Entrepreneur Insight

Urth Caffé: Turning a Labor of Love into Booming Business

Passion drove entrepreneur couple to open Urth Caffe; a CPA helped them turn a profit.

Since the first Urth Caffé opened its doors in Southern California in 1991, the organic coffee company and eatery has grown exponentially. The café, known for its gourmet coffees and celebrity clientele, will generate more than $38 million in revenue this year, according to the company's chief financial officer. What many don't know is that there was a time when husband-and-wife owners Shallom and Jilla Berkman were barely making ends meet.

"We spent many years with no profit, struggling to survive, maxing out our credit cards, yet nothing stopped us," Shallom Berkman said.

Profit margins are notoriously thin in the restaurant industry. According to a study from Ohio State University, about sixty percent of restaurants fail after three years. How did the Berkmans make it?

It was not a cakewalk. It fact, it took Urth Caffé more than 10 years to turn a profit, and along the way there was heartbreak and many lessons learned.

Passion for business and sustainability

Every Thursday, a formal coffee tasting takes place at Urth Caffé's roasting facility in downtown Los Angeles, where 200,000 pounds of coffee beans are roasted every year. Different varieties of coffee from around the world are roasted to varying shades, carefully labeled and separated into glasses. Within four minutes, the ritual must begin – each tester smells the aroma of the coffee, tastes the brew by the spoonful, then spits it out, like a wine tasting. "Because if we drink 50 cups of coffee, we're going to need a paramedic!" Shallom Berkman said, laughing.

Shallom and Jilla Berkman visiting one of their organic coffee farms

"You have to have a love for what you're doing, because there are going to be hardships; and you have to have the inner fortitude to survive those hardships."

-Shallom Berkman

The Berkmans source coffee directly from all over the world, including farms that they helped to set up in Uganda, where farmers grow heirloom and organic coffee beans, which means they come from trees that have not been genetically modified. These trees grow very tall, don't produce a lot of beans and require deep shade, making the growing process much more complicated and time consuming. The Berkmans travel to the coffee farms and consult with farmers on what kind of species of coffee trees to plant, and help them deal with issues like pests and drought in an organic way. It's a labor-intensive process, but you can taste the results, according to the Berkmans.

Shallom Berkman Meeting with Organic Coffee Suppliers

"You're going to have the richest cup of coffee, one of the strongest cups of coffee you've ever tasted, but low acid, so it digests easy, and all kinds of sweet, complex flavors," Shallom Berkman said.

For the Berkmans, the key to their success is the high quality of their products. But quality is expensive. And it took a while for the Berkmans to figure out how to make money doing what they loved.

Turning a profit

After they hired a professional certified public accountant who pointed out the problem areas, they were able to turn a profit.

"What I brought to the table is structure," said Henry Versendaal, the chief financial officer of Urth Caffé, an industry veteran who has worked in just about every restaurant position since he was in high school, from busboy to controller.

When he started at Urth Caffé 12 years ago, the first things Versendaal focused on were cash flow and financial controls. He noticed that accounts were overdrawn often, so he put together a daily cash analysis and projection, and then created budgets, all of which were new for Urth Caffé. He said it took him nine months to organize the back office and produce a financial statement.

Versendaal also changed the way employees were rewarded. The Berkmans were very generous with their employees and rewarded managers based on increasing sales numbers, but not on the overall returns after costs were taken into account. Versendaal said he changed it so that employees would be given bonuses based on overall profits, which incentivized them to actively control costs and waste.

"As [the managers] became more interested in what they needed to do, we educated them: you don't carry any high inventories, you schedule your labor based on what your volume of business is going to be. And if it's a slow day, then you send people home early. They wouldn't [have thought] of those things [before] – because they didn't understand the effect that that would have on the business – until we told them it was going to affect their bonus," Versendaal said.

Versendaal also advises businesses to make sure they are capitalized sufficiently, and to make sure that their investors understand the big vision and are in it for the long haul.

"As soon as you start running out of money, you start cutting corners [and] then your customers will notice right away. It won't be the same product that you dreamed of. Instead of growing the business, you'll just be trying to survive," Versendaal said.

In Urth's case, many of its investors are customers who believe in its mission, trust the owners and are willing to wait longer for success.

First heartbreak turned business strategy

The Berkmans also had trouble finding the right financial partner. After their first branch in Manhattan Beach became popular, Berkman said the landlord evicted them so that he could raise the rent.

"It was a real sad, tragic experience for us, and we never wanted to let that happen again," Shallom Berkman said.

From then on, they decided to make purchasing all of their properties part of their growth strategy. That required a lot of capital. They turned to banks, but Berkman said none of the big ones would give them a loan. Some of their partners suggested they contact East West Bank. Watch Berkman talk about the experience here:

Expanding into the future

Now that it has established financial discipline, employee training and capital reserves, Urth Caffé is expanding.

In addition to six locations in Southern California, and two in Tokyo, the Berkmans say they plan to open up three more branches in Southern California -- in Orange, Santa Barbara and the South Bay -- and now have a licensing agreement in Saudi Arabia.

"You have to truly believe in what you're doing; you have to proceed with passion; you have to have a love for what you're doing, because there are going to be hardships; and you have to have the inner fortitude to survive those hardships," Shallom Berkman said. "I really believe that if you have sincere passion for what you're doing, you will not fail."