The daring entrepreneur is always on the lookout for the next money maker that will springboard his or her saving account into the millions.
One of the most profitable industries to explore is hospitality. It’s a high stakes, win-it-all-or-go-home venture that can be incredibly rewarding. You just might hit paydirt and land the next big restaurant or cafe in your neighborhood.
In the food industry, coffee shops can be a comfy and profitable little start-up that attracts their fair share of would-be investors. Another perk is how quickly you can be off and running with a cafe; all you need is the right attitude, a seasoned barista, an amazing espresso machine and a prime location.
Consider this article a primer on opening your own coffee shop. We’ll whet your appetite by talking about all the benefits of such an endeavour, then what you need to get started.
The Benefits Of Starting A Coffee Shop
Starting a coffee shop has a huge number of benefits, including:
A high profit margin
Consider the starting path of Starbucks back in those dreary Seattle days. The empire all sparked to life as a small business owned by a couple of friends with a passion for coffee.
There’s a reason for their extraordinary success: Colombia’s number one export has one of the largest profit margins imaginable. There are hundreds of stories of young people who invested in the beans industry and managed to make huge profits in a matter of months.
Coffee shops are potential rags-to-riches stories. Of course profit margins are a huge part of building a successful business but it isn’t everything…
Be your own boss
As the owner of your own business, you’ll no longer be chained to the rigours of a nine-to-five. You get to set your schedule, and you get paid based on your value, not a set salary. In other words, the harder you work, the more profit you personally make.
Granted, starting a hospitality business can require a ton of work, but unlike working in a cubicle, you get to make the rules.
Express your creativity
Owning something new and unique will enable you to create your own environment as a reflection of your inner self. Decorate the coffee shop your way. Name drinks creatively, tapping into all manner of things like your favourite bands or movies.
Successful coffee shops have an amazing ability to spread across the country. Impos client Toby’s Estate, for example, began out of his Mum’s garage in Woolloomooloo, Sydney before the first Toby’s Estate cafe opened in 2001.
Since then, the successful cafe enterprise has gone from strength to strength, opening cafes across the country. Toby’s Estate now operates cafes in Singapore and New York.
How Much Does It Cost To Open a Coffee Shop?
One of the key ingredients when opening a successful coffee shop is to develop a concept based on research and planning.
To create a brand that stands apart from the rest and adds something new to the mix you need to combine both solid planning with deep creativity. It’s crucial not to start a coffee shop without first thinking through the key issues.
There are two financial questions that pop into the mind of a hospitality entrepreneur whenever they think about spending their money on something new. How much does it cost? And what’s my return?
In the coffee industry, the first one is fairly easy to answer while the latter is subjective and speculative at best.
Consultant Matt Milletto estimates the cost of a new coffeehouse can range from $150,000 to $500,000. In comparison, a coffee cart might cost anywhere between $5,000 to $20,000.
Let’s break those figures down and see exactly where your money will be spent. In general, your initial budget should take into account at least these distinct checkpoints, each as crucial and important as the former.
This is everything concerning the space you’ll be using for your shop. We’re not only talking about ongoing rent, utilities, maintenance and insurance, but construction and design costs. As a rule, rent should be no more than 15% of projected sales.
Usually, there’s miles of red tape to sort out before opening up your cafe. Each metre of government oversight comes with a price tag, such as lawyers, legal fees, licensing, compliance fees, etc. While these costs will vary by location, you at least need to be aware of them before starting.
A quality semi-automatic espresso machine will cost you $2,000 – $5,000, a super-automatic espresso machine can cost anywhere from $5,000 to $20,000. And that’s just the espresso machines.
You’ll still need to buy grinders, cooking equipment, restaurant equipment (tables, chairs, stools etc.), blenders, refrigerators, point-of-sale gear, and hundreds of other items that will add up.
You’ll have a fair amount of disposables to take into consideration. Every day you’ll be using paper cups, dishwashing liquid, cream, beans, sugar, fruit, muffins, pastries, and more. These will be recurring costs every month that you’ll need to account for.
When you first open, you’ll need to create ways to let people know about your business. These can include a wealth of options, like social media ads, printing flyers, attending local events and numerous other options.
Payroll and Tax Costs
Employees have to be paid. The government also has to be paid. Neither group will be happy if they’re not.
You’ll always need extra cash to cover any overflow from the initial plan. Once you’ve finished your airtight budget, calculate at least 20% more; this is your rainy day stash.
Figuring Out Your Profit Margin
Now comes the moment of truth. After all that work, how much profit will you rake in? As stated above, that’s a rather subjective question. There are three elements you have to take into account in order to calculate a profit margin…
For me, the #1 reason why startup cafes fail to achieve economic sustainability, is the endless supply of amateurs that fall victim to the siren’s enticing call ‘to own our own cafe/restaurant’. These people have no idea about how to price products that are capable of giving the owner/manager a competitive return for their long hours worked and a competitive return on their substantial investment.”
– Peter Baskerville, founder, owner and manager of over 15 cafes and coffee shops.
With proper management and an outstanding team, a cafe’s base profits should equal roughly 10-18% of its sales. There are coffeehouses out there, in chic areas, that might boast a higher return, but the average well-handled establishment will straddle these numbers.
The markup on coffee is higher than most food items. In fact, it’s only rivalled by the markup on craft beer. An average cup of coffee costs less than a dollar to produce, yet it usually sells for around $3.50. Other items on the menu have a much smaller profit margin. Coffee sales alone should constitute 25-35% of your gross.
There’s a saying in business, one that has become an axiom for any success story: location, location, location. Prime real estate is a defining quality between a coffee shop that makes it and one that goes bust.
Coffee expert Steve Fisenko states that a well managed store in a financial district can generate a gross annual income of $500,000 during its first 2 years. By the third year, that same well run cafe might net over a million bucks.
Of course, it’s possible to not make a profit with a coffee shop. But if you do your research, plan accordingly and put together an outstanding team, you can easily keep your shop in the black.
Tips For Getting Started
Here are a few tips to help you hit the ground running.
Offer High Quality Coffee and Produce
These days, most people know the difference between a good and bad cup of coffee. You might have picked the most expensive location. But if your machine is subpar or your barista is a newbie or your beans aren’t bought from a proper roaster, you’ll be pushing bad coffee, which nobody likes.
Loyalty cards, discounts, promotions, web based ads, social media free-for-alls, and even complimentary coffee shots are a great way of attracting clients. This can be an especially potent strategy in the beginning when you’re trying to drum up interest in your shop.
Limit the Menu
Offer multiple items but be careful, too many items can cloud your customer’s decision. No cafe needs more than three muffin flavours or four types of sandwiches.
The more items you have on your menu, the more material and ingredients you’ll need, and thereby more overhead costs in disposables. It’s better to focus on doing a few things really well instead of many things averagely.
Be Smart With Your Pricing
Don’t implement a single profit margin for all your products. Don’t price every item under the same umbrella. Price according to customer expectations and what’s being moved. The goal is to always balance margin with volume. If you’re selling a high volume of a certain product, you can make up the difference on profit margin.
Target Those On The Go
Target customers who come in and take their coffee to-go. Why? Because a customers who only drinks one cup while endlessly leeching off your WiFi isn’t as profitable as one that pays for his cup of coffee and leaves the space open for someone new.
Starting a coffee shop can energise you in ways far beyond what a cup of coffee can do. You have the chance to start something that truly matters, and that can become a centrepiece of a community.
And, you have the opportunity to make a sizable amount of income.
That’s a win-win.