Sunday, March 19, 2017

How to Open a Coffee Shop Business and Achieve Success: A Beginners Guide


Are you confused with the plethora of information on how to open a coffee shop? And they tell you not to trust anyone that has never opened, owned or operated one before. Should you?


Well, it doesn't mean you can't listen to them. Sometimes the so-called experts who have “been there and done that” may not understand your perspective and their advice may not be best for your situation. So, be wary about listening to these specialists. Instead, read and seek information from all viewpoints and then forge your own path.

An expert is someone who knows a lot about the past – Tom Hopkins

In this article, I will give a step-by-step guide to the essential components of opening a coffee shop, from a beginner’s perspective. This is to help you achieve a better understanding of the industry, identify the key priority and prepare for the downsides of any options.

Coffee and Coffee Shop Statistics


First, let’s take a quick look at coffee and coffee shop statistics taken from The National Coffee Association and The Specialty Coffee Association of America. This is to spur your interest in starting a coffee shop business and as inspirations for your business strategy.

Coffee Shop Business in the USA

  • In 2016, there are around 24,000 coffee shops across America with Seattle having the most number of coffee shops.
  • Based on available data, about 50,000 more coffee shops will open for business within the years to follow.
  • Espresso Drive-thru Business sells approximately 200-300 cups of espresso and coffee-based drinks per day.
  • As a guide, the average Espresso Drive-thru business sells between 200 to 300 cups of both espresso and coffee-based drinks per day.
  • Independent coffee shops sell more brewed coffee (69%) than espresso-based drinks (31%).

How Much Coffee Does an Average American Drink?

  • In the USA, men drink as much coffee as women. They consumed an average of 1.6 cups per day per person. But women are more concerned about coffee price than men.
  • Among coffee drinkers, the average consumption in the United States is 3.2 cups of coffee per day. This translate to about 400 million cups of coffee per day. This makes the United States the leading consumer of coffee in the world!

daily caffeine intake to help open coffee shop business

What percentage of people drink coffee (2018)?

  • More than 64% of Americans over 18 years of age drink coffee every day, of which 7% prefer specialty coffees that include frozen blended coffee, nitro coffee, and cold brew. Out of this 7%, 13% go for frozen/blended coffee, 11% for a cold-brew and 4% for nitro coffee.
  • That 35% of coffee drinkers prefer black coffee and the rest of the 65% prefer to add sugar and cream.
  • 82% of coffee is consumed during breakfast hours.
  • 41% is consumed between breakfast and lunch
  • 13% drank coffee in the evening 

Coffee Trend Among the Younger Consumers (13-18 years) 

These younger consumers are the fastest growing demographic of coffee drinkers and are important indicators for your business strategy planning. 
  • Prefer drinks that are portable and easy to carry around
  • Also prefers sweeter and creamier coffees such as ready-to-drink coffee i.e. bottled pre-made coffee like Frappuccino, or Cold Brew.
  • Packaging and presentation are important. 
  • Looking for nutrient-rich foods and drinks – some stores are already selling mushroom-infused coffee!
  • Looking at other options such as Carbonated Coffee and Cocktail Coffee

Other Trends to Lookout For

  • Direct trade coffee i.e. you buy directly from the coffee producer and not through a middleman. So, you get cheaper and fresher coffee beans, and the producer gets a better margin.
  • Consumer's increasing interest in the specialty coffee - cold brew coffee and nitro coffee which currently make up only 4% of the total coffee market.

You may to also check these articles:

  1. Is coffee good for men?
  2. Is coffee bad for women?
  3. How to Store Coffee Beans

How to Open a Coffee Shop Business - The Essentials

The following list of activities are the major actions to be thoroughly reviewed and worked on to ensure that your coffee shop business is legally compliant and you will not be wasting time and money as your business grows.

1. Register a Business Entity

This is not required now but once you are ready to start your own coffee shop business, form a legal entity. Register a company or buy existing shell company. This will be the entity that owns and run the business operation, sign any agreement, buy equipment etc. The company will also:

  • Open a business bank account
  • Obtain necessary permits and licenses.
  • Get business insurance. 

TIP: When it comes to choosing a business name, opt for a name consistent with your brand.

2. Funding - Coffee Shop Start-up Costs

The cost to open a coffee shop can be high as it depends on you, your coffee shop business concept, and its location etc. and business loan now is not easy to get.

