The profit margin for a coffee shop is a vital aspect as it will determine if your coffee shop will succeed as a viable business. As a coffee shop owner, you must operate under a high-profit margin for ultimate success. To understand the overall profit margin, you must first know more about the net profit margin.
80% is a viable gross profit margin for a coffee shop to keep it in operation. The average purchase amount per transaction is around $5 in this business, which is a goal to achieve per sale to reach that gross profit margin.
Since the markup of coffee compared to the cost of ingredients is high, a coffee shop is superbly profitable and popular to start.
Key Factors That Affect Your Profit Margin
A coffee shop can be more costly than profitable and only wise business decisions can maximize the profit margin. Make your coffee shop as profitable as possible with this guide:
• Profit Margin Formula
According to Investopia.com, your Net Profit Margin is your bottom line profit as a percentage of your revenue. Your Net Profit is also known as the bottom line is what is left after all costs are deducted from the revenue and all revenue streams are accounted for. This will provide you with the most accurate picture of the financial health of your coffee shop.
To calculate your overall net profit margin, perform this equation.
Net Profit Margin = (Net Income / Revenue) X 100
First, determine your revenue. Find out how many units of each product on your menu that were sold to customers. You can look back on your records in your sales software to discover your total revenue.
You must figure out your net income by completing this formula. Your net income is your overall profit after expenses and the cost of goods sold has been subtracted from your overall revenue. While your revenue is ultimately what your coffee shop made during the year, the net income is your profit once you factor out related expenses and costs of preparing your coffee products.
Net Income = Revenue – Expenses – COGS (Cost of Goods Sold)
Expenses would be bills you must pay to keep your business running such as building rent, electricity, and supplies to name a few. COGS will be what you have to pay to create each unit of product to sell it to your customers.
Say that your revenue is $95,000, your expenses are $12,000 and your COGS are $10,000. Your net profit will be calculated as follows:
Revenue-Expenses-COGS= Net Profit
$95,000-$12,000-$10,000=Net Profit
$73,000=Net Profit
Now that you have your net profit, you can calculate your net profit margin.
(Net Profit/Revenue) x 100= Net Profit Margin
($73,000/$95,000) x 100= Net Profit Margin
0.768 x 100= Net Profit Margin
77%= Net Profit Margin
In this example, your net profit margin would be 77% which is very close to the average 80% that is needed to run a successful coffee shop. In this case, you would just need to improve sales by increasing prices by 3% to 5% and heightening shop promotions to spike customer interest in your products.
• COGS Breakdown
Most profitable coffee shops have a similar production cost to serve their drink and food menu items. You must shop around vendors to the best of your ability to source your coffee beans and ingredients for the best possible quality and price. Below are a few examples of what your cost per cup can be:
Medium Cup of Black Coffee
Disposable 12oz Cup, Lid, and Sleeve $0.21
$1.83 1lb of Mexico Chiapas SHG – La Concordia (made into espresso) Coffee required for 12oz of water is 4 tbsp or $0.23
$0.02 packet of Cane Sugar 2 packets $0.04
$3 Gallon of Milk 3 tbsp of Milk $0.03
COGS = $0.51
Espresso Mocha
$1.83 1lb of Mexico Chiapas SHG – La Concordia (made into espresso)
2 shot of espresso = 34 grams of coffee = $0.134
$18.95 Chocolate syrup(87.30oz) $0.10/tbsp Cafe Mocha Recipe 2 tbsp $0.20
$2.18 Whipped Cream(15oz) $0.14oz Cafe Mocha Recipe 2oz $0.29
1 cup milk $0.02 Recipe 2 cups $0.04
($5.49/25count) 1 Disposable 12oz Cup, Lid, and Sleeve $0.21
COGS = $0.87
• Markup & Profit Guide
The Cost of Goods Sold (COGS) may differ slightly between the cost breakdown of a house coffee and an espresso mocha. The gross profit margins and markups are listed below against the menu item prices. Here are a couple of examples explaining how the proper markups on your coffee products will generate a positive gross profit margin.
Per item gross profit and markup must be calculated by using this formula.
Drink Markup = Sales Price – COGS
In the example of the house coffee, the sale price is $2.60 and the COGS is $0.51. Therefore, the drink markup is $2.09.
Once you have discovered the drink markup, you can complete this equation to find out the gross profit margin per item on your menu. If the gross profit margin is not at least in the 70% to 80% range, consider raising prices by 3% to 5% to accommodate for this gap.
For the house coffee, calculate the gross profit margin for that specific product by using this formula.
Gross Profit Margin = (Drink Markup / Sales Price) X 100
Gross Profit Margin= ($2.09/$2.60) X 100
Gross Profit Margin= 0.8 X 100
Gross Profit Margin= 80%
Expenses
The expenses of your coffee shop will have a direct impact on your profit margin. Variable expenses are tied directly to the number of menu items sold. Being that the dominant variable expense will be the COGS. Fixed expenses are dominantly the staffing costs, rent, utilities, and taxes.
