Cash Flow Lessons from The Profit: Tea 2 Go

cash flow lessons from the profit

The Profit TV show airs on Tuesday nights, 10 pm on CNBC. Last week’s episode featured Tea 2 Go, a retail store selling made-to-order tea and loose leaf tea. The final outcome was Marcus starting another company, American Tea & Spice Shop. Each business offers franchises.

There aren't a lot of cash flow lessons in this episode as it dealt mainly with products, franchise management and the personal drama between the owner and his son. However, Tea 2 Go did make one of the most common and deadly cash flow mistakes.

The Facts

  • Tea 2 Go was launched in 2012 as a franchise concept by Jeff Hunt in Texas.
  • Tea 2 Go serves only tea (no coffee or other beverages) and sells made-to-order tea drinks and loose leaf tea.
  • The stores did not sell any food or incidentals.
  • The business is run by Jeff and his son, Taylor.
  • There were originally 19 locations, including franchises, but only 11 of the stores remain today. The owner, Jeff, owns 2 of the remaining stores.
  • The 2 corporate stores are losing money at a rate of $3,500 to $5,000 per month.
  • There is no POS system (Point of Sale).
  • The franchises sell for $30K and they have to pay a 4% royalty.
  • The tea sold (including cup and straw) has a 90% profit margin.
  • All the tea is purchased from one distributor.
  • In 2015, the business brought in $2M in revenue.
  • The business owes over $1M, and $750K of that is a bank loan Jeff took to build out stores so he could sell as franchises.
  • All the $30K received from new franchisees goes towards debt service.
  • The company has $272K in assets, and a negative net worth of $780K.

Analysis

  • The 90% profit margin on the tea sounds great, but it does not include labor. Labor usually adds 30% to the cost, so the true profit margin is 50-60%, which is the average for a successful business.
  • We aren't told how the business made $2M in gross revenue in 2015. The number of new franchise sales don't add up to this, and one of the corporate-owned stores is selling only $10K of product per month. When taking into account the 4% royalty the franchises have to pay, the numbers still don't add up.

Lessons Learned

  • Marcus wanted to bring up the average customer ticket price from $3 to $10. In a brick and mortar retail store, where you can service only so many people due to space and time constraints, this is the smartest way to grow your business. Often owners think opening a second location is the answer. At some point, a second location is the correct answer, but only after you've maximized the per-customer ticket price in your current location.
  • The tea sold in the stores was purchased from only one distributor, and this made the business vulnerable. If the distributor decided to stop shipping, the business would have no product to sell. In a smart and strategic move, Marcus gave equity in the new business (American Tea & Spice Shop) to the distributor. In the picture above, the gentleman on the left is the distributor - Manish Shah, owner of Maya Tea.
  • The most common and most deadly cash flow mistake a business can make was made by Tea 2 Go. They took on too much debt and all cash flow and profits went towards servicing that debt. Debt service can kill your business, even if you are making a profit. See my blog post, "How You Can Go Out of Business While Still Making a Profit."
  • Too many businesses borrow money without a clear plan on how the business will repay the debt and still have cash to operate. Business owners tend to be dreamers and optimists, which are wonderful qualities. But when you borrow money, you must be pragmatic, analytical and conservative when you plan on how you will repay the debt.

 

Please note: The assumptions and opinions here are for teaching purposes only. I in no way mean to insult or throw shadow on anyone’s character or business acumen. I understand that very limited facts are presented in the TV show, and I’m aware that there’s always more to the story.


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