Updated: Apr 11
Many people have seen great profitable coffee restaurants and cafes. How do you enter the business and built your dream?
Here is how to build a coffee shop. How much would it take? how profitable can it be if you do it right? does it have to be in the prime location? what are the tricks of masters and how should newbies be careful about?
Table of Contents:
How much does it take?
How profitable can it be?
What are the difficulties to anticipate?
What are good tips for newbies?
What is the secret of a good cafe?
What are tricks of masters?
Friendly caution for first time entrepreneurs.
Steps for starting and check list
About the author
How much your coffee shop costs is largely dependent on the kind of setup you are going to build. For instance, If you are looking for a drive through cafe, then it might cost from $80,000 to $200,000. Whereas going through a walking in coffee shop could require a shell out anywhere from $80,000 to $275,000 (these numbers are approximate costs, it doesn't matter with cost but it depends up how you want to build your cafe). At the same time it’s important to note that even these approximate could vary depending upon the size and location of your coffee shop.
This single shop costed 50000 Australian dollars for this 35 sq meter space. there are many hidden and intangible costs that are associated with starting a cafe business that aren't always obvious to the newbie.
A restaurant owner wrote in Quora:
"It cost me about $150k to open mine. That was roughly:
20% working capital
10% pre-opening salaries
10% everything else
I think we did it pretty cheaply. We didn't hire any architects or consultants. We didn't need to do much to the space. We didn't need to apply for any plannig permissions. We didn't pay any deposit or rent up-front. "
You need to assume you won't make money for two years.
How profitable can it be?
This usually depends on your unique circumstances:
Jurisdiction (taxes, licenses etc.)
Market (competition, demand, purchasing power etc.)
For example, if you have a coffee shop in a good location in a small town and have a loyal customer following, you might be very profitable. This is in part because your competition will be low and your operation costs will be low. On the other hand, you could have a coffee shop in the best possible location in a big city with tons of foot traffic, but you might be less profitable because of high operation costs.
In most cases, coffee shops are pretty profitable, earning an EBITA (Earnings before interest, taxes, and amortization) of around 25%. In some cases they are extremely profitable, because of high volume, great placement, etc., some earning an EBITA of over 60%.
However, survival rate of cafe is very low. Some shops have no customers because of their bad product, location and poor marketing and lose money every day, sometimes there profit margins are as lows as -50%.
You can readily assume the profit margin on a cup of coffee ranges from .60 to 1.25 depending on various factors. So if your sales is 1000 cups a day, you're looking at $600 profit a day in low end. However, 1000 cups is a LOT and that number isn't taking into effect fixed costs (hardest part of restaurants). Unless you pay the entire initial investment up front and call it "even" you may only see $100 profit daily for years.
An experienced coffee shop builder in England wrote:
" As a rough example, I can say that 24.6% of coffee shops in the UK reported £200,000+ annual turnover in 2015 (Source: Café Culture Show) and on average, a typical coffee shop that sells 250 cups per day makes about $215,000 per year (US). That, however, can vary depending on how much a coffee shop charges for each cup and how much each customer typically spends."
As a reasonable expectation, if you have 100 sales per day and the average transaction is $5, you make $500 per day and about $15,000 each month, assuming you are open 7 days a week. In one year, you would bring in $180,000 in gross revenue. For many coffee shops, sales often double within three to five years so keep that in mind as well if you are a successful business owner.
What are the challenges?
The ease at which new coffee shops can enter the market: New entry businesses exert the greatest amount of profit squeeze on coffee shops. 'Every man and his dog' thinks they can successfully open a coffee shop ... and they do. 'Nothing to it' they say. These operators come and go but meanwhile they force prices down in the market and take enough business from good operators to make it hard for them to ever be profitable.
The ease at which customers can turn to substitutes: With the prevalence of quality make-it-at-home/office coffee machines, substituting your coffee shop offer has never been easier. Add to this the fact that just about every food item you make can be made by your customers at home for a 1/3rd of the price.
The significant amount of competitor rivalry: There are big national and international chains in the market with big advertising budgets. They use their market power to secure the best sites, best buying prices and the best staff. Even other independently owned coffee shops will make it difficult for you in the market because they all offer pretty much the same products and compete for exactly the same customers.
Tips for first time starters:
Do your market research.
A coffee consultant wrote:
We have a mall here in Alabang known as Molito. It has like ten coffee shops at any given time. I say “at any given time” because the turnover rate is ridiculous. Most of these shops don’t last a year. They go out of business and are replaced by another one.
