Coffee Shops – Understanding Profitability In The Coffee Business

Coffee Shops Understanding Profitability

Getting Profitable

make money in the coffee business

Here we will examine the conditions, variables, and actions that are necessary for generating a profit from your retail Specialty Coffee Business.

While only three factors in the coffee business are important to your customers:
  1. product quality,

  2. customer service, and

  3. store ambiance, you’ll need to control numerous other variables to yield a profit Before we discuss these variables in future articles, I thought it might prove useful to talk about profitability in general, what it is, and how it is generated.

To put it simply, profit is the money that is left over from your sales after you have subtracted all the costs and expenses related to those sales. When I speak of costs, I’m referring to your “cost of goods” (COG), the dollar value of ingredients and packaging that were used to produce your sales.

Most profitable coffee businesses will run a combined cost of goods somewhere between 32% and 38% of total sales. In other words, 32c to 38c out of every dollar of sales you earn will go back to pay for ingredients 8c packaging.

After this cost has been subtracted from sales, the income that remains is referred to as you “gross profit on sales.” All other expense must then be subtracted from your gross profit to determine your actual bottom-line profit or loss.

Other expenses includes such things as employee and management labor, payroll taxes, rent, insurance, repairs and maintenance, utilities, small wares, bank charges and credit card fees, etc. If there is money left over after subtracting all these expenses from your coffee business, you were profitable! However, if there isn’t enough money to pay all your expenses, and yourself, then you lost money.

So, if you aren’t making any money, then why is profit eluding you? Lack of profitability can be attributed to a couple of reasons:

  1. excessive costs and expenses, and/or

  2. lack of sales. While there is always room to tighten-up on spending, lack of sales is the culprit responsible for most business failures.

It’s important to understand that a certain level of sales will be necessary to make money. What that level is, will be determined by the unique conditions associated with your business; i.e. average purchase per customer, the number of customers that visit your business each month, and your cost of goods and expenses.

In reality, even an inexperienced coffee business owner who is making some mistakes may find that it is impossible to not make a profit if their sales are great enough. And, conversely, a very experienced, seasoned owner may find that it’s impossible to make a profit if sales are anemic.

If you own a typical sit-down coffee cafe, the following chart shows the profitability you might expect at various levels of sales.

Understand that your cost of goods should not change much as a percentage of sales as your sales grow. For example, if you generated $10,000 in sales last month, and used $3,500 in product to produce those sales, then your cost of goods was 35% ($3,500 + $10,000 = .35 or 35%).

Therefore, if you generate $100,000 in sales next month with your coffee business, you should expect that your cost of good will remain around 35%, or you should use about $35,000 in ingredients.

Obviously, what also increases as sales increase is the gross profit that’s leftover after you subtract your cost of goods from sales. In the above example, your gross profit would increase from $6,500 on $10,000 of sales (S10K – $3,500 COG = $6,500), to $65,000 from $100,000 in sales.

This would provide you with a lot more money with which to pay expenses, yourself, and a lot more would be left over as profit I’m not suggesting that if your current monthly sales are only $10,000 that you should expect to be able to increase them to $100,000, but it does illustrate the effect higher sales has on profitability.

What’s exciting is that as your coffee business sales grow, profit grows exponentially! In other words, your profit will grow at a faster rate than sales.

For example, if your sales double, your bottom-line profit might increase by 2 ½ to 3 times. This happens because most expenses wont increase by the same percentage as your sales growth, and some expenses won’t increase at all.

Expenses like labor, payroll taxes, laundry and uniform, employee meals, and credit card fees might increase slightly. However, fixed expenses such as rent, insurance, loan payments, licenses and permits, etc. won’t increase at all. So to put it simply, build sales and profit will blossom!


4 Ways Mobile Can Future-Proof Your Coffee Business

The coffee industry’s outlook on this year reminds me of the opening lines of Charles Dickens’ novel A Tale of Two Cities: “It was the best of times, it was the worst of times.”

First, the “the best of times”: Quality coffee is more popular than ever. Consumers will gladly pay premium prices for fair-trade beans, new preparation methods, and a curated ambiance.

But even as coffee culture is now ubiquitous, so are Starbucks locations. Independent coffee shops are squeezed by chains, by increasingly sophisticated home preparation, by consumer belt-tightening – indeed, by each other. As coffee culture democratizes, it puts pressure on independents to raise their games.

