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How Do Commercial Coffee Machine Leases Work? – Archived

September 14, 2015

PLEASE NOTE: This is an archived post and the information in it is outdated and may contain inaccuracies. For more relevant information that is totally accurate as of October 2018, please visit our updated guide to how coffee machine leases work.
Buying or leasing a commercial coffee machine for your office or cafe can be an extraordinarily baffling experience. It’s super opaque to the point where it almost feels like you’re buying a used car from someone trying to get one over on you.
In this post, we’re going to explain both the business model / theory behind buying or leasing a professional coffee machine and then go into the specifics of how we do things at Bibium.
WARNING: This post is super in depth. If you’re looking for something a bit easier to digest, try our introductory post on how commercial coffee machine leases in the UK work.

The Commercial Coffee Machine Business Model

In many ways, coffee machines are like any retail item:

  1. A coffee machine company makes them then sells them on to a distributor.
  2. The distributor (that’s us!) buys them, marks them up some percentage, and sells them to an end user for a profit.

But a coffee machine by itself if pretty useless – it needs coffee to complete its mission in life: A bit like a shaving razor and a razor blade or mobile phone and sim card. Further, commercial coffee machines are pretty expensive – the cheapest begin at around £1,000 while pricier (but still common) models can reach £12,000. Because of that, many clients choose leases over 3-5 years to defray the cost a bit.

Leases complicate the straightforward model above a bit. Instead of simple one-two, it’s something like:

  1. A coffee machine company makes a coffee machine then sells it on to a distributor.
  2. The distributor (that’s us!) buys them, marks it up some percentage, and sells the coffee machine on to a leasing company for a profit.
  3. The leasing company collects lots of payments over 3 – 5 years that add up to an amount that’s higher than what they paid the distributor.
  4. When those payments are all done, ownership of the machine reverts to either the distributor (us) or the client (you).

That long-term commitment gives the machine distributor an opportunity to sell the client their coffee over the duration of the lease, which can be a fantastic (and lucrative) opportunity. At this point, you’ll see a few different approaches from coffee companies.

The Discount then Gouge

A cynical approach…the coffee company will offer a massive discount (50% or more) or loan you the coffee machine for free, which is a fantastic start. In order to qualify for this deal, though, you’re asked to sign a coffee supply agreement that requires you to buy a fixed amount of very expensive coffee of indeterminate quality every month. It’s not uncommon to see a company charge £25/kg for coffee they paid £4/kg for, and the client has to keep buying a minimum amount of coffee each month for 3 – 5 years whether they need it or not. The coffee machine company loses money on the machines but hopes to earn it back over time with exceptional margins on coffee.

In the worst case, many clients end up stockpiling cases and cases of rubbish coffee in the pantry. This is how pod machine contracts work, incidentally. This can be dangerous for the coffee company as well if, for example, there’s an economic downturn and dozens of clients need to break their contract suddenly. The distributor is forced to take back loads of expensive used coffee machines, which they’re still making payments on, and there’s suddenly no more income coming in from coffee sales.

The Win-Win

Similar to the Discount then Gouge technique with some crucial differences. The coffee company will discount the machine down to their cost – typically a 20% reduction – in exchange for the client signing a flexible supply exclusivity contract. In this case, the supply agreement asks the client to buy all their coffee from the coffee supplier, but the prices are fair, the coffee is excellent, and there are no minimum orders. This is our approach.

It ensures that our business remains sustainable even if the client falls on hard times, it doesn’t unfairly and restrictively burden the client, and it makes sure everyone’s incentives are aligned. It’s a real win-win.

The Outright Purchase

Exactly the same as Full Price Leases, except it’s an outright purchase. You pay for the full machine upfront and the transaction is complete. Benefits include a lower total spend (25 – 35% savings over a 3-5  year lease) and less admin and paperwork to deal with. We also do this on occasion.

