Over 80% of Americans drink coffee in the United States and with a population of nearly 330 million people, that’s a lot of cups of joe that need filled. With that much demand for just one drink, the dream of being a coffee shop owner may be closer to a reality. Let’s take a look at the possibility of living the life of a coffee shop owner.
How much do coffee shop owners make?
The range in a coffee shop’s potential income stretches from $5,000 a month to upwards of $20,000 a month. But even these numbers can be higher or lower depending on a number of factors and variables.
If you already own a shop, you’re probably aware of some of the ups and downs that come from the business and this article will help you to alleviate some of the negative factors that are impacting your profitability.
If you’re contemplating opening a coffee shop, the information here will guide you through the steps needed to be successful and avoid the pitfalls other venture seekers fell into during their coffee shop owning experience.
How much a coffee shop owner makes boils down to a relatively simple formula:
Expense of Running the Shop – Gross Amount of Sales = Coffee Shop Owner Income
While that looks to be a fairly easy math problem to solve, the number of factors that can affect the left side of the equation begin to complicate the problem, thus affecting the answer on the right, the profitability of the shop. Let’s take a look at all of the pieces to this financial puzzle.
Factors That Affect Profitability
Every successful business begins with being in a great location. No matter what you’re trying to sell, if you are not located in a high traffic area where customers already exist, chances are your business is not going to do well.
Part of choosing your location will involve knowing who you are directly competing with in the area. Trying to establish a small shop next door to a corporate giant like Starbucks is going to hinder your ability to make money, regardless of how good your java is.
Type of business
What is the purpose of your coffee shop? There is more to being a coffee shop owner than just selling cups of coffee. Who are you wanting to serve? College students needing a place to de-stress from hectic finals? Coffee enthusiasts who relish in talking about all things coffee-related? Maybe you’re wanting to run a drive-thru only shop for busy soccer moms carpooling the team to their next game. Whatever your reason, you need to have a customer base in mind.
Volume of sales
This factor is pretty self-explanatory. The more you sell, the more you make. The tricky part comes when trying to determine what to sell, how much to sell it for, and how to increase the number of sales your business has on a given day.
One way to increase the volume of sales your shop experiences is by offering a variety of items that complement your coffee options. Selling breakfast foods like muffins and pastries will increase the amount each customer spends in your shop.
Offering items unique to your coffee shop will help you stand out among the crowd of options customers can find at other locations. Special mugs, rewards programs, and gift cards are easily created and help to increase sales, especially around holidays.
Costs of running the business
Every business has two types of expenses, fixed and variable. Fixed expenses are ones that remain fairly consistent in cost from month to month. These are the expenses where you have little to no influence over.
On the other hand, variable expenses can fluctuate due to adjustments you can make in where and how your spending. For example, finding a vendor that offers cheaper cups and paper goods can make a significant difference in your monthly expenses. By re-evaluating your variable expenses, you can reduce costs and, in turn, increase your monthly income.
Of all the factors I’ve listed, pricing your products is the one many shop owners seem to struggle with the most. You have to keep prices low enough to be competitive in this long-standing industry but high enough to keep your books in the black. It’s a delicate balance between offering the best product at an affordable price to keep customers coming back and selling enough stuff to pay the bills and make a living.
Pricing involves researching the market in your area to determine how much competitors charge as well as how much people are willing to pay. Then you need something that makes you stand above the competition to win the business of the customers in the area. It’s definitely a juggling act of customer satisfaction and profit margins.
Profits Beyond Money
The desire to be a coffee shop owner must come from something more than a way to get rich. Running a highly successful coffee shop is going to take endless hours of hard work and dedication. You have to be someone who loves coffee and the culture it has created. The drive to escape the 9-5 rat race for the freedom of being a business owner has to be at the heart of your mission.
If having a place where you enjoy what you do, where people come to recharge or be social, if the love of coffee makes you want to share your passion with others, then making huge profits may not be a necessity for you to consider your business successful. While you will need to make money in order to stay in business, your reasons for having a coffee shop are yours alone.
Factors Working Against You
Amateurs in the industry
America is the land of opportunity and nowhere is that truer than in the food and beverage industry. Anyone can open a new business and this can negatively affect the rest of the coffee shops in an area. Too many places for customers to get their cup of coffee will ultimately drive down the prices, that’s the hiccup business owners face in the realm of supply and demand.
More make-at-home options
When I was a kid, my grandma’s kitchen had the good ol’ Mr. Coffee brand coffee maker and a bag of Folgers crystals to start the morning right. Now with hundreds of machines from Keurigs to Nescafe espresso machines, customers are finding more ways to DIY their morning cup.
