Over 50% of Americans (over 18) drink coffee every single day. To give you a better perspective, that is roughly 150 Million people drinking coffee everyday.
The average drinker consumes roughly 2.7 cups each day, which means almost 405 million cups of coffee are consumed each day!
With this kind of demand, it is not surprising that on an average, any coffee drive-through with decent visibility sells 250 cups each day. However, what is surprising is that even with this kind of demand, very few coffee shops breakeven let alone make profits.
Only the top 50 shops and chains earn the majority of profit in the coffee industry.
Most cafes run at a gross margin of 75-80% or even higher. In spite of this, the operating profit is less than 2% for most coffee shops.
The coffee shop industry is highly profitable, yet most coffee businesses fail. Successful owners can make up to 6 figure income easily, while most owners struggle to keep their doors open. Before starting your own coffee shop, it is important to understand which of the two groups you belong to and how to avoid being in the struggling group.
This article will help you understand the revenue potential of your coffee shop so you can avoid big losses.
Table of Contents
Understanding Coffee Shop Revenue
When it comes to businesses like the coffee shop, a generic revenue figure is not an accurate depiction at all. The devil is in the details, and getting deep into these intricate details help you get closer to an accurate projection.
The revenue potential of a coffee shop depends on several factors which we will discuss below. Analysis of these factors help project costs, income streams, potential growth and profits.
Coffee Shop Concept
This basically refers to the kind of experience you develop for your customers. Your concept will determine the costs of physical space, interiors configuration, menu mix, customer service experience and more.
Your costs will be highly dependent on your business concept.
Here are some very rough estimates to only help understand how much the initial cost could differ depending on the concept:
- Small coffee shop with seating build out – $40k – $200k
- Cafe and Bakery build out – $120k – $350k
- Drive-through coffee stands build out – $10k – $90k
The coffee shop concept will also determine your revenue potential. For instance, in the first scenario where you have a simple cafe, you will find a ceiling on pricing. You will get only customers who want a simple coffee along with a small baked good. Their overall order value at your coffee shop will be small a majority of the time.
On the other hand, customers visiting the high-end cafe will spend more time on an average in the cafe as they come for both the coffee and the experience (experience could be defined as brand, think Starbucks). They would be willing to pay much more for the whole package. For instance, at a drive-thru, you could get your cappucino for $1.50, but the same at a high-end cafe could cost you as high as $8 or $9.
Knowing and understanding the coffee shop concept is a good starting point, this will help you make sense of many figures in your money making analysis.
The Break-Even Point of a Coffee Shop
When you start a coffee shop, you will incur multiple costs. Costs of buying and renting a space, licenses, and other start-up costs (detailed below). Only when you cover all these initial costs, and the daily operational costs, there is surplus profits that are available to be returned to you, the coffee shop owner.
The break-even point is when the revenue will equal your costs.
Once you have this breakeven point, you can determine when the coffee shop actually starts making money and how much.
Calculating Your Coffee Shop Costs
Coffee Shop Start-Up Costs
Start-up cost for a coffee shop can fluctuate greatly. This is due to factors such as your shop concept, menu items, and physical location. However, the cost categories remain mostly constant.
A list of most common start-up costs (for every coffee shop concept):
- Property rent and taxes
- Brokerage Fees
- Cooking/Brewing equipment (Coffee grinders, brewers, blenders, frothers)
- Interiors and modelling costs (lamp, lights, figurines, plants)
- Furniture (tables, chairs, desks)
- Crockery, table decor, utensils (plates, vases, candles, napkins)
- Kitchen supplies and starting inventory (beans, milk, cream, flour)
- Permits and licenses (Health department, local county)
- Staff Training
- Start-up accounting/legal fees
- Launch and initial promotion
Once, you have these start-up costs, you will be able to include the figures in your break-even analysis.
There are several costs associated with your everyday operations. For instance, for all the equipment in your cafe, you need to pay maintenance and electricity. You need to pay your staff who clean, serve, manage and help you with other cafe activities.
