Are you considering opening your own coffee shop? If so, you should first consider how and if you are going to make money doing so. It is easy to assume that by simply starting a business that you will generate revenue. But will it be enough and can it be sustained? In this article we will explore the question: Do small coffee shops make money?
To answer this question do small coffee shops make money, we will examine these five factors that will ultimately determine whether your small coffee shop makes money:
- Fiscal Responsibility
Let’s get real for a second. With profit margins, that, unfortunately, include your salary if you take one, estimated at a meager 2.5% annually for an independent coffee shop, making any real money seems far fetched in this business. To break it down even further, you will need to sell your products at a 20% cost to you while hopefully maintaining a labor cost of no more than 40% (the target should be 30% but let’s leave some wiggle room as small businesses tend to run at higher costs). That’s already 60% of your earnings and we haven’t even taken rent, utilities, taxes, or any further overhead costs into consideration. This leaves little left other than scraps for you at the end of the day. You’ll need to be very passionate about what you’re doing.
Now let’s fast-forward a bit and jump ahead to when you are operating in multiple locations. Now you’re making money! As we’ve seen with other small coffee shops, such as La Colombe or Pret A Manger, the only way to truly become successful and make money is to increase your scale. I’m not talking 80 locations nationwide kind of scale but growing, even to 3 or 4 locations in your city, will allow you to raise your sales and profit margins while spreading your total costs around as well.
Rewind. Expanding from one location to multiple locations doesn’t just happen. This will have to be something that you include in your business plan from the start. Then follow up with budgeting and planning for your next location almost immediately after you open the doors of your first.
Not many coffee shops out there, big brands included, can turn a decent profit from selling coffee alone. A big key to increasing revenue is to diversify your food and beverage menus. It is almost too easy of a sale to add pastries or even sandwiches as a compliment to your coffee offerings. Of course, people want a danish with their latte! Along with adding food, it would be wise to offer an alternative beverage selection as well. Carrying bottled water, tea and even juice can increase the amount of traffic in your cafe by appealing to a broader range of clientele.
Next, consider how you are going to go about providing these items.
Making everything in house allows you to grow your own identity and put your mark on whatever goes in the case. Producing all the food that you sell also allows you to earn more profit because creating something from raw ingredients costs less than purchasing it pre-made for resale. The only tricky thing to take into consideration is the underlying costs involved in the production. Whoever is preparing the items needs to be efficient with their time (they are probably getting paid by the hour) and have knowledge of what they are doing to minimize food waste.
You may also look into partnering with other local small businesses in sourcing items to sell. For instance, offering bagels or muffins from a local bakery now captures a broader audience and increases the scale of your reach with little added effort.
So much more applies here than just spending your money wisely! Yes, that is the general overview but when opening a small business there are many more associated expenses to control with less capital to fall back on. Considering that you’ll need somewhere between $80,000 – $250,000 just to open the doors and what we have already discussed as your potential profit percentage, having an intimate knowledge of your expenses is paramount.
Step one lies in the preparation. There are truly no “hidden” costs in operating a business, but there are costs that you don’t know. Do your research before opening and become an expert on the finer details and what goes into each category of your expenses. These should all be listed in your business plan and properly budgeted for so there are no surprises as to where your money needs to go and why. Finally, give yourself a financial cushion to allow for unexpected events. This will give you peace of mind and flexibility when encountering financial adversity.
As a small business owner, technology is going to be one of the most powerful tools in your arsenal of entrepreneurship. From accounting software that will simplify and streamline the numbers for you to utilizing social media for your marketing campaign. Listed below is a breakdown of how a multifaceted approach with technology will help you build the business and increase your overall sales.
- Financials – There is a plethora of software out there to help you manage your finances. Utilize programs that can help you manage or even reduce your expenses.
- Sales – Create a digital storefront where you can maximize your sales reach by packaging and selling your coffee and branded merchandise online. Making use of online ordering for in-store pickup will also streamline your in-store sales.
- Marketing – Utilize social media and other online forums to increase the scale of your restaurant before you’re able to physically expand. You can create a large online presence even as a small, single-store business.
- Synergize – Make use of cloud technology and video conferencing to save time, share thoughts, and complete work quickly and efficiently.
- Productivity – Use time tracking software and digital task management tools to ensure your coffee shop is operating smoothly and achieving its daily, weekly, and quarterly goals.
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For most, solidifying your business plan is the most difficult first step in setting out on your journey of opening your coffee shop. In essence, you are setting the framework for your entire operation and progress forward from that point on. That is true, but many new entrepreneurs get hung up on their plans at some point or another. This is where your research comes in handy. You set the framework, a guideline if you will, but it is just truly that; a guideline. It will allow you to confront most circumstances when proceeding forward, but you’ll also need to allow for flexibility.
When talking about turning a profit for your shop it is just as important to recognize what isn’t working for you as much as it is important to recognize what is. The capacity to analyze your deficiencies and act on them is a necessity in any successful operation. Your coffee shop will be no different. Don’t allow yourself to get hung up on your plan, but allow for fluidity. In addition to allowing for flexibility in your overall plan here are some other examples of showing flexibility in your day-to-day business operations that will enable you to increase revenue.
- Enhanced Competitiveness – Rigid concepts cannot adapt to new competition. Grow and incorporate new trends and ideas.
- Team Building – When team members possess different strengths and weaknesses, synergy occurs when operational tasks are spread amongst the team.
- Scheduling – Everyone will appreciate a flexible schedule! Having the ability to take a day off here and there will greatly improve an individual’s productivity.
- Marketing – Is social media working for you? Or should you place ads elsewhere as well? A three-pronged attack is better than one.
- Revenue Streams – You may only have designs on selling coffee, but as this article has mentioned repeatedly, diversifying your sales tactics with different in-store items and online sales will ultimately determine your capacity for success.
At the end of the day, answering the question of your ability to make money as a small coffee shop is ultimately up to you. Many things factor into success even beyond what I have listed here. Do you have what it takes?
What are some other ways of diversifying your offerings?
Diversifying your services is a good way to complement your establishment. Offering game night, trivia, or stand-up comedy are all effective ways of offering something extra to build a business.
What other marketing tactics should you be utilizing other than social media?
As a small business, local store marketing (LSM for short) is a good alternative to solely marketing over social media. Bring samples to local businesses with business cards or coupons to garner interest.
Should you take out a buffer loan?
The best option to gain funding is still either crowdfunding or angel investing for small businesses. But if you find yourself in a pinch, it would be best to get a buffer loan if you don’t think you have quite enough capital.
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Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.