Competition from big-budget national chains
In addition to all the make-at-home options out there, jumping into the pool of the coffee industry means you’ll be up against the big boys. They have established a stronghold on the market and are able to spend exorbitant amounts of money on marketing campaigns and opening more locations. Some offer the opportunity for franchising, so if you can’t beat them, you can join them, if you prefer.
Steps to Opening a Shop
Owning a coffee shop takes research, planning, and a considerable amount of start-up expenses. The more time you take doing things the right way the first time, the sooner you’ll be making a profit doing what you love, selling coffee.
The following checklist is essential to opening any business in the food and beverage industry. You’ll find it best to seek out the help of professionals familiar with the business to avoid making any costly mistakes. No one can be expected to know everything about the business of owning a coffee shop and the work that’s involved. Don’t be afraid to ask for help with things like writing the business plan, making renovations to your shop, or how to market your product.
- Business Plan
- Finding Location and Renovations
- Buy Equipment
- Finding Vendors and Staff
- Food Industry Compliance
Pitfalls That Cause Shops to Fail
Anyone can open a shop
As I mentioned before, places like the United States make it easy for anyone and their brother to open a business. This influx of people who don’t know what they’re doing ultimately has a negative impact on those who do.
Many business owners face the struggle of trying to compete with other shops that don’t know what they are doing. These fly-by-night entrepreneurs sweep in thinking they’ll be the next big thing, drive prices down among their competitors and then fold up shop as quickly as they arrived.
Foodservice compliance issues
Healthy and safety is the biggest hurdle food industry owners have to face. Kitchens get messy and inspectors expect perfection, and for good reason. Regulations are constantly being updated to ensure what you serve is safe for the consumer. Violating health and safety codes, whether through negligence or ignorance of the laws can cost your business dearly in fines and forced closures.
Business owners who try to find short-cuts or loopholes in the system only hurt their chances of being a successfully profitable coffee shop. The expenses from making your place of business compliant with city and state health codes can seem high but pale in comparison to the negative consequences of not following the rules.
Too focused on profits and not on the customer
When a business owner cares more about making money than they do about serving their customers, their business is bound to fail. From the moment you start planning your coffee shop business, your customers’ needs should be the focus of your business plan. A successful coffee shop has done research and ensured their shop didn’t:
- Design a poor layout that impedes serving the customer
- Waste money on expensive kitchen gadgets
- Ignore the ambiance of the service area
- Limit the types of food and beverage available
Overwhelmed by the waste in the food industry
This is definitely going to be bothersome to some people who don’t like seeing food go to waste, but unfortunately, it’s the nature of the beast. Often times, new owners will try to reduce waste but end up losing customers when they run out of item A or no longer offer item B. That’s not to say businesses don’t make adjustments to reduce waste. It is just another situation where you learn as you go with regard to what sells and what doesn’t.
Customer service is your business
Making money as a coffee shop owner is only going to occur if your business has quality customer service. Hiring personable staff to serve your customers will go along way towards generating repeat business. People want to be treated in a way that makes them feel important, especially when they’re forking over $8 for that chocolate macchiato with soy milk and a shot of mint flavor.
It can never be said enough in the business world which is why they say it three times in real estate. Location is the key to any business becoming a success. It doesn’t matter if you have the best coffee in the world at the lowest price, if your shop is in a bad location, no amount of marketing or gimmicks will bring customers to your out of the way hide-out.
Perhaps you’ve found the greatest spot to open shop with a high demand for delicious coffee. You hired experts to renovate the place to ensure customers are served efficiently by the friendly and knowledgeable staff. Now all that’s holding you back is knowing how much to charge for that espresso and cheese danish.
Keeping prices competitive while still making a profit is by far the hardest job a coffee shop owner is likely to face. Making adjustments by shopping for cheaper vendors or offering reward programs are two ways that can help in the pricing war of the food and beverage industry.
What is the average income for a small coffee shop?
The average small coffee shop tends to see an income rate of 2.5 % of gross sales. This is due in part to the fact that the top coffee chains earn 70% of the industry’s income. However, like all averages, working harder and smarter will raise the bar to a more profitable level.
How do I increase my profit margin?
In order to increase your profit margin, you first need to reduce your business expenses where you can; cheaper supply vendor, better insurance rates, etc. Then you need to increase your number of customers and how much they spend per transaction through marketing and offering additional menu items or coffee-related products.
Want to learn how to start your own coffee shop? Click here for our startup documents.
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.