Your first option to fund the start-up cost is to talk to family and friends about investing in your café business. Walkthrough your business plan with them and keep them posted in all the research works that you are doing. If this is not possible, check if there are any business assistance programs or local loan options that are available.

Remember that for any business, profits will come in only months later. So you need to set aside sufficient money to cover for your personal day to day cash requirements, possibly to cover for at least six months. Can your wife continue to work full time while you spend time building up your coffee shop?

Other funding sources are:

  • Partnership – A business partner who will bring in his percentage of the capital to fund part of the start-up cost
  • Bank loan in the form of either business loan or personal loan
  • Venture capital funding, but this also mean the investor has a share in the business
  • Crowdfunding. This is from the general public and requires a form of incentives or rewards to these contributors.

TIP: For a pre-prepared template on how to do your coffee shop financial analysis, check it here at BestTemplate.


3. Do a Simple Coffee Shop Business Plan

A clear business plan is important for success as a business operator. It is a roadmap from which your new coffee shop develops and must contain your start-up costs, your target market, and how long it will take to break even.

For starter, do a quick and simple one-page business plan that summarises your strategy, your target market, sales, and marketing plan, how to turn it into a profitable business, and how you differ from your competitors. 

Once you gather more information, with the help from the list below, you can amend and expand this business plan. If you are looking for financing, your banker will require the long-form business plan. To write a strong business plan that is relevant today and tomorrow, read my article on How to Write a Business Plan that Stays Relevant.

TIP: If you are still struggling with writing a business plan, you can get the pre-prepared template here at BestTemplate.


4. Choose Your Space

Decide on your space. Do you intend to run your business on a mobile kiosk or truck, or a full brick and mortar location, which can either be a café bistro, internet café or coffeehouse? Remember that each has its own constraints. A smaller space means less variety of drinks and foods to sell.

For the brick and mortar location, create a floor plan that caters to grab-n-go customers, space for the customer to form a line, and a seating area that is efficient for employees to serve etc. 

Observe how other cafés design their layout – is it efficient, and how can it be improved? Walk through your design and visualize every possible scenario from the customer and employee's perspective. 

TIP: Don’t forget the exterior – external appearance, the signage (check my article on Coffee Shop Name and Logo for reference), landscape etc. since these are the first thing a possible customer see before deciding if they want to enter your premise.


5. Find the Right Location

Once you decide on your type of space, then choose the right location. The location of your cafe plays a major part in the success of your coffee shop. Choose a location with lots of foot traffic. But good location can be expensive. Is it within your budget?  Remember your dream location may not happen overnight and it is best not to rush on this decision.

Do a comparison. Is it better to spend money on a better location that already has the foot traffic? Or it is cheaper to spend extra money on marketing to attract that traffic. To learn more about this, read my article on finding the right location.

Ask if the premise owner can give you a sample of the lease agreement to review. Basic things to look for:

  • Rent cost
  • Lease period 
  • Subsequent lease renewal terms and conditions
  • The fine print on who pays for what – must be clearly stated in the agreement.

Remember that location is not everything! You still got to put in your best practice restaurant marketing to work. You have to take control of whatever you can to bring in more customers.

Understand your customer's need. Build a culture to care for your customers AND your staff.

TIP: The cost of leasing/renting the premise should not be more than 10% of your revenue.

Don't think for one second the change of location will bring you success


6. Secure the Right Coffee Shop Equipment


The type of coffee you want to sell will determine the equipment that you require. Do you need a cappuccino machine, French presses or drip coffee machines?

These depend on your space and budget (and what you had written in your business plan! Don’t divert from it as it will affect another aspect of your cost and margin).

You may also be tempted to buy the new and trendy brewing machine or other latest gears. Even if you have a deep pocket, you should not. Go for the trusted model that has gone through the test of time. This will ensure full support for parts and services even if it has less breakdown.

Besides coffee machines, you also have to look at the water filtration system. A good filtered water is a key to good coffee. Read my article on How to Make Coffee Taste Good to understand why water quality is crucial to good coffee.

Ice Making Machine is another important component of your cafe's equipment list. Read my review on Manitowoc Neo Ice Machine, the best compact ice machine if you are on a budget.

Lease the Equipment?

You can also lease an equipment instead of buying it outright. This will reduce your start-up cost but check the equipment lease agreement for an exit clause in case you need to shorten the lease agreement.