Some of these are fixed costs. Even if you do not have any customers, the fixed costs need to be paid. The variable costs will depend on the number of units sold.
Operational Fixed Costs Examples
- Rent and maintenance
- Payroll (salaried employees)
- Other charges (software use, cleaning contract)
Operational Variable Costs Examples
- Payroll (Flexible variable hourly employees)
- Utilities (Electricity, Gas)
- Marketing and Advertising
- Supplies (kitchen and cleaning materials)
There are two advantages of analysing the operational costs. First, in calculating the breakeven point or understanding the profit portion from the total revenue. Second, it also helps determine high cost areas of the business that could prove to be challenging long-term.
To explain the second point better, think of the coffee shop in its first year. Lot of costs can be higher than expected.
For instance, bad portion controls and high food wastage lead to increased costs. These could be small amounts if seen per unit, but these add up and contribute significantly to food costs (total food costs make almost 30-35% of total costs for coffee shops).
Over time, this food wastage can be reduced by efforts such as more staff training, more appropriate portions, and back-up food optimization.
Here are some more examples to understand possible cost optimizations:
- One of the common high-cost areas is overstaffing. Over time, by understanding capacity patterns and using predictive scheduling, staffing can be optimized and workflows can be adapted. This will help drive down one major component of prime costs.
- Inventory Management: Initially, it is common to stock up extra to ensure you are prepared for the onslaught of business. However, if your coffee beans last two months, storing 6 months supply becomes an issue (literally have cash sitting on your shelf you can’t access). After the first few quarters, the business rhythms will become clear and you will be able to reduce the inventory requirements to optimize cash flow.
When you are trying to calculate costs of the coffee shop, you should reduce the variance for mismanagement over time. As after the first period, you will know the business better.
Calculating Your Coffee Shop Revenue
Coffee Shop Sales Projections
In order to project sales, here are some important factors to take into account:
1. Number of expected customers per hour/day
2. Number of open hours/days a week
3. Average receipt purchase (Detailed below)
Instead of estimating sales for each item, it is better to start with total expected sales. Later on, when you have enough information about purchase mix, it becomes easier to predict sales per item.
Multiplying the 3 factors will help you estimate your total sales for a specified period of time.
If you have no idea how to estimate this, you could look at the footfall in your nearest coffee store and observe the purchase behavior of customers there. Similarly, you could also try to get the numbers of comparable coffee shops in a similar location as yours.
Average Order Value for a Coffee Shop
Simply put, this is the total amount spent by a customer on their bill. This number tends to be variable. Some customers might just come in for a coffee, and their bill amount in that case will be in the range of $1-$5.
Some customers will come in and take sandwiches with their coffee. They may also want a cookie and a bottle of water to take home. Such a customer could end up paying anywhere between $15-$25.
To simplify your calculation, you will need to figure out the average of these bill amounts. Take your total sales (or expected sales) for a day and divide that figure by the total number (expected) of transactions.
Knowing your average sales receipt will help calculate expected revenue.
Calculating Coffee Shop Revenue
If you wish to go a step ahead in your calculations, you could also account for the potential to increase your average order value.
Just like our costs, the revenue side can also be optimized. Once the business learns about customer preferences and market trends, it can introduce ways to increase the average order value.
For instance, by introducing the option to add chocolate/nutty syrups to your coffee or milk alternatives for which you can charge additionally. Once the business learns more about its regular customers, they can also change their selling techniques to increase average order amount.
Maybe you notice that in the mornings, office-going crowds are their regular customers. The Baristas now always suggest an extra shot to the customers to help them get through the day. This small suggestion could help increase sales.
When it comes to average order value, you could also account for seasonal factors. During the autumn and holiday season, it is common for coffee shops to add new flavors and new drinks to the menu. We know one major brand who essentially created the Pumpkin Spice craze. These unique drinks allow for a higher price point than the items on the normal menu.
Gross Revenue for a Coffee Shop
Your gross revenue will be the total revenue.