• Location:
Be sure to layout your space with consideration to customers who will be using your shop to chat, work, meet, read, grab a coffee on the run, and who are there to truly appreciate coffee. Different table layouts and interior design can promote greater volume and per-transaction sales. Other important variables include safety, crime rate, accessibility, surrounding businesses, and competitors. Your location’s direct measurable impact on your profit margin is the cost of your lease, and the foot traffic patterns of the location.
• Labor:
Labor expenses can include payroll taxes, overtime, health care, bonuses, sick days, vacation days, insurance, benefits, meals, supplies, and training costs.
The labor expenses below are provided by Omniclaculator.com. You can use this website to help you with your other business calculations.
A full-time Barista works 40 hrs per week. The gross hours per year would be 2,080 contingent upon the fact that the Barista worked all 52 weeks in the year.
If the Barista makes $12 per hour, multiply that by the yearly 2,080 hours and he/she makes a gross pay of $24,960 per year.
Figure out the rest of your labor costs for the rest of your employees based on the example shown above. Add these numbers up to receive your total labor cost.
The other additional costs associated with your employees will depend on what your company decides to offer including taxes, insurance, benefits, and overtime.
• Marketing and Advertising:
According to cardconnect.com, many coffee shops spend $100 or less on marketing and remain profitable and no more than 3% of their annual revenue. For example, if the coffee shop produces $63,000 a month in revenue its marketing budget would be $1,890.00 a month.
Check out how to calculate start up costs HERE.
How to Markup Your Coffee and Food Products
So how do you markup your coffee and food products? Take these couple of simple steps.
Find Out the Cost to Make the Product
The cost to make a cup of coffee would involve the price of:
- A coffee cup and lid.
- The number of coffee beans used to roast the coffee.
- Any cream or sugar used to make the coffee.
The cost of a pastry product would involve the price of:
- The ingredients used to make one batch of said pastry.
- Figure out this cost for an entire batch.
- See how many units you can make out of one batch.
- Calculate how much the cost is per unit by taking the batch price and dividing it by the number of units you created.
And so on if you sell breakfast or lunch meals.
Frequently Asked Questions
A profit margin of 80% means that you are sustaining your coffee shop with a healthy net income that can properly be put back into the business to help it continue to succeed. You can also pay yourself as the owner with part of the coffee shop’s net income after you have paid off expenses and paid your staff.
In general, small-batch coffee roasters make sure that the farms from which they source their beans yield high-quality coffee and sustainable farming practices. Roasting techniques and attention to detail used in their roasting set their beans apart from mass-produced coffee in fragrance and flavor.
The perfect coffee shop floor plan layout is easy to navigate and will allow the customer to flow seamlessly from ordering to picking up their food or coffee. If possible, space should also be allocated for seating that will not interfere with this customer ordering and pick-up flow. Be sure you have space for a retail coffee area where customers can purchase coffee products to take home with them for when they are not visiting your coffee shop.
To learn more on how to start your own coffee shop checkout my startup documents here
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.
Hi! I’m Shawn Chun
My adventure in coffee began when I first launched my first coffee shop back in the early 2000s. I had to figure out so many things on my own and to make it worse within 2 years of opening two large corporate coffee chains moved in just blocks away from me!
As I saw smaller and even some larger coffee shops in the neighborhood slowly lose customers to these giant coffee chains and slowly close up shop, I knew that I had to start getting creative…or go out of business.
I (like you may be) knew the coffee industry well. I could make the best latte art around and the foam on my caps was the fluffiest you have ever seen. I even had the best state-of-the-art 2 group digital Nuova Simonelli machine money could buy. But I knew that these things alone would not be enough to lure customers away from the name brand established coffee shops.
Eventually, through lots of trial and error as well as perseverance and creativity I did find a way to not only survive but also thrive in the coffee/espresso industry even while those corporate coffee chains stayed put. During those years I learned to adapt and always faced new challenges. It was not always easy, however, in the end, I was the sole survivor independent coffee shop within a 10-mile radius of my location. Just two corporate coffee chains and I were left after that year. All told the corporate coffee chains took down over 15 small independent coffee shops and kiosks and I was the last one standing and thriving.
Along the years I meet others with the same passion for coffee and I quickly learned that it is not only “how good a barista is” that makes a coffee shop successful, but the business side of coffee as well.
Hence why I started this website you are on now. To provide the tools and resources for up and coming coffee shop owners to gain that vital insight and knowledge on how to start a coffee shop successfully.
Stick around, browse through my helpful blog and resources and enjoy your stay! With lots of LATTE LOVE!
Shawn