How to increase profit margin:
If you want to open and run a successful and profitable coffee shop, here are a few best practices to follow:
Search for a Great Location Relentlessly
Evaluate Your Competition in the Area
Refine Your Menu - If an Item Isn't Helping Your Bottom Line, Nix It
Invest in a Quality Website Design
Be Active on Social Media
Treat Your Baristas Well, Pay Them Well, and They Will Promote You
Customer Service is Everything
Hire Someone to Do Your Accounting or Pay Close Attention to It
Serve the Best Coffee You Possibly Can
Latte Art Sells Coffee
Don't Forget the Free Wifi... Always
Be Active in Your Coffee Shop and Make Friends with Customers
Give Your Baristas Permission to Give Out Free Drinks on Occasion
Host Events, Have Live Music
Open Your Doors - Go Outside and Hand Out Samples
Support the Local Community
By following these tips, you will automatically set your coffee shop up for higher profitability.
If you can maintain operating costs in any economic cycle, coffee shops earn you huge profits after three years in operations. During those three years, make sure you create a fabulous customer experience, brew ridiculously good coffee, and hire right crew to provide quality service. Just beware of rental and labour costs that normally kill the business.
You need to prepare enough to operate at a loss for 2 years or more, while you struggle to bring the business to profitability. It’s unpredictable, you are more likely to fail than succeed. Franchising is safer, but more expensive and still no guarantee. If this is your first business, pick something that has lower start-up costs. Not needing to sign a lease and pay rent would be ideal. Opening a business with savings and no other source of income is a bad idea. Until you know a business is profitable, you should be doing it on the side of something more stable, don’t go all-in.
Tricks of masters
Coffee shops can be very profitable but one of the biggest keys is that you have to have multiple locations or a franchise type plan / mentality to really be successful in the business.
Consistency is key.
One of the problems that cafe/coffee shops face is their relatively low unit product price and low average customer sale,
1st the taste of the coffee, the organic coffee gives a fine texture and clear posture.
2nd the ambiance. Coffee lovers choose silent, calm, noise-free surroundings to have coffee because many peoples take coffee in order to release stress and anxiety and depression so it a stress buster to many.
3rd execution and communication. The staffs and the manager of the shop need to be accurate and appropriate so that customers love to visit.
Consistently serving the finest espresso - It is rare in business to discover a product where consistently offering 100% quality is the best commercial decision you can make. In fact I am the greatest advocate for the '80% is perfect' commercial model. But espresso coffee is one of those rare products where consistent 100% quality matters. Customers will walk past 10 other competitors to get the best espresso which is why this factor alone means you don't need the highly visible, most expensive location. So buy the best espresso coffee machine (3/4 group Italian made with e61 groupheads and set to the right pump and temperature levels) install it with a water purifier and demineralizer, use a conical grinder, and only buy top quality Arabica or Arabica 90%/Robusta 10% freshly roasted beans and make sure every cup is made by a fully trained barista who is continually seeking the 'the god shot'.
Ergonomics is vital - Make sure the coffee workstation and layout is such that the barista hardly moves their feet in performing all their coffee making duties and they are not competing for the space with other staff members or functions. High volume coffee sales are the foundation stone of every coffee shop, so make sure this workstation is perfectly laid out with easy access to underneath bins, bean storage and bar fridge milk, having the right height benchtop with easy access to cups, grinder, accessories and reachable overhead storage of supplies. The best setups also have a small inbuilt sink to allow for quick, easy ongoing cleaning. Also, place the cash register on the front counter in close proximity to the barista's workstation. This allows the barista to hear the customer orders and get a head start on making them in the busy times while allowing the barista to work alone in an efficient way in the very slow times.
Use loyalty cards - I resisted using these for a long time ... but they really do work. Make sure it is a quality card that will survive some wear and tear and look good in a customer's wallet. Nothing better than seeing a new customer's face light up when you give them a buy 7 get the 8th one free loyalty card but tick off 6 of them so that on their very next purchase they get a free one 'maybe for a friend'. Cheapest customer acquisition and referral system ever.
Promote multiple sales - A coffee shop will never make enough money to pay the bills from coffee sales alone. Coffee may be the prime motivator for customers coming to the business, but they must leave with multiple sales if you are going to be successful. As a target, coffee should be no more than 40% of your weekly sales and 2 item sales per customer transaction is the 'holy grail' benchmark. So make sure the traditional coffee accompaniments (muffins, cookies, cakes) are close by at the point of sale and the coffee shop offers cold food, cold drinks and some hot food to ensure the best chance of multiple sales.
Limit the assortment - Many newbies in the coffee shop game think that wide assortments and extensive product offers are a key competitive advantage. They forget that the customer is simply hungry or thirsty or both and that a wide choices for most people creates anguish. So cover the necessary categories but with limited strategic offers. (e.g. three flavors are enough, three sizes are enough, three types of food/drink are enough). Every item you add to the assortment creates many multiples of management effort (costs) and mostly without adding anything to the revenue streams or customer experience.