Full Price Leases

The simplest lease approach…the coffee machine company will pull together a lease agreement for you at full retail price and that’s it. The client doesn’t get a discounted coffee machine, but she’s not locked into a long-term coffee supply contract either. Once the lease agreement is done, the client can buy her coffee from whomever she’d like, though the original distributor of course hopes she’ll buy from them. We do this sometimes when it makes sense.

Comparing Coffee Machine Leases

This is how the four approaches compare over the course of three years. In this example, I’ve used a WMF 1500 S coffee machine (pictured above) running through 20kg single origin Fairtrade coffee per month, which is a pretty standard configuration for a medium sized office.

It’s important to note that while coffee machine leases are tax deductible, outright purchases are not. Therefore, because every £10 spent on machine leases reduces a tax bill by £2, it’s like an automatic 20% discount. That’s reflected in the sums below.

As you can see, the Discount then Gouge model looks like a fantastic deal up front, but you end up paying about 30% more over the course of three years. Likewise, outright purchase saves money on leasing costs, but without a supply agreement in place, and because of the tax incentive mentioned above, the machine ends up being more expensive, and the client is still paying the same amount for her coffee.

What if the client wants to buy a machine outright AND sign a supply agreement? That’s actually a pretty good option as well, and involves less paperwork.

At Bibium, we’re happy to help with any of the last four approaches above, but we’ll never charge an extortionate amount of money for rubbish coffee then force you to buy it.

How Do Commercial Coffee Machine Leases Work with Bibium?

Enough of the theory, professor. How does it actually work if I want to lease a commercial coffee machine from you?
It’s very much like leasing a car, actually, and there are a total of 18 steps to the process (we counted!) once you’ve told us you’d like to lease a coffee machine. It all looks very complicated, but it’s our job to make it as seamless as possible for you, and we actually deal with 12 of the 18 steps ourselves:

1

You’ll receive an indicative quote for your coffee and coffee machine

[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_column_text]First you need to pick a machine, of course, and you’ve got your choice of three different types:

Once you’ve decided which coffee machine you want, we’ll do the sums for what it’s all going to cost and transform that into a monthly lease estimate. As a rough rule of thumb, you’ll want to take the total price and multiply it by 1.24 and divide it by 36 for a three year lease. For a five year lease, multiply the total price by 1.37 and divide it by 60. So for example:

  • Total price: £5,000
  • Multiply by 1.24: £6,200
  • Divide by 36: £172 per month for a three-year lease

What all goes into a quote?

Not just the machine, it turns out. There are extra things you’ll want to look out for:

  • Water filter: you need this to make sure the water going into your machine isn’t full of limescale
  • Milk cooler: if you’re getting a machine that makes milk drinks like cappuccino and lattes, you’ll need something to keep the milk cool
  • Cleaning tabs and fluids: coffee machines are finely tuned animals, and they need regular cleaning
  • Delivery and installation: having a super nice professional coffee machine is no good if it’s not set up properly
  • Lease admin fees: the leasing company charges an initial admin fee and an annual fee
  • Extended warranty and service plan: all our coffee machines are covered for at least a year, but if you want three-year’s full cover, it costs extra

The quote is indicative here and will be finalised once the lease company does credit checks, but it’s rarely more than 5% – 10% off.

This is also where we’ll discuss things like machine availability, delivery lead times, and ask if you’d like to sign up for coffee ground recycling.

2

The client lets us know she’s happy with the indicative quote

2. Does the client want to roll the admin fees into the lease?

The dreaded admin fees. If you’re doing a lease, the leasing company charges £130 to set up the lease and £40 per year to maintain it. There’s nothing we can do about this, unfortunately. You can choose to either pay the fees upfront or roll them into your lease.

At this point we’ll get you started with one of our patented commercial coffee machine lease worksheets to make sure everything stays transparent, and we all know where we are in the process.[/vc_column_text][/vc_column][vc_column width=”1/12″][/vc_column][/vc_row]