Lastly, the hardware and software must streamline your day to day operations. Get a powerful Coffee Shop Point of Sale that has inventory management, checkout process, and sales reporting.

Get at least three quotes before you buy. The internet is a good source for price comparison or even the place to buy your furnishing and equipment requirements.

TIP: Allow between 30 to 40% of the total renovation cost budget for furniture, fixtures, and equipment.


7. Adhere to All Local Regulations


Different areas and local councils may have different requirements when it comes to opening a coffee shop. For example, in the US, all equipment must be NSF certified before they issue a business permit.

So check with your local government on their requirements. Put that in your business plan checklist.


8. Do Your Groundworks - Research the Competition

8.1 Educate Your Self about the Industry

  • By attending any expo or seminar about the industry
  • Read or subscribe to industry magazines and newsletters
  • Network with suppliers, existing operators, and bankers

8.2 Are You Financially Literate?

If you are not from the financial background, learn about cash flow. Studies show that the majority of businesses that fail were actually profitable but went down because they were not cash flow positive.

8.3 Research the Competition

Check prices of coffee selling in your area. Analyze all the local restaurants and food trucks that might compete with you.

Then look at what they offered, the design and ambiance for each of the establishments.

how to open coffee shop business

Can you offer something different? Give quality coffee, food, and services. Be involved in the day to day operation. Be the head barrister. Be the best. Hone your skills, set standards and drive your team to get better and better.

And remember to keep your coffee shop clean all the time. Read my Restaurant Cleaning Checklist Infographic to guide you through the cleaning process. Keeping your cafe clean all the time is important. 79% of people will not return to a messy restaurant or with dirty toilets. Even if you serve the best coffee and food.

The following statistics are real. It shows how important are your first two years of operations. So, keeping yourself informed of the industry, knowing your competitors, effective financial and restaurant operation management will move you towards a successful operation.

  • 66% of small businesses will survive their first 2 years
  • 50% of all new businesses survive 5 years or more
  • 33% will survive 10-years or more

8. Hire Staff


For new cafes or small coffee shops, some of your staff duties will cross over from one section to another. For example, your waiter can double as host or bartenders. So, when you hire people, explain this to them. Employ only those that agreed to this flexibility in their duties.

Payroll costs account for about 25 to 35% of your total gross sales. If it gets higher than this, you either have to reduce your operating cost or increase sales.

Items deemed to be "controllable expenses" are:
  • Salaries & Wages 25%
  • Employee Benefits 4.5%
  • Direct Operating Expenses 4.5%
  • Music & Entertainment 1.0%
  • Marketing  2.5%
  • Utilities 2.5%
  • General & Administrative Expenses 4.0%
  • Repairs & Maintenance 0.5%

These add up to about 44.5% of your total expenses. If these are well managed, you can control your profit. It is also a good business practice to hire either a full time or part time accountant to assist you with these function.

NOTE: "Controllable Profit" is a good indicator of how well you are managing your restaurant. There's a direct correlation between management's operating abilities and "Controllable Profit" (Controllable Profit = Gross Profit - Total Controllable Expenses).

This is one of the Key Indicator for restaurant owners to know where to focus their attention.

Irrespective of these numbers and tools to track performances, it is no secret that good people are hard to find. So, as I had mentioned earlier, build a culture of caring for people. Not only for your customers but also for your staffs.

TIP: For a start, you can hire people on a part-time basis (students, housewives, pensioners) or get friends and family members to volunteer during the first few weeks. Do not hire too fast. Take time to pick reliable and trusted staff. Set a high standard and demand the best from your staff and of the workplace. It is a win-win situation for both you and your staff if everything goes well.

“Always treat your employees exactly as you want them to treat your best customers”


9. Source Specialty Items

One way to be different from other coffee shops is to create your own signature blend. Find a reputable roaster that can help you get that signature or your very own special blend.

But avoid the mistake of wanting to serve everything or do everything. You will likely fail. It is better to be good at something than second-rate at everything.


10. Think About Food Items

Your coffee sales will not give you enough margin to pay for the controllable expenses.

Sure, coffee may be the reason why customers come to your shop. But to make enough margin, they must buy other stuff as well.

So think about food items to serve. Hot food and/or cold food such as sandwiches, muffins, cookies etc. Then place them close to your point of sale.

