Thinking of Opening a Coffee Shop?

Crowded coffee spaces and firework acquisitions are making the specialty coffee industry nervous enough to start using the world “bubble.”

In Issue 5 of 25, SCA’s quarterly magazine, JANICE ANDERSON and DAN MCCLOSKEY used their extensive experience mapping the growth of specialty coffee across the US to offer their perspective on the state of the market. Here, in a Daily Edition exclusive, they focus on what current and aspiring coffee shop owners can do to stand out in a crowded market.

A love of coffee is commonly cited as the reason for starting a coffee business – being passionate about what you do is as important as it is infectious to those around you, but it’s not enough to start and sustain a business. Starting a business means you have to dream a little: am I going into coffee to start a revolution, or just do something nice in my neighborhood? Do I want out in five years, or am I in for the long haul?

From our experience, starting a coffee business can be one of the hardest things you will ever do. Here are a few good practices we recommend when starting and growing
a coffee business.

WRITE A BUSINESS PLAN: UNDER WHAT CONDITIONS WILL MY BUSINESS WORK?

A business plan is the model for how you will build your business, and we always recommend starting with the expenses. The costs of starting up and running a business will vary dramatically according to location, build out, furnishings, POS system, equipment, website, salaries, payroll taxes, and utilities.

These are expenses that you must pay whether the business has a good day or bad day – this is your “burn rate.” Once you have your burn rate, ask: how you can get enough capital for at least two years of “burn”? Being undercapitalized is likely the number one reason for small business failure. Now, look carefully at your burn rate. Face the reality of fixed costs, and then ask yourself: do I really need to buy that roaster now? Also, we recommend cutting your salary in half: the leader eats last.

At this point, you should build the revenue side of your plan. Start by identifying products, pricing (check the cafes in your chosen area), costs (don’t forget almond milk, bamboo stirrers, employee drinks, and waste). Look at how many coffee drinks, pastries, and bags of retail coffee you need sell in a day, a week, a month, and a year in order to meet your burn rate.

Next, find out how many people live and work within a half mile of your location, and within one mile. How many competitors are within that area? Nearly all cafes are local, which means your plan can’t rely on your business being a “destination” for your customers. Build your revenue plan starting from zero and build it realistically. At what point will you have enough sales margin in a month to cover your expenses?

Now that you have a relatively comprehensive – and likely somewhat scary! – overview of your situation, you can write your plan. You will likely now be convinced of the value of adding an expense line for marketing to help you create your brand and your logo – running a business is not just about the coffee. In coffee-dense areas, adding a line for PR costs can help your business gain visibility faster.

SCALING: GROW ALONG WITH YOUR COMPANY

Once your business is underway, check in periodically with your business plan: it is your roadmap in the beginning and your measure of progress over time, but you’ll also need to continuously adapt it to changes in the mar- ket, industry factors, and internal challenges that you may face. Manage your business for profitability, down to the last customer. Add business technology to improve visibility to how your business works and tighten controls, plan cash flow, and measure your performance to goals. As you grow, it’s likely your business needs will outstrip your capabilities as a manager or a business owner – these are critical moments for honesty. It helps to identify your inadequacies or your inexperience, and then find someone trustworthy and with knowledge to advise you!

Build your team with hardworking people who have experience and skills that you don’t have. If it’s time to start the wholesale program, hire someone who’s done it.

If you’re ready for your third location, hire someone who has managed a multi-unit business. If you’re going to buy another com- pany, or would one day like to be purchased by one, hire someone who knows the ins and outs of these transactions and how to pull the pieces together after the merger.

It’s common to feel as if you don’t have enough hours in the day, but taking a management or finance class, becoming fluent in
P&L and balance sheets, and participating in the coffee industry to build your knowledge and stay current with the health of specialty coffee are all good ways to make sure your business stays healthy.

COMPETING: THERE ARE TOO MANY COFFEE BUSINESSES IN MY NEIGHBORHOOD!

Assuming that you didn’t go willingly into an over-saturated market, you may still find yourself in this situation at some point. If you do, you will need to focus on the fundamentals of your business and on delivering the  promise of your brand: this will be key to your survival. When the revenue pie is shared among more businesses, it puts a lot of pressure on the players, and logically, large well-capitalized businesses will be better equipped for survival. They won’t be the only ones, though; smart brands will become more efficient and will continue to think “long term,” protecting their core culture and continuing to deliver their best experience for loyal consumers. Cuts to quality and prices have dangerous and long-lasting effect, so we always recommend avoiding these temptations.

It’s also important to be involved and up-to-date on the local goings on in your community. Avoid the surprise of running out of consumers by checking population statistics in your area every year and watching for new or failed businesses that will affect your traffic. Attend local business, government, and cultural meetings where possible.

JAN ANDERSON is the President of Premium Coffee Consulting (PQC) where she works alongside DAN MCCLOSKEY, PQC’s Founder and Chief Creative Officer.