There are many drivers to wanting to open and run your own coffee shop. But can it be a good business you wonder? As coffee shop owners, sadly, the answer is not straight forward. In our experience, a coffee shop can give you a profit but it depends on many factors and has an important emotional toll on the owner as well.
A coffee shop can be a good investment, rounding about 5% of net profit. However, it depends on many factors like time in business, location, sales, and keeping your costs low.
Want to know more about the “it depends” side of the business. Please read along, you will not regret it.
From a financial point of view, is it a good investment?
According to Douglas et al. (2019), the accommodation and food services sector in the United Kingdom has a survival rate of 34.2% of businesses every 5 years. This means that only 3 out of 10 food businesses will still be up and running after 5 years of being set up. This study is for the UK, however, it can probably be applied to many other geographies.
This brings the issue into consideration, is it or is it not a good investment to open up a coffee shop? Unfortunately there are big uncertainties, but knowing them upfront will certainly ease the way.
A coffee shop could become a good investment but certainly not the first month and certainly not the first years. You must be patient, and this means having money to sustain the business for at least a year.
Coffee shops at first seem like a good investment, mainly because of its high-profit selling products, especially coffee drinks. Also, the initial investment costs may not be so high. However, coffee shops require a high volume of sales, mainly because of its high operating and fixed costs, but also, because the net absolute income you receive by each unit sold is usually not high.
High gross profit margin products
Products sold in coffee shops, like coffee drinks, have high-profit margins, usually from 65 to 80% gross profit margin. However, the price for a single cup of coffee is usually not high, which makes it necessary to sell many units of coffee. This high volume usually means more labor and cost which in turn increases costs.
Related content: Gross margin for a cup of coffee
To balance this equation of high volume / low net income per cup, coffee shop owners usually introduce other products that may accompany coffee like sandwiches, salads, and pastries. This increases the volume of sales and therefore income, but also increases labor and costs.
Cost of labor, operational and occupancy expenses
These costs are usually high and will take a toll on the high gross profit margin of the products sold. Usually this will turn a 65 to 85% percent gross profit margin to a 5 – 10% net profit margin at the bottom line. Many businesses spend months or years with negative numbers, so you must be prepared to have the capital for your business to perform under break-even point for at least a year, for some business it requires years.
Related Content: What is EBITDA for your coffee shop
Location
Location is one of the most critical aspects for your coffee shop to be successful. It is the first aspect that will drive customers to your coffee shop. Also, it is important to understand the behavior of your consumers, in relation to the location.
For example, a coffee shop located at the center of the city on a high traffic street will probably have customers in a rush during the first hours of the day. On the other hand, a coffee shop located in the suburbs will probably have families or friends during the weekend looking to have a relaxed time.
So depending on the location, you will have a certain consumer behavior and expectation and therefore accordingly should be the service and products that you serve. These consumer expectations will be different during the weekdays, the weekend, and the time of the day.
Customer service
So the first part is getting your customers to enter your coffee shop, now it is your turn to be able to retain them through great customer service and quality products. One of the most important aspects of your business to grow over time is to achieve and retain a loyal customer base.
You should be able to maintain your business for a while below the break-even point. But at the same time, it is important that month by month you start to see steady growth in your sales, and especially on your visits per day. The numbers will vary between business and business, but a steady sustained curve through many months will be crucial to know that your business will be able to achieve financial stability.
Costs and expenses
It is critical to keep your costs as low as possible, without sacrificing quality, in order to have a profit. Be careful with decrease that can result from employees not following recipes, from wasting coffee when preparing your coffee drinks, or from ingredients that spoil because of inadequate inventory planning.
Primal Costs, consisting of costs of goods sold and labor, along with rent, will be your primary costs. So keeping these two under close control will be critical to your business thriving.
Quality
Coffee shop customers usually expect a cozy atmosphere, but also great quality products. A study performed in the coffee shop business in London, by A Petkovic (2018), revealed that coffee shop customers are less price-sensitive when receiving high-quality products. Also, high quality and good customer service are factors for customers to return to coffee shops.
From an emotional point of view, is it a good investment?
How do you imagine your life, what is your ideal day? Do you envision your self being able to manage your own time, talking to customers regularly, putting yourself at the service of others?
Working hours
Most coffee shop owners work many hours per week, more than a 9 to 5 job, at least for the first years of your businesses. If you imagine that you will have more personal time when having your own coffee shop, the probability is that it will be the contrary, at least the first years.
You will find yourself dedicating long hours to your coffee shop. Not only will the daily management require time, but also, you may find your self substituting employees who for some reason can not show up to work. You will be faced with many unforeseen situations that will require your attention daily.
However, on the other hand, you will be the owner of your time. You can decide when to take time off or run to do an errand, without having to ask permission. You can decide how to prioritize your activities during the day which can also give great satisfaction.
Dealing with customers
As talking and interacting with customers can give great satisfaction, there can be many stressful situations of unfulfilled expectations. Sometimes customers can even be mean, and will expose this dissatisfaction on your Facebook or Instagram account damaging your image. You have to be able to cope with these situations, as not all customer interactions will be pleasant.
On the other hand, you do get to meet really interesting people. Some customers will become even your friends and be loyal to your coffee shop. You will also see that you may start to connect to similarly minded entrepreneurs and all this can be very fulfilling to your heart, mind, and soul.
Financial pressure
Differently than a regular job, your paycheck may not be the same every month. You must always thrive for obtaining customers, sales, making events. Your earnings are never guaranteed. Foremost, now there are other people depending on you, This financial pressure can be tough to endure.
However, when things go right, and you make goods sales, you feel really good and proud of your self. It is important to know that usually when sales are high you feel really good, but when they are low you tend to feel concerned. So it can be a bit of an emotional roller coaster.
Family and personal time
Maintaining an equilibrium between your coffee shop and your family time will also be a challenge. Many times, the family will start spending time in your coffee shop. The weekends or family holidays may get sacrificed because you may need to dedicate some of this time to your coffee shop.
These factors may not apply to your coffee shop, but they are important to be considered as a possibility, especially during the first years of your coffee shop.
So rounding up. Is it a good investment to have your own coffee shop? It depends on all the factors stated above as well as the vision you have for your life and the sacrifices you are willing to make. I hope you have found this article helpful, it is based on endurance and sacrifice, but also satisfaction and joy of owning a small coffee shop.
References:
Petkovic, Ana. 2018. 2018 dissertation for MSc. International Business Management.Royal Docks School of Business and Law, University of East London CAn be found at: https://repository.uel.ac.uk/item/84711
Douglas, J. Doulgas, A. Cano, M. Moyes, D. 2019. Factorial Structure for Independent Coffee Shops and Cafes Success Factors: a UK Study. 22nd International Conference, Greece. Can be found at: https://research-portal.uws.ac.uk/en/publications/factorial-structure-for-independent-coffee-shops-and-cafes-succes.