Opening a cozy little coffee shop is a dream for many people. There’s something alluring about the idea of greeting strangers with a warm cup of coffee in the morning and helping them start their day. A successful coffee shop can bring in some nice profits too – at least if you run it properly.
Are coffee shops profitable in the long run though? And is the market currently in a stable position with good future prospects? A lot has been happening around coffee shops and similar establishments, as automation has started to change the landscape significantly. Don’t worry though – as someone planning to open your own coffee shop, those changes are pretty much all positive.
Are Coffee Shops Really That Profitable?
One great thing about coffee shops is that they have a very large profit margin compared to businesses with similar startup and maintenance costs. Depending on what type of coffee you want to sell and factors like your presentation, you could be looking at profit margins as high as 90% per cup!
That might seem like a lot, but you have to remember that coffee is rarely going to make up the majority of your profits. You will have to expand your menu to attract a steady crowd of customers, and many of the other products that you’ll be selling will have significantly lower profit margins.
Even with that in mind, you’ll still be ahead of many other similar types of businesses with relatively little effort. Running a food truck is about the only other thing that comes to mind with similar prospects. The difficult part is making your coffee shop stand out and establishing a firm presence for it on the market.
What Are the Main Costs of Running a Coffee Shop?
The main costs of running a coffee shop can be separated into several categories. Those include rent, supplies, utilities, equipment, as well as the licenses necessary to start your business in the first place. You should also think about promotion and adding extra products to your menu to make things more interesting for your customers.
How much you can expect to pay for rent depends primarily on the location of your coffee shop and its size. On average you will have to pay between $500 and $2,000 per month. This can vary significantly though. Try to be as early as possible in your search for the ideal location because your choices will likely be limited. You might have to compete with other entrepreneurs looking to set up their own establishments as well.
You will also need to spend a good chunk of money on supplies. Coffee is the most obvious one here. You also need to think about cups, napkins and other additional supplies that you’ll need on a daily basis. And while offering coffee alone is fine at the beginning, you will quickly have to think about expanding your menu if you want to stay relevant and retain customers. Many coffee shops offer pastries and other similar products. Baking those on site is usually not reasonable while you still have a small operation. You will probably have to purchase them frozen or even freshly baked, which can quickly add up to your expenses.
A coffee shop requires a lot of electricity and water to run. Even if you're using high quality machines with optimized procedures you will still use a lot of water in the preparation of your coffee on a daily basis. You likely won't have many dishes to clean If you're primarily serving coffee to go, but on the other hand, you will have a lot of waste to deal with. Set aside at least $1,000 per month for utilities.
You should prepare around $20,000 – $30,000 for the initial equipment. This includes an espresso machine, which can cost around $1,500 on average. You will also need a regular coffee maker, which will cost roughly the same. You'll need a lot of refrigerated storage space to keep your products fresh. Anticipate spending at least $1,000 on that for a start. A good water filtration system can significantly improve the quality of your coffee. It will cost you around $2000 on average. Pay attention to the kind of filtration you are purchasing as well. Reverse osmosis, for example, tends to waste a lot of water, but it provides the best filtration quality.
You can probably run things on your own at the beginning. You don't need to have any prior experience to handle that stage of your business adequately. Once things pick up though, you'll definitely want to look into hiring help. Expect to pay around $10 to $15 an hour.
At the very least, you will probably need a food service license. This can cost up to $1,000 depending on which state you're operating in. You might need additional licenses as well. Check if there are any mandatory insurances for this type of business in your state. Generally, if you're not sure, it's best to pay for a consultation with a lawyer to guide you through the process.
One of the biggest challenges of setting up a new coffee shop is attracting customers. If you're lucky, you won't have to spend anything on promotion in the beginning. But things rarely work out that way. You should get in touch with a professional marketing agency as quickly as possible if you want to establish your position on the market. How much this will cost you depends on various factors, but expect to spend at least $500 a month.
How to Make Your Coffee Shop as Profitable as Possible
While the profit margins of a coffee shop are pretty good in general, you will have to put in some effort to ensure that you maintain a stable business. You should look into loyalty programs and similar deals that can help you attract and retain customers. You should also consider hosting events occasionally. This doesn't have to be anything fancy. Even the occasional book reading night can still keep things varied.
Many coffee shops offer loyalty programs. The most common implementation is in the form of a stamp card. You can also look into something connected to social media. For example, giving discounts to people who share posts about your coffee shop. Try not to get too pushy with those though. This can quickly backfire if you're not careful. Make sure that you're not violating any rules of the platforms you're using as well.
