, Smithers acknowledges.
“They did good things, because now all the stores are operating in the black. But what it cost to do that is not good,” she emphasizes. “The Fairlawn location is down 30 percent in customer count, there’s a service issue because you can’t have just one person waiting on 15 guests, and because inventory was cut, well, in this business, people aren’t going to come back next week to get what they want.”
Filtering a fresh brew, Smithers says she’s determined to avoid mistakes she made before.
“Reorganizing a business is so much harder than building it from scratch. But we can do this, and in everything we do now, we ask ourselves the question, ‘Do our decisions and our actions mirror our philosophies of quality service, quality product and quality experience?’”
Percolating initiative
To assure quality service and also run the stores at 25 percent labor cost, Smithers has reallocated her staff and is motivating employees with a new training and incentive program.
“When we got the company back on January 14, we instituted a tiered system for our employees,” she says. “First, we made an offer to our two senior managers to become district managers. They’ll have six stores each that will ultimately report to them when we’ve made all our acquisitions for this marketplace.”
Since the district managers already know how to operate Susan’s in accordance with company philosophy, they’ve been entrusted with overseeing the successful operation of each store in their group, says Smithers. They’ll also teach store managers how to hire and train the right people, with the right attitude.
The store managers, in turn, will hire and train supervisors and store employees.
Although she’d like to emulate Starbucks CEO Howard Schultz by offering comprehensive health care and employee stock options, Smithers says she can’t afford to do that.
“But I can pay more than minimum wage, promise a fun environment where employees can get good guest feedback, and offer opportunities to make an increased hourly wage based upon knowledge and service,” she says.
Susan’s new employee training program attaches the incentive of an hourly wage increase to the successful completion of sequential training modules. The more that employees learn and grasp about company philosophy, guest service and behind-the-counter performance, the more they can earn.
“We feel that philosophy, service, and ringing on the cash register has a very high dollar value,” Smithers says, explaining that the simplest things influence guest satisfaction — from saying please and thank you to counting back a customer’s change. There’s even a “15-second policy.”
“Within 15 seconds after a customer reaches the counter, you need to say something, whether it’s, ‘Hello, we’ll be with you in a minute or two,’ or ‘I know the line looks long, but we’re fast.’ It’s just reassuring someone that you know they exist, and that they matter to you.”
Making beans count
Smithers says that, in the final analysis, the quality of her product comes down to the roasted bean.
“By personally selecting quality beans from the country of origin, and by roasting the beans ourselves, we control the quality of our product,” she says.
First, Smithers selects the coffee bean that best exemplifies the message Susan’s should bring to the community about the country of origin. During the roasting process performed at Susan’s roasting facility, the conversion from a raw product to a consumable product is under the company’s control.
“Then we pick the roast we think will best feature that coffee,” Smithers says. “When it comes out of our roaster, it is absolutely as fresh as it can be.”
Susan’s also controls the freshness of its product by guaranteeing that no coffee will be sold if it’s more than 12 days out of the roaster.
“I still think we have the best quality coffee in the city. At least that’s one thing that nobody tampered with during the transition,” says Smithers.
Creating coffee connoisseurs
To provide a quality experience, Smithers aims to create “smart guests,” using the strategy American wine merchants used to promote domestic wines.
“They made their wines the product of choice by making people smart — giving wine tastings and tours of their vineyards and educating people about their
wines,” she says. “People could then share their knowledge at dinner parties and gatherings. It made them feel smart and important.”
Smithers plans to use that model by giving tours of Susan’s stores and roasting facility to small groups and organizations. She’s also pushing to educate her public by way of store literature, newsletters and roasting classes.
But the most dramatic move to create a quality experience is the new look of Susan’s stores. Smithers is theming the dcor of each shop after countries famous for good coffee: Columbia, Panama, Guatemala, Africa and Costa Rica among them. Locations will be ornamented with artifacts — statuettes, tapestries, masks and costumes — indigenous to the country of origin. Poster-size photographs taken during the Smithers’ travels to that country will embellish the walls.
“There’s such a thing as positive voyeurism, and I think this will be fun for our guests, enhance their coffee experience and add to their knowledge.”
And to differentiate Susan’s from coffee shops that typically sell mugs and gift baskets, Smithers is negotiating to import merchandise from coffee countries into her stores.
“We want to bring in tapestries, ceramics and other items that can connect our community to coffee-growing countries,” she says.
While some may perceive that Susan’s is becoming too “global” to remain a community coffee business, Smithers certifies that each store is being redesigned to serve the community in which it is located.
“I’m not planning on not owning Susan’s, so I’m rebuilding everything. I’m even back behind the counter again, to reassure our guests and employees that I’m dedicated to my stores.”
How to reach: Susan’s Coffee & Tea, (330) 733-3444
A brewing passion
The inspiration for Susan’s Coffee & Tea came in the late ’80s after Linda and Ted Smithers retired from their former professions — she as a consultant and lecturer, he as the owner of a family floral supply business.
“In our travels around the country, we found ourselves gravitating toward coffee stores, and we just became passionate about specialty coffee,” says Linda.
Convinced that coffee was a unique commodity that could be differentiated by quality and personable service, the couple returned to Akron and opened a coffee shop in December 1989 in Fairlawn Town Centre — christening their business after Ted’s daughter Susan, who had died two years earlier.
“She was a coffee lover long before we were, and she used to send us flavored coffees from Long Beach, California,” says Linda.
When Susan’s debuted, it was the only coffee caf around, and the only roaster retailer.
“But we quickly found out our competitors were a blue can and a red can,” Linda laughs.
The plan was to open five stores in five years. They accomplished that in three: Fairlawn (1989); Kent (1991); Canton/Belden Village (1991, closed in 1996); Orangerie Mall, downtown Akron (1992); and MainPlace, downtown Akron (1993).
“We should have stopped at that point, but we believed we needed to dominate the market,” says Linda.
Two more spots opened in ’93 — a kiosk in the MainPlace skywalk and a store in Medina. The skywalk kiosk closed within months, and Medina was sold in ’98.
Between 1996 and 1998, Susan’s grew to 16 sites, with stores and kiosks in Canton, Hudson, Massillon, Manchester, Montrose and Stow. Unprofitable operations quickly resulted in the closure or sale of the new locations, with the exception of an outlet store in Rolling Acres Mall and a seasonal kiosk at Canal Park Baseball Stadium.
Today, annual combined revenues of the stores averages $1.7 million, with another $500,000 derived from a roasting company, and marginal sales from a direct-to-consumer operation.
With renewed direction and rededication to Susan’s three-part formula for quality, the Smithers aspire to add 12 stores within 21 months. Acquired companies would be able to retain their names and gain the benefit of Susan’s administrative, accounting, marketing and computer capabilities. (The company’s 10,000-square-foot headquarters at the Kennedy Business Complex in east Akron includes offices, a warehouse and the roasting facility.)
The benefit to Susan’s, says Linda, would be stability.
“The more sources of income we have to operate with, the better.”