10.1 Cookie Sales

Research shows that 75% of customers look for food as well as coffee. And guess what? Cookie sales are the second easiest thing to sell in a cafe business after a cup of coffee. So get that cookie designed for today's new age conscious cafe consumer, and place a big jar next to the cash register. Get the barista and cashier to ask every customer if they like to buy a cookie with their coffee order. You will not be disappointed with the outcome!

Don't forget cold drinks and mineral waters. This will ensure better chances of multiple sales.

Will you prepare these yourself? If you opt for this option, it means more staff to hire and extra equipment to buy. Will it be better to source them from a good local bakery? Do the calculation and check which option is financially viable.


11. Furnish Your Coffee Shop


Starting a new cafe can be expensive. Decorating and furnishing items can add up to your cost. But you can reduce them by buying things online, do bulk purchase or buy used furniture.

As the decor and furnishing will set the tone and ambiance of your cafe, choose well. You also want to create a comfortable environment for people to come back.

For inspiration, check this book that features 33 eclectic coffee shop designs with good design aesthetics. For some affordable restaurant tables and chairs, check these options on Amazon.


12. Market Your New Business


It is tempting for new coffee shop businesses to overspend in their marketing efforts. Instead use low-cost marketing methods such as:

  • Leveraging on the Social Medias such as Facebook, Twitter, Instagram etc. Start a conversation or place ads on these media.
  • Have your own website as studies show that: 
    • 81% of people search the web for places to eat
    • At least 80% of those who search a restaurant online will visit the restaurant
    • Get your customers to add a review of their dining experience as 85% trust online reviews
  • Hand out flyers and network with the community.
  • List your coffee shop in your local F& B review website.
  • Use email and SMS to further expand your network.
  • Create a culture to care for your customers. Find time to meet them from table to table. This will create customer loyalty.

Begin to market your cafe as early as possible. By the time you open, you have excited customers ready to be part of your business.

The cost of marketing and Public Relation depends on your business plan and other factors that only you, the restaurant owner, know for sure. Do what's best but stick to your budget.


Other Marketing Ideas

  • Offer unique products such as specialized roasts, local ingredients etc.
  • Fee Wi-Fi (some establishments have now imposed a time limit to free Wi-Fi. This will free up the chair and tablespaces for other new customers).
  • Have a customer loyalty programs. The best program is to give discounts or other incentives to regular customers.
  • Sell coffee related items 
  • Host or sponsor local entertainment, readings or book club events - only if it is within your budget
  • Train your staff using this restaurant training plan template

Opening a Coffee Shop Business Infographic

how to open coffee shop infographic

Conclusion


Starting a new coffee shop can be exhaustive. Despite good planning, you can still make mistakes and cost can go beyond budget.

Follow the above guidelines on how to open a coffee shop. It will at least reduce these issues.

Did I miss anything else? If you are a restaurant owner, love to hear your comments and tips for future coffee shop start-up owners. Share it below!

Thanks.


18 comments:

  1. Hi Mazlan

    Fascinating article with lots of information to absorb.

    Lighting is another thing to think about. A local cafe is small and narrow and the colour scheme they chose is a dark brown with brown lamps. From the outside the cafe looks dark and uninviting. So although their coffee and food are amazing they have trouble getting people through the front door!

    Amazing how cafe owners have to think about everything - it's like a puzzle!

    Thanks
    Alisa

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  2. This is a great post! All the important factors are spelled out clearly both in words and in visually, so it was very easy to follow. Even though I'm not planning to open a coffee shop right now, I'm sure those who are would benefit from reading your post. I think the most important thing of all is that you're a coffee and food lover and you like to talk about it with customers? I always enjoy going to restaurants and cafes where the owners are passionate about the drinks and food they serve. When they are passionate, it's reflected in the taste I think.

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  3. Hi, Alisa. You just raised an important item that any coffee shop owners should note. Yes, lighting plays a very important part in creating the right ambiance. In the case of your neighborhood cafe, maybe it was their intention to create that soft lighting and 'dark environment' which some people find soothing. What I would add on to that are nice big potted plants at the entrance and inside the cafe. Then have spot lights that focus on these plants. I think it will help. (without the owner having to repaint or change the existing lighting - only add more focus lights for the potted plants). Other additional item can be scented candles for all tables.Thanks Alisa for sharing this important point.

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  4. Yes, Ayako, I agree with you. That is why it is important for the coffee shop owner or the restaurant manager to personally see the guests and ask if everything is okay or, as suggested by you, talk about the food and drinks etc. This simple interaction will translate to a good customer service and customer loyalty. The customer will even, by word of mouth, tell their friends and relative of their nice experience and will give good review of your cafe. This is an invaluable and free advertising for you!Thanks Ayako for dropping by and commenting.