Merchandise your margins - Price according to perceived customer value not according to accounting determined markups. For some well known items (coke can) you will need to be at or even below market price and this loss should be made up with high margins on other items that are exclusive to you or in the 'don't-care and addictive' mindset of your customers. So don't add a blanket markup to your entire product assortment, but price line by line according to customer expectations and what the market will bear.
Get your beachhead strategies right - Getting traction in a competitive marketplace like coffee shops is vital and you will need to have a clear understanding of how to get customers to initially give you a go and a plan for keeping them returning and referring you to their friends. This is a whole other topic that I have now written about here ... What are some Biz Dev best practices for startups?.
Counter service - Counter service is the cheapest most efficient and effective service system for a coffee shop and it is now fully accepted by customers thanks to the global success of McDonalds. Counter service is hassle free for both you and your customer and it significantly reduces your wages bill. So get the customers to order and pay upfront, give them a number on a stand along with their drinks and deliver the food or better still give them a buzzer that calls them up to the counter when the food is ready. Counter service means that you can handle the peak demands that occur in coffee shops at breakfast and lunch and it is a lot less stressful on everyone ensuring the friendly banter can remain an important part of your offer.
Pre-make as much as possible - Custom-made offers assume that the customers know precisely what they want. They don't. Customers see you as the expert and are hoping that you will suggest to them the right combination of food/drinks they should be trying. In a coffee shop context I found it best to pre-make the food and leave the custom making to the coffee. Custom food is also a high cost option for you because you can't get the economies of scale making-to-order and it limits your turnover in those peak periods where you should be busy pumping out the sales as quickly as possible not spending the time making custom orders.
Understand what you are really selling - Too many businesses, including coffee shop owners, don't fully understand the need they are really satisfying for their customers and so they often concentrate on the wrong parts of their offer. Customers frequent a coffee shop for many more reasons than just hunger and thirst. There is the escape from a stressful office, the chance to maintain or grow a relationship, a place to get away to do some reflective work, a chance to engage with familiar coffee shop staff at a particularly lonely time or as a place to do business and reach an agreement. Understanding the needs you are really catering to, will help you better construct your offer and make decisions that keep your customers returning and so maintaining the coffee shop's success.
Target takeaways - I know all your friends will tell you to get comfortable lounges, free Wi-Fi, table service and lots of in-house entertainment ... but customers sitting on one cup of coffee for hours enjoying all these benefits, won't pay your rent. My most financially successful coffee shops had a limited number of not-so-comfortable bench & bar stools to make the coffee shop look lived in and loved, but I concentrated on building the takeaway business. Takeaway customers pay the same price as the sit-down customer but without any of the occupancy costs and you will serve 10 of them by the time your sit down customer has finished sipping on their first cup of coffee as they enjoy a chat with their friends on Facebook using your free Wi-Fi service.
Serve on the front line - While a goods/transactional business can still succeed with a non-present owner (convenience store), a coffee shop needs the owners care, attention and engagement. Customers expect it and staff are far more enlivened when the owner in on hand taking orders or making coffee or is generally hovering in active care of the business.
The location is important but it is not the deciding factor. A cafe needs to have the right ambience. A coffee shop that I rate as the best in my home town, is located far away from any meaningful retail foot-traffic, yet it is one of the best cafe/coffee shops I have seen, trading 365 days a year and doing an estimated 150 kilos of coffee beans per week.
Busy cafe - This means that everything is working at optimal levels. The coffee grind is fresh and has not lost any of its most aromatic elements and the commercial espresso machine is maintaining the water in the lines at the optimal temperatures.
Coffee roasted on the premises - This means that the roasted coffee beans are fresh and have been stored properly by the baristas, away from the taste eroders of light, heat and moisture. Bellissimo have also won many awards for the quality of their roasted coffee beans.
Passionate well trained staff - No matter when I ordered my coffee there, I seemed to be served by the same baristas who took great pride in ensuring that every coffee was 10/10 perfection. They knew how to extract the 'the god shot' and they didn’t boil the milk.
The best equipment - They had the top of the range commercial conical grinders and 2 x Italian designed and made 4 group espresso coffee machines.
(Bellissimo Coffee in Fortitude Valley, Brisbane Australia )
Make sure your business plan involves taking care of these four factors.
1. Location. This matters so, so much. Let's your store is on a busy street that leads to a freeway on-ramp. Great! But which side of the street? Believe it or not, something like that could make or break you. With coffee, speed is incredibly important, and it's not just speed of drink making that matters. If your customers have to spend a long time finding you or looking for parking, they may never even try your product.
When dealing with car traffic you want to be on the same side of the street that traffic tends to be flowing in the morning hours. If you can get off-street parking, that will help a lot. This is mostly a concern in medium density areas.
