The barista with a nose ring announces names of everyday customers with orders in hand. Teams of students and freelance workers pour over computers and books while sipping the signature roast. You’re picking up your bag of cold hard cash to the sounds of Jack Johnson, Norah Jones and Coldplay. No more board meetings. No more traffic.
Dreaming of quitting your day job to open a coffee shop? So are we.
Contrary to our dreams, running a coffee shop is truly hard work. The same amount of effort, flexibility and time commitment is needed to run a café as with any service-based food business. New owners should expect to put in 80-hour work weeks. Concerns include employee theft, food spoilage, product sourcing issues, high attrition rates and difficulty finding quality employees at desirable wages. In addition to all of this, many of the factors determining the success of your business fall outside of your control. The shop is at the mercy of Yelp reviews from local coffee drinkers with the highest of standards. And the unknown can strike at any time—global pandemic, anyone?
Because of the incongruence between our coffee shop dreams and the coffee shop reality, thousands of local cafés nationwide have been shutting down. Closures affect business of all sizes, from small independent shops to large chains, such as Second Cup and Tim Hortons. Even Starbucks will be closing three times more stores in 2021 compared to previous years. Closure causation has been cited as high competition, market saturation, fickleness of customer base, economic depressions, and unrealistic lifestyle expectations of owners.
But don’t give up on your coffee shop dreams quite yet! Despite these difficulties in running a shop, 78.5% of restaurants and food outlets are still operating a year after incorporation.
There is huge demand for coffee, as it is a staple in the morning for working adults. There has also been rising interest from Millennials and Gen Z-ers. Coffee is one of the highest-value commodities worldwide with global coffee trade worth $601.4 billion.
A single small-to-medium sized coffee shop owner can expect to earn $60,000 to $168,000 in personal income annually. In a bad case scenario, you’ll make your money back in just three years.
However, there is large variability in the profitability of these shops. What factors go into whether a coffee shop will be successful or not? How can you ensure your shop is profitable?
Cafés are modern-day libraries, with 75% of young adults and students visiting coffee shops to study or get work done. Two times as many coffee shop goers enjoy their coffee in-house rather than taking it to go. Customers view cafés as a space bridging the gap between home and the office.
Profitable brick-and-mortar coffee shops create an ambient space with a perfect balance of comfort and sophistication. Your café should allow visitors to both hyper-focus on work and also have deep conversations with friends.
Coffee is a low-value item. In order to ensure profitability you must focus on selling large volumes to generate income. The good news is that margins are generally 90% or higher. You can expect to sell your coffee for around $3.99 per cup and your shop will spend about 18 cents to make this cup, leaving you with $3.61 in profit per cup.
Profitable coffee shops consider the costs of running an inhouse shop. A sit-down coffee shop costs $258,000 to $484,000 to open from scratch. Most of these expenses come from rent and commercial-grade equipment.
You may consider running a drive-thru coffee shop or coffee van. Food and drink vans are one of the most profitable small businesses to open in 2021. A coffee van costs around $35,000 to $1000,000 to start up. This reduced cost is mostly due to not needing a large kitchen nor storage space. Profitable coffee vans focus on coffee quality to keep customers paying a premium without the expense of comfy seating areas and wifi.
One of the most important factors impacting the cost of running your coffee shop is your shop’s location. Location affects expenses for rent, insurance, licensing, maintenance and repair. In addition to costs, location influences foot traffic, customer demographics and prices.
Profitable coffee shops map out their competition’s distance from the shop, pricing, menu variation and specialty coffees. As well, these shops ensure their space is somewhere easily accessible, visible and clear of any pungent smells to allow their coffee’s aroma to permeate the area.
Expect securing real estate to take around 90 to 180 days and permits six months or longer. You must personally guarantee the lease so be sure your personal financials are in order and you have reliable savings. Be sure to budget in attorney consultations to review and negotiate lease terms.
As well, profitable coffee shops hire an architect and general contractor. If you have a franchise you’re in luck, as this construction is standardized with the heavy lifting done for you.
Profitable cafés know online preferences, with 67% of coffee shop goers prefering to order online. These cafés allow customers to order and pay in advance as well as pay via mobile.
Consider a coffee shop POS platform with built-in options for online ordering that allow customers to browse your full menu, order and pay from their phones. Be sure to partner with a POS provider that has an intuitive interface for simplified employee training and increased customer satisfaction.
It costs five times more to bring in new guests rather than retain existing customers. In addition, 45% of customers are encouraged to visit a coffee shop more if that shop offers mobile ordering and loyalty schemes. A POS platform should add incentive features, such as loyalty rewards or discounts when customers purchase online. Rewarding repeat visits and sending automated reminders through a customer relationship management (CRM) system will entice return visitors.
Roughly 16% of people go to coffee shops daily. This means many of your customers have a refined coffee palate. In order to ensure profitability, your coffee must be high quality.
Guests typically allow for three bad brews before abandoning your business. Even if 95% of your drinks are perfect, you’ll still lose customers within a year.
To improve quality, the most profitable coffee shops establish set recipes and quantities. A robust POS platform can help you store recipes and pictures that help baristas, whether new or seasoned, ensure perfection. As well, be sure to partner with a POS solution that has a kitchen display system (KDS) to update incoming orders to your kitchen in real time.
The most profitable coffee shops standardize their recipes to better monitor stock and waste. Be sure to check your inventory regularly and note items running out more frequently to optimize predictions. In addition, look for a POS that manages inventory automatically.
The most difficult to track items are generally dairy. These costly perishables need to be ordered in smaller batches more frequently. Keep a close eye on this inventory to reduce waste.
As well, look for a POS that reports which items are most popular and at what times your store is most busy throughout the week. This will allow you to sync up your supply and demand to make more informed inventory and staffing decisions.
EXPERT TIP: Don’t be afraid to negotiate pricing with your supply chain to ensure the highest profitability.
In order to manifest your coffee shop dreams and avoid the coffee shop nightmare, there are a number of things you need to monitor. These include the ambiance of your shop, financial planning, location of your shop, customer service, quality of your coffee and your ability to manage inventory.
Juggling all of these variables can be difficult if not impossible for one individual. To create the most profitable business, owners must use a robust POS. Of course, we think you should consider a coffee shop POS platform, like the one we offer at Revel. A truly comprehensive platform will help you automatically keep track of inventory, offer loyalty incentives and predict traffic in your store, all with 24/7 support. Learn more about Revel’s coffee shop POS platform today.