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  5. Hi Mazlan,
    Great info, thanks for that. It's something that I have been considering for some time and may well do this with a friend as a partner. Loved your infographic. Do you have any article that give a breakdown in the initial investment for opening a coffee shop? I know they must vary depending on your location etc. but it would be nice to have a rough figure. Also, do you think I would be better taking a franchise, opening a brand new coffee shop or buying an existing established one?

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  6. Hi Craig thanks for dropping by and asking those important questions. Right now, i have not written any article on the investment cost breakdown. But you can refer to a similar article at restaurant owner website. I hope this helps.Personally I prefer to open a brand new coffee shop rather than buy a franchise or buy into a established shop. There are advantages and disadvantages to each of these options. If you are new to the business and prefer taking the 'easier route' then the franchise is best. It is like going for tour of Europe and instead of doing it your self, you join a tour group. More expensive but all planned for you. Buying into established shop is like flying there on your own and taking the local tour as you as you please. Starting on your own is only for those who have done a very thorough research, do all the ground works and immersed deeply into the industry like joining the local coffee shop association, subscribing to industry journals etc. Similar to you planning, booking flight, hotel, car rental, train, museum entrance etc. all on your own. More exciting but can be risky and time consuming.So Craig, good luck and best wishes in your coming coffee shop business. Do drop by again and post or share your experience here for others to learn. Thanks once again.

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  7. I had thought about opening a coffee shop with my daughter a couple of years ago. We had the perfect location, but we did not factor in many critical things mentioned in your article. So glad we decided not to, but it's still something I might pursue in the future and your site is something I will reference. I thought your business plan information was extremely helpful. What is an average profit point for a coffee shop?

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  8. Hi, Linda. Opening any business and that includes a coffee shop, need some serious research. I am glad this article is of some assistance. So before you embark on that coffee shop, read and do lots of research. Time spent on this is worth it in the long run. Average profit point for a coffee shop? Well, it depends on a lot of factors but generally try to aim for at least 10 to 18 percent of your sales. If your shop is family owned, you can keep the profit margin as low as possible to decrease business tax expense (not applicable if you are taking a loan for your shop), But draw your salary and benefits as part of your operating expenses.

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  9. While I agree giving free WiFi will create seating problems, you have to give this as your competitor is doing it.

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  10. John, you are right otherwise, people will go to your competitors. However, if your coffee is better than theirs, they will still prefer your coffee shop. Don't forget, most people subscribe to a data plan anyway and free WiFi may not be an issue.

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  11. I don't care too much for location and decor but I must get good food and drinks. So it is important for would be owner to come out with good recipes for their foods and drinks.

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  12. I like this checklist and while there are other small things that you also have to consider, this contain all of the important things that you must go through.

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  13. The quote by Behdad Sami reminding us that changing of location doesn't necessarily bring us success is smack on. Very often we think that by tweaking one problem will solves all. Running a coffee shop may sounds simple but it isn't. You have to put in lots of effort and that include lots of research. Just my two cents worth.

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  14. Yes, Ricky. Even if location and decor are not the best, good food and drinks are important to drive people back to your coffee shop. But there are also other issues that need to be looked at. Such as cleanliness and customer service. In fact, cafe owners have a tough job at monitoring many issues. I hope to cover all these in this website.

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  15. Yes, Simon. Running a coffee shop or any other business for that matter is not easy. You have to do a lot of research and monitor your operation continuously.

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  16. Hi Mazlan,

    I've long been wanting to open my own coffee shop and was thinking on going for a franchise to save me time and all the complications but then after reading your article, I have to re-think. Franchise or build your own?
    Either way, I will spend on having one, why skip the exhausting yet exciting part of planning and searching right? How important do you think, is having to use a good name to a shop?

    Happy brewing!

    Rock

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  17. Hi Rock. This is a difficult question and both have their merits and issues. The safe way is to opt for a Franchise but you need more capital. Starting your coffee shop business from scratch is exciting but you need to familiarize yourself on your product niche and your potential customers. Do a checklist for both franchise and doing the business on your own and see which options tilt more to your advantage.Having a good name is therefore crucial if you are staring on your own. You can check out my article on how to choose a good name for your coffee shop here: How to Choose Your Brand name

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