Many coffee purveyors see “going mobile” as a box to check and nothing more. It may surprise you to learn, however: mobile can help you solve four top vulnerabilities coffee businesses face in the current year.

A word on mobile payments

You’ll notice right away that mobile payment isn’t a near-term vulnerability I discuss below. Mobile payment is exciting, but it doesn’t solve a particularly pressing customer problem. You can already pay for your coffee a zillion convenient ways. Paying with your smartphone will impress your date, but it won’t make your life appreciably easier.

Mobile payment is coming, however, and coffee brands must embrace mobile generally for long-term survival. But how do you start? Enter mobile loyalty programs. By encouraging repeat business with a mobile program, you’re forging a crucial mobile link between customer and merchant, paving the ways for lots of exciting longer-term innovations with near-term benefits that merchants and customers love.

Problem: Earning rewards can slow down the line.

Solution: Beacons automate mobile check-ins for regulars.

Beacon technology is perhaps the most exciting innovation to hit mobile loyalty for coffee businesses. We predict it’ll become widespread by the end of the year.

Think of beacons as lighthouses: they emit a low-energy Bluetooth signal that nearby mobile phones can respond to, like moving ships. You roll up to your favorite coffee shop, phone in hand.

You’ve already signed up for a loyalty program and checked in manually once. Sensing this, your mobile app asks if you’d like to automate future check-ins with this merchant. If you agree, you’ll be automatically checked in every time you stroll into the shop.

Beacons automate mobile check-ins, which eliminates fumbling for your phone and keeps the register lines moving. But beacons also empower merchants to deliver magical new retail experiences. If you browse near the coffee-making equipment, a mobile message can alert you to cool products on sale.

With automated check-in, mobile pre-ordering becomes infinitely easier – see below. We’re just scratching the surface with the potential of beacon technology, but its sure to be tremendous.

Problem: Customers only stop in for morning joe.

Solution: Targeted mobile specials bring them back all day long.

It’s an age-old problem: how do you tempt the AM-coffee crowd back for lunch or snacks?

Answer: mobile specials tailored to their preferences.

Say it’s a rainy, cold Thursday afternoon. You ping your customers with a demonstrated sweet tooth for a 3pm snack: get 2 cookies for the price of 1 – while they’re still warm! The customer checks in at your store and taps the special to redeem it at the register – nothing simpler or more satisfying.

Mobile specials are an incredibly versatile tool for coffee businesses. Introduce new menu items to customers likely to enjoy them. Drive foot traffic during slower hours. Cross-sell products your customers may like, but just aren’t aware of. Surprise loyal customers with an occasional treat. Try a “Like Us to Unlock” mobile special to motivate your social media fan base.

Think of mobile specials like a barista well-versed in every one of your regulars’ tastes. They can confidently recommend a new menu item or today’s special, and customers will appreciate the personalized assist.

Problem: Who has time to wait for an order?

Solution: Mobile pre-ordering speeds up the line.

Another mobile innovation on the horizon for 2015 is mobile pre-ordering. The concept is simple but thrilling: instead of rattling off the details of your daily coffee order, your mobile app will soon know your regular order and alert wait-staff to start preparing it as soon as you check-in. Talk about speeding up the line.

Problem: How can you personalize service and market more effectively?

Solution: Mobile puts “big data” to work for small coffee businesses.

Another under-appreciated benefit of mobile loyalty programs is how data-rich they are. Customer buying habits, purchase frequency, product and reward preferences, even how successful your latest mobile special campaign was – coffee merchants can know all of that and more instantly with a mobile loyalty program. Marketing insights are yours for the asking once you’ve got a mobile loyalty program up and running.

Mobile loyalty helps you test your best hunches about what new menu items to introduce, how to boost foot traffic, which higher-value products to cross-sell, and much more. It complements your social media efforts nicely, too.

Best of all, the data you’ll gather with a mobile loyalty phone helps you cultivate deep and lasting relationships with your customers in an intimate space: their mobile phones.

By Rob Belhge, VP of Perka, a First Data Company For more information about Perka and other business solutions, please visit www.firstdata.com/smallbusiness or call 866-965-8330.

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Coffee Shops - Understanding Profitability
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Coffee Shops - Understanding Profitability
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Coffee Shops - Understanding Profitability In The Coffee Business takes you through a practical guide on making money from coffee with your shop.
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