Upselling is one of the best ways to bring in extra money when running a coffee shop. Offer combo deals and make it a habit to suggest upgrades to people. You can even have time-limited deals. For example, certain pastries may only be available before noon. You can also use this to get rid of old inventory that's been lying around for too long. This will also help you rotate your deals, keeping them interesting.
Coffee shops can be great places for socializing. Many people visit them for reasons that have nothing to do with drinking coffee. Don't be surprised if you see people sitting at a table, reading a book, or working on their laptops for hours on end. With that in mind, you can also set up some events to leverage the social aspect of your business. Board game nights are a great example. You can also host tastings of new coffees, or have a “breakfast menu” during some days of the week.
Offer Additional Products
By now you should probably be getting the idea that a coffee shop can rarely survive on coffee alone. You should offer additional products as early as possible, ideally when your business is just starting. Baked goods are a classic example. Ice cream is another one – however, it's a more seasonal product. Many people like to enjoy a soft drink with their coffee, so make sure you have a good stock of those as well. You can also look into selling nonfood items like magazines and newspapers.
One unfortunate fact about running a coffee shop is that it tends to generate a lot of waste. If you're not careful with your inventory, you might end up losing a lot of stock as it expires. That's why I recommended having a large fridge from the beginning in the costs section above. You should learn to prioritize items that are about to expire. Sign up for programs aiming to reduce waste as well.
If you set up a website for your coffee shop, I recommend looking into some coffee affiliate programs to boost your profits as well. These will not have much of an impact on your main operations and they can easily be handled on the side, providing you with some passive income as time goes by.
What Are the Main Challenges of Running a Coffee Shop?
As long as you're adequately prepared, running a coffee shop tends to be a relatively smooth experience. However, there are still some challenges that you should anticipate and prepare for. This is mainly tied to the competitive nature of the market. You will need to put a lot of effort into standing out. You must also carefully balance your purchasing and current inventory to ensure that as little as possible goes to waste.
No matter where you decide to open your doors, there will likely be at least one other coffee shop already established in the area. You will have a tough time getting off the ground if that place already has an established customer base. Many people tend to stick with their favorite coffee shops, even if potentially better ones open nearby. This means that you will have to be a bit aggressive with your marketing during your first few months. Do your best to stand out. If you have a unique angle to your business, make it as prominent as possible.
Specific Local Tastes
Even if you are a local, you can never be too sure about the preferences of people in your area. Coffee is one of those things that people tend to have strong opinions about. You should do some research into your local market to verify what exactly people are looking for before starting to stock up your new coffee shop. For example, there might be a specific variety of coffee that is only popular in your area, but not anywhere else in your region. It can take some time to adapt to those factors. You should make it a point to talk to your customers and ask them what they like and don't like about your current menu and overall presentation.
Expanding Your Menu Too Quickly
A common mistake when running a coffee shop is to be too aggressive in expanding your menu. While it's good to offer additional products, having a menu that’s too large can quickly drag you down. You will frequently have to deal with inventory problems, and you will probably lose a lot to spoilage. Having a good POS system can go a long way in helping you figure out what to prioritize.
I keep bringing up this point, and for a good reason. Coffee shops tend to have lots of issues with their limited inventory space. Bags of coffee can quickly start taking up a lot of space. And they're only one part of the equation. Many of your products will need to be refrigerated. That's why I believe that spending extra money on a large refrigerator is one of the best investments you can make into a new coffee shop. Try to always have some extra buffer space available. You should take advantage of discounts on the market, which ultimately means being prepared to store a little extra for the month.
Frequently Asked Questions
Q: Is opening a coffee shop a good idea if I have no prior experience with similar businesses?
A: All things considered, running a coffee shop can be very lucrative, even for a beginner. This business model doesn't have some of the disadvantages of other types of restaurants, and it’s pretty easy to get your shop outfitted and keep it stocked. However, you should still not take things lightly. You must be prepared to deal with some serious competition and make the occasional compromise if you want to stay afloat.
Q: Should I be quick to move when a more attractive location becomes available?
A: I would recommend against moving your coffee shop too often, even if you regret your original choice of location. If you manage to attract regular customers, your location will be one of the things that keep them coming back. Sure, a new place might offer more foot traffic or better exposure in general, but do you really want to sacrifice all those loyal customers you’ve gained over the months? On the other hand, if you can afford it, opening up a new location is always a good option. However, this means that you will need to hire additional help, as you’ll no longer be able to run things on your own.