Dealing with foot traffic is a bit more complex. If you were looking at a particular corner with lots of foot traffic as a potential location, it would definitely be worth it to spend a couple of days (maybe one weekday and one weekend) near there counting passers-by. If there's a diner or cafe near by, hang out there by a window for a while, and count how many people come in. Also take note of how many people will cross the street then enter the store. This is more of a concern in high-density areas.
All the other concerns of starting a food service establishment also apply, of course.
2. A consistently high-quality product. "Consistently" is definitely a key word there. You want employees who have integrity about the product they are serving. You want clear guidelines about how espresso shots should pour, and what is acceptable to serve. Milk steaming must be done properly as well. This doesn't mean micro-managing your workers, but it does mean having exacting standards. Above all, your coffee should taste good.
Almost as important - your coffee should look good. This means cups should be clean, and drinks should be attractive. For example, I like to float my espresso shots on top of Americanos so that the drink has rich crema on the surface when served. It looks better than just a cup of black. You might or might not require latte art, and I've worked in both environments. Just remember that what latte art ultimately communicates is that the milk has been properly frothed. Sometimes coffee is just coffee and sometimes it's a treat. When it's a treat, do small things to dress it up.
3. Good service in a welcoming environment. I'm sure there's a ton written elsewhere on what makes good service. So I'll just say that your employees should be friendly, attentive to the customers' concerns, and serve your product efficiently. Everything else boils down to these three fundamentals.
Your store needs to be clean and attractive. What constitutes "attractive" will vary widely by your location and clientele, but clean will not. Even if your store is by a college campus and your store is a bit dark, with hand-me-down sofas and furniture, you still need to keep things clean. Have a daily and weekly chore list and enforce it.
4. A simple, but flexible menu. Have default recipes so your baristas don't need to ask the customer a million questions to get their order. For example, make all your drinks with a double shot, but be willing to serve a single. This kind of thing will speed up the ordering process, and make things friendlier to people who aren't in coffee shops every day.
Milk variety and alternatives are important. Some high-end coffee shops get snooty about this, and that really has no place in your business. Yes, people can be ridiculous about ordering incredibly sweet enormous drinks, but this is about accommodating people with special dietary needs. Offer soy milk at the very least, and strongly consider adding rice or almond milk (or both.)
Friendly Caution for First Time Entrepreneurs
Try not to be the statistics.
Business risks are invisible until you get close to them. Just because you don't see or hear does not mean they do not exist.
Business is great! it is true relationship between you and your customer and your end consumer. In business you provide value and get paid. You got to have followers and fans and subscribers. If the business is designed right and you are lucky, you can be highly profitable. You have a money making tree in your house - you can get money anytime by just working.
However, there are risks especially for first time entrepreneurs (FTE). You may underestimate the difficulty and competition. and you do not understand the competition landscape or the cost of acquiring customers, even if you have a great product.
Here are four general advices:
There is no vacuum in business. There is no smart perfect ideas. You must investigate in the market.
If you have never done business on your own, you must acquire the business mindset of service, value, customer leading, and learning by experimenting.
Social media is a place to conduct business, not a place to build a business. It sounds low cost but it is really lean.
Just building a product or a solution is not automatically business. People may not want to buy. You must also operate and manage the store.
The top three reasons why business fail after 1, 3 and 5 years are:
You do not have enough capital;
You are under prepared;
Experienced and dirty competition sneaks in.
Steps for starting a coffee shop
Step 1: gain some experience as a business minded person. The mindset of business is transferrable to everything you do and every type of business you enter.
Step 2: talk stalk at your experience and capital. Make it very realistic even to your self. A coffee shop needs basic ambience, quality assurance, and business idea, including the location.
Step 3: investigate your current and future competitors. Find out if there are local Starbucks and find out their customer flow on a daily basis.
Step 4: find the location. Your location may not be the busiest street but you need to know where it is.
Step 5: identify your expected cups of service per day after two years, your way to get at least one key service staff, and your pricing strategy.
About the author:
Chang Liu is passionate about entrepreneurship and teaching entrepreneurship . When he was a full professor at Northwestern University, he started teaching entrepreneurship to engineering graduate students in 2012 - it was a great hit with smart engineering students who were never exposed to business. Liu put everything in practice. He successfully started six companies (NanoInk, NanoSphere, Integrated Micro Devices, SensicFusion, TeenSharks startup school, and Seven Parallel Consulting). He has experience in product innovation, marketing, and end consumer store management. He is the author of four textbooks on both technical and entrepreneurial topics. He earned a PhD degree from the California Institute of Technology (Caltech) in 1996 in Electrical Engineering. He lives in Chicago, IL, United States.
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