February 14, 2022
Adam Hoeksema
If you’ve decided to open your very own coffee shop, although it’s an uphill battle there is huge market potential, as the world’s population drinks 2.25 billion cups of coffee every day. This shows that running a coffee shop has the potential to be very profitable.
The question is, how much? How much does the average coffee shop owner actually make?
Admittedly, the coffee shop industry is highly successful. However, it’s not easy to make it when only the top 50 contenders earn most of the profits. That’s why you must calculate the potential coffee shop profit margins for your unique situation before you start your own coffee shop.
First, it’s a great way of knowing whether you’re placing your money in the right place. More importantly, however, it helps you keep your financing in check while running your coffee shop.
If you want your coffee shop to attract all the coffee lovers in your city, keep reading. First, let’s talk about the potential coffee shop margins, revenues, and costs you’ll be paying.
How much do coffee shop owners make?
According to Toast the average coffee shop owner makes $60,000 to $160,000. In order to calculate your specific coffee shop profit potential you will need to create a set of financial projections with your own assumptions for your startup costs, potential revenue, gross profit margins, operating costs and financing assumptions. Our coffee shop financial model can help you narrow in on whether a coffee shop is a good business for you to dive into.
Concept of a Coffee Shop
One of the main things that your coffee shop potential profits depend on is the concept itself. Whether it’s a simple, coffee-on-the-go coffee shop or a luxurious and high-end alternative, the concept of your coffee shop determines the customer experience.
The former would offer a minimalistic physical space and a basic menu, including coffee and some bakery items. Meanwhile, the latter would provide a lusher interior, aromatic experience, and a versatile menu.
Of course, the concept of the coffee shop will also determine the cost of the space, interiors configuration, staffing, menu mix, and more. You can expect the following startup costs:
- Startup cost of a sit down coffee shop - to open a sit-down coffee shop will be between $200k and $375k.
- Startup cost of a franchise coffee business - a franchised coffee shop startup cost can go up to nearly $675k.
- Startup cost of a coffee kiosk or coffee cart - the initial startup cost of coffee kiosk can be just $20k-$75k.
Break-Even Point of a Coffee Shop
The break-even point of a business refers to the stage where the total revenue and costs are equal. That means you are neither gaining nor losing any money. The break-even point of your coffee shop is an important milestone for many reasons.
Mainly, it’s the point where you’ve stopped only investing your money and have finally started earning it. This is the stage that you can begin calculating your coffee shop profit margin. Now is the best time to enhance your team, increase prices, and perfect your menu.
Calculating the break-even point of your coffee shop is simple. Whether you include the startup costs in the equation is a matter of preference, though.
Costs of a Coffee Shop
While calculating the total costs of your coffee shop, you can categorize them into startup costs and operational costs.
Startup Costs
Undoubtedly, the startup costs of your coffee shop will depend primarily on the concept, as we’ve mentioned before. Other factors that influence startup costs include physical location, staffing, and menu items.
First in your startup costs are the property rent and taxes along with the brokerage. Of course, this cost will be much higher in commercial areas. But it may be outweighed by the advantage of having more customers.
Next, you’ll invest in the brewing and baking equipment, as well as crockery, table decor, utensils, kitchen supplies, and starting inventory. The starting inventory of a coffee shop may cost anywhere between $5k and $10k.
For the interior, you’ll need to factor in furniture and modeling costs. Then, the next stage is to invest in staff training, which is essential since customer service can make or break a business.
Lastly, the most crucial parts of your startup costs are the permits, licenses, and startup accounting.
Operational Costs
Everyday operational costs need to be factored in, as well. As a coffee shop owner, you’ll be paying for maintenance and electricity used by all the brewing and baking equipment.
Other than that, you’ll have to pay for the staff, whether those are the servers or cleaners. You can also factor operational costs into two categories; fixed costs and variable costs.
Fixed costs, which occur whether you are open or not, include rent and maintenance, payroll, insurance, taxes, and other charges. On the other hand, variable costs only depend on the units sold that day. These costs include the inventory, payroll of hourly employees, utilities, supplies, marketing, and advertising.
The less you pay in operational costs, the higher your coffee shop profit margin can be.
Revenue of a Coffee Shop
The main elements to factor in while calculating your coffee shop profit margins and revenue are the sales projections and average order value.