You can calculate gross revenue each month by multiplying the average order value by average transaction per day by the number of days open in a given month.
Coffee Shop Profit Margins
The amount by which revenue exceeds the costs from the sales is your profit margin. When you are selling a simple coffee, the cost of material, waste, labour, overheads should all be covered in the costs, and the sale price should be higher than the costs to have a profit.
To calculate profit margin, you divide the net income by net sales. You account for all your fixed cost and operational costs in the calculation.
You can increase your profit margin either by reducing costs or by increasing revenue. However, in some cases you’d have to dig much deeper. For instance, the cafe decides to increase revenue by increasing the price. When you increase the price, it is highly possible that the cafe will lose some customers. Say, for every 10% increase, you will lose 2% customers. So do not assume the same number of transactions when you do the calculation for total revenue or profit.
Knowing your average profit margin, or item/category wise profit margin helps you understand how much the business gains from every sale. This information is useful for menu pricing, understanding the need for cost cutting, budgeting for marketing and for taking other such strategic decisions.
Should You Open a Coffee Shop From Scratch or Buy an Established Coffee Shop?
Whether you buy an established shop or start from scratch can also affect your revenue and costs. Neither is better than the other, it depends on the factors we just discussed above.
When you are buying an established business, you take over a trained staff, an existing customer following, get hold of licenses and permits easily, and have historic records to build your strategic decisions.
Although this could sound easier than starting from scratch, it highly depends on the business you are taking over. It could be a poorly run shop, and in that case cleaning up could be even tougher than starting from scratch.
Starting from scratch has its own set of pros and cons. It takes longer, and could be more expensive and needs a lot more work to settle it. However, you also get a clean slate to really plan well according to the market need of the hour and have the flexibility to experiment.
Doing the Coffee Shop Calculations
You learned several business metrics and factors so far. Using these, you can calculate your profits by subtracting all your costs from the total revenue. In the explanation, we also included ways to account for optimization so you can have a much better idea about the business potential.
In your calculation, if you do not reach breakeven or the profit figure that you desired, go back to your business plan and try to see which avenues you can modify and then re-do your calculations.
Some more metrics you can use for a even better optimization and projection:
- Weekday-weekend ratio
- Monthly/quarterly growth
- Labor/food/salary costs as a percentage of total costs
- Rent/other major expense as a percentage of total costs
How Much Do Coffee Shop Owners Make?
By now, you already know that the answer to this depends on several variables. According to several independent studies, a medium sized simple coffee shop owner can make between $50,000 to $250,000 per year per location.
This range outlined above is determined by many of the items this article touched on earlier. Such as average order value, margins, locations, build outs and all the costs associated with them. Remember, without the right cost structure and margin controls you may never make a dollar.
However, this is just an average, and there are many coffee shop owners who do not make anything significant, and on the other hand some owners easily make 6 figure incomes a year.
The personal income is determined by how much salary you are able to draw from your profits, and how much you wish to reinvest. Some owners also account for expenses such as health care premium and insurances from the salary they draw and this could be another variable you might want to consider.
Read Also: How Much Do Bakery Owners Make?
Time to Brew Your Own Cup of Coffee
In the coffee shop business, the failure rate is high. Almost 50% of the start-ups shut after 5 years, and only about 33% make it past 10 years.
There are several reasons that cause this failure. Surprisingly, bad coffee is almost never the reason. The most common reasons are bad lease agreements, really high costs, poor location, overstaffing, and poor management. All of these are reasons that are under control of ownership, can be avoided or can be worked upon.
Good knowledge and planning is a must in this line of business. While the failure rate is high, the creative avenues are higher.
There is a lot you can do to make your coffee shop a success. Differentiated menu, crafted coffees, interesting concepts, cost optimization, smart pricing, revenue channels, there is a lot that you can play with to generate profits. Find your strength in one of these avenues and chart a solid plan, this combined with hard work and patience – your passion for coffee will be monetized.