Sales Projections
While you’re projecting the sales of your coffee shops, there are a few elements to factor in. Firstly, calculate the number of expected customers per hour and day. Then, factor in the open hours per day and week along with the average receipt.
At the start of your coffee shop business, it will be difficult to predict sales per item but you can make your best estimate based upon industry research. For that stage, you can try to calculate the total expected sales. The more your business progresses, the more information you’ll have about the purchase mix.
If you’re having trouble estimating those three elements, simply observe the nearest coffee shop in your area. Looking up the stats of any coffee shop in your area will give you an idea of what to expect from your customers if everything goes well.
Average Order Value
It’s a no-brainer that not every customer will have the same order value. You’ll be getting a wide variety of customers, meaning your average order value will also fluctuate accordingly.
The main type of customer you can expect is the one who simply wants a coffee and maybe one bakery item. You’ll mainly get this type of customer in the morning when they’re heading for work. Typically, their bill will be anywhere between $1 and $5.
On the other hand, you’ll serve customers who come later in the day and probably sit and enjoy their coffee at the café. Since they’ll also be paying for extra bakery items and water, their bill may range from $15 to $25.
To calculate the average order value, you’ll only have to divide the total sales of the day by the number of transactions. Not only is it the simplest way of finding the daily revenue, but it’ll also help you determine your daily profit margins.
Gross Revenue
Of course, the best way to ensure the success of your coffee shop is to increase the revenue. Increasing the average order value means that you’re ultimately increasing your coffee shop profit margins and revenue.
But, how can you increase the average order value? Once you’ve surpassed the break-even point, you’re ready to increase the prices of your products slightly. You can also broaden your menu, enticing your customers to try out more options.
Introducing new syrups, extra shots, seasonal drinks, and brewing styles is the most foolproof way to increase the average order value and revenue for a coffee shop. Additionally, you can ask your barista to give friendly suggestions to regular customers once they’ve learned their coffee habits.
Estimating your gross revenue is the main step to predicting the coffee shop profit margin.
Profit Margins of a Coffee Shop
Your coffee shop profit margin is the total revenue minus the startup and operational costs. Of course, if you’re calculating the daily profit margin, you won’t have to include the startup costs in the equation.
There are two ways you can increase your coffee shop profit margin. You can either reduce costs or increase sales, and we’ll tell you exactly how to do that later on.
There are endless benefits to knowing your coffee shop's profit margin. Mainly, it helps you pinpoint trouble areas in your business. Plus, you’ll be able to perfect your prices in a way that serves you and your customers best.
Lastly, you’ll know the financial health of your business and figure out which product or marketing tactic is increasing your coffee shop profit margin the most.
How to Increase Coffee Shop Profit Margins
Here are a few tips to keep in mind if you want to significantly increase your coffee shop profit margins.
Controlling Your Costs
You may think you’ll benefit from investing more into the startup and operational costs. However, that’s the easiest way to reduce profit margin. You’ll find that there are many ways to run a successful coffee shop while still cutting costs.
Saving a few hundred dollars a month will not only go a long way in savings, but it’ll also increase your profit margin significantly. Review all your monthly expenses to see where you can cut costs and opt for a cheaper alternative.
For example, make sure your supplier isn’t overcharging you if you can get cheaper, high-quality stock elsewhere. Another way to cut costs is by buying second-hand brewing equipment and opting for power-saving alternatives.
You should also make sure you’re not overstaffing, which is a major reason that coffee shops often fail. Not only will this enhance your team as you will only keep the best workers, but you’ll also be able to cut costs due to a smaller payroll.
Your Coffee Shop’s Stock
Second, you must always remember to keep an eye on the stock at your coffee shop. It is very smart to buy a few things in advance when you have the money.
Consult a waste management specialist to create a plan that helps you purchase and dispose of your stock most economically. Buying wholesale is another excellent way of cutting the costs of your coffee shop’s stock.
Reviewing Your Menu
Reviewing your menu will not only help you cut costs and increase the coffee shop profit margin, but it will also attract more customers. Every few months, any successful and smart coffee shop owner renews and enhances the menu to keep customers coming back for more.
As a result, your average order value will also multiply.
For example, if you notice that one of the coffees is selling in large amounts, you can increase its price. Increasing a few cents won’t affect your customers, but it’ll definitely benefit your business significantly.
A great way to attract more customers is by appealing to different types of people. Offering non-dairy, sugar-free, and vegan options, as well as eco-friendly packaging can attract more customers to your place.
An increase in daily sales produces a direct increase in the coffee shop profit margin.
Your Marketing Plan
A strong marketing plan is what keeps any coffee shop going on its low-demand days. Special offers and discounts for students or customers with loyalty cards are bound to keep them coming back for more. This will also influence them to buy more products at a time.
Other than that, customers will also be attracted to breakfast/lunch deals, BOGO deals, and free samples. The more generous you are to your customers, the more likely they are to stay. A social media presence is another great way to connect with your customers and make a name in your local area.
Creating a Financial Forecast
Last but not least, tracking your finances and making educated predictions is the best way to increase coffee shop profit margins. Your accountant can help you with this.
A financial forecast will help you assess the impact of certain marketing strategies, as well as the performance of certain products. Other than that, it’s a great way to assemble your costs and revenues to calculate the profitability of your coffee shop.
If you don’t want to go through the tedious hassle of creating one yourself or hiring an accountant, check out our pre-made coffee shop financial forecast. These CPA-developed spreadsheets are versatile, allowing you to factor in your elements and create accurate projections.
FAQs
Here are the answers to all your questions about coffee shop profit margins.
Are coffee shops profitable?
Yes, coffee shops are one of the most profitable businesses you can opt for. An average coffee drinker consumes over 3 cups a day, which is a testament to how much coffee is sold worldwide daily.
Since the startup cost and stock prices of a coffee shop are much lower than most businesses, the coffee shop profit margin is extremely high. You can even expect up to 93.5% gross profit for every cup of coffee you sell.
The best way to maintain the profit margin of your coffee shop is with effective cost management and a suitable concept for your location.
Another option to consider is to open a donut shop or cafe that serves food in addition to coffee. This may change your margins, but ultimately increase your sales and profitability.
Should you open a coffee shop from scratch or buy an established coffee shop?
Whether you buy an established coffee shop or open one from scratch, it’s a matter of financial situation and preference. If the established coffee shop is under your budget and has the team, physical space, concept, and menu you desire, it is recommended to go for it.
The main factors to keep in mind when opening the shop are coffee shop profit margin, price, timing, location, terms, and current sales. However, if the coffee shop you have in mind is a unique concept, it is recommended to start from scratch to execute your idea flawlessly.
How much do coffee shop owners make?
Since the coffee shop profit margin is high, coffee shop owners can earn an excellent salary if they manage costs effectively. As a coffee shop owner, you can expect to make anywhere between $60k and $160k every year.
This is the salary you can expect after you’re done paying payroll, bills, rent, and other fixed and variable costs. However, this number can fluctuate depending on the revenue, location, staffing, and concept.
Be careful not to overstaff as their payroll can reduce your salary significantly and reduce coffee shop profit margins. A simple coffee shop only requires only two baristas on each shift and a few other helpers.
What is the Failure Rate of Coffee Shops?
The failure rate of coffee shops is between 5% and 65% over the last decade. Why such a large range? Well we are pulling data from two different government data sources to come up with an estimate. According to the BLS report only 34.5% of businesses that started 10 years ago are still operating. This means that out of all small businesses that were started in 2011, only roughly 65% of them have closed by 2021. We also know that food and beverage businesses tend to have higher failure rates than average based on SBA loan default data. According to this SBA analysis roughly 4.7% of the food and beverage businesses that received an SBA loan between 2010 and 2020 have defaulted on their SBA loan by 2020. It is pretty safe to say that if you defaulted on an SBA loan then your business has failed, hence we were able to estimate that over a decade between 5% and 65% of coffee shop startups will close.
Conclusion
With the failure rate of the coffee shop industry nearly as high as the profit margins, it’s hard to keep the doors open. Only 33% of coffee shops last more than 10 years, and 50% don’t even make it past five years.
That’s why it’s best to keep track of your coffee shop’s profitability for a better chance of success. The most efficient way to do so is with a financial forecast sheet. Once you understand your business’s profit margins, the rest of your finances will fall into place naturally. And if you need some guidance creating your business plan, check out our free coffee shop business plan template.
So, what are you waiting for? It’s time to find your strength in any of the avenues we mentioned and make your mark in the coffee shop industry!
