Сoffee is becoming increasingly popular; over 75% of American adults drink coffee and over 58% drink it daily, a significant increase from only a few years earlier. Because of this market growth, the addition of new coffee shops continues to be viable despite more than 50,000 coffee shops already existing in the U.S. alone. According to Statista, next year, in 2016, we’re looking at a grand total of 55,246 coffee shops.
However, because the majority of the market is controlled by the top coffee shop brands, it is crucial to research local competition before setting up shop.
In order to succeed despite the competition, a potential owner needs to focus on 3 main things: location, atmosphere, and niche.
“We made the classic novice mistake of trying to be too many things to too many people, and as a result we were nothing to everyone. We lost our identity. Our customers didn’t know what we represented, so we became just another lunch place that also served coffee.”
Peter Cohan, Founder, Peter S. Cohan & Associates
Location is one of the least changeable aspects of a coffee shop as well as one of the most important, so a potential owner should make sure to put in the research and money to ensure his/her coffee shop is located in the best area possible. To demonstrate the importance of location, the latest study in the café industry in England showed that the primary reason why people visit one coffee shop over another is its location. If a shop is not convenient to get to, it will almost always receive significantly less foot traffic. Generally, shopping malls and retail parks ensure high levels of footfall, although rent rates in these areas usually are significantly higher.
In addition to location, atmosphere also makes up a large portion of the customer’s experience at a specific coffee shop. Simple things such as clean tables, internet access, and the right music can add immeasurably to a coffee shop’s atmosphere. Also, because of the labor intensive nature of the coffee shop business, a friendly, high energy staff team is essential for success.
Because of the competition with larger, more established coffee brands as well as other local shops, it is important to select a certain niche customer to serve in order to stand out. Rather than trying to serve all customers, choose a certain group of customers whose needs are not being met by another local shop and focus on creating a shop that caters to them. This choice should influence hiring decisions, price point, products sold, and general atmosphere.
These books will provide you with more information to help you make your coffee shop profitable:
A COFFEE SHOP RATIO
When you get down to basics, selling coffee is a numbers game. If you play the game correctly, you win. If you try to cut corners or stray from your focus, you will lose.
Let’s begin by breaking down the numbers, starting with the cost of coffee. Say, for example, a one-pound bag of fresh-roasted coffee costs $7.45 at wholesale. As a coffee shop owner, you have four basic ways to sell that pound of coffee.
The first is to resell the bag of whole bean coffee at retail. If your sales price is $11.45, you make a gross profit of $4.00.
The second option is to brew and sell drip coffee. Assuming you brew the coffee according to specialty coffee standards of 3.75 ounces of beans for each 64 ounces of water, and you sell the coffee for $1.70 per cup, you’ll make about $31.75 per pound gross profit when factoring in the 11-cent cost of the paper cup and plastic lid.
Until you consider the third and fourth – and by far the most profitable – options: selling espresso-based beverages or hand poured coffees like V60 (see below).
You can pull about 50 espresso shots from your one-pound bag of coffee. If you sell each espresso shot as a caffé latte for $2.70 using 30 cents of milk and 11 cents for your cup and lid, your gross profit increases to $109.50 per pound of coffee.
People often ask how hand-poured coffees fit into the ratio. You can create about 22 –V60 12 oz. cups of coffee from your one-pound bag. The costs of coffee and lid are about 50 cents. If you sell a hand-poured coffee for $2.95, your gross profit is $ 2.45 per cup or about $ 54 per pound.
You don’t have to be a bean counter to understand that selling coffee in the form of an espresso-based drink or hand-poured coffee will go much further than selling a bag of beans or a cup of drip coffee.
So what is “The Ratio?”
The ratio is simply the number of espresso-based drinks sold to the number of cups of drip coffee served. The higher your ratio, the higher your profits. Over the years, our customers have found that a ratio of 80 percent espresso-based drinks to 20 percent drip coffee maximizes profitability.
At this point, you may be thinking that espresso-based drinks have a higher sales price because they cost more. That’s true. But you incorporate the cost of the cup, lid, milk, syrups and other ingredients into the price of drinks, as you can see below.
|Drink||Cost||Price||Profit / drink|
|Caffe Latte, Regular|| $0.77|| $3.35|| $2.58|
|Vanilla Latte, Regular|| $1.02|| $3.75|| $2.73|
|Mocha, Regular|| $1.10|| $3.75|| $2.65|
|Drip Coffee|| $0.56|| $1.90|| $1.34|
It’s clear that you’re going to make about twice as much per drink when you sell espresso-based drinks as compared to drip coffee.
So, how does the ratio play out across multiple transactions in your coffee house? Let’s take a look.
Say you’re currently processing 400 transactions per day. Here’s how the ratio affects your bottom line.
|The Ratio: Espresso/Drip||Daily Sales||Espresso Profit/Day||Drip Profit/ Day||Daily Profit||Yearly Profit|
At this level, you’ll make about $110,000 more annually if your ratio is 80/20 as compared with 20/80.
How to Improve Your Ratio
For most coffee shops, the ideal ratio is 80 percent espresso-based drinks to 20 percent drip coffee. The ratio is simple but powerful. It affects every area of coffee shop operations. Several areas have a big impact on The Ratio. Here is my top five.
1. Great-tasting Espresso-based Drinks. The quality of your products is paramount. Customers are not going to pay twice as much for an espresso-based drink unless it tastes twice as good. To ensure repeat customers, drink quality must remain consistent day to day, month to month and year to year.
Drink quality begins with the quality of the beans – their origin, roasting, packaging and freshness. So buy the best you can find.
Your baristas must be trained to produce drinks that are flawless in both preparation and presentation.
You may think your drinks taste great, but are you sure? If you hear from customers, “I love it when you make it but not when … does,” you may need to spend more time on training your folks.
2. Well-trained Staff. It’s not enough for your staff to know how to make perfect espresso-based drinks. To increase your ratio, they also need to be personable and skilled in customer service.
Your baristas and cashiers must recognize regular customers and get to know their tastes so they can suggest new drinks for trial. They must be observant and have good interpersonal skills – which enable them to upsell a customer without sounding pushy or offensive.
3. Efficient Coffee Shop Layout – An efficient layout directly impacts profits. The most profitable beverage – an espresso-based drink – should be showcased.
That’s why the first thing the customer should see upon approaching the bar is the espresso machine. The drip machine should be as far from the customer’s sight as possible.
You also don’t want to set out self-serve coffee in air pots. Doing this removes the personal interaction that enables you to upsell to an espresso-based drink.
Working with hundreds of customers, we’ve found that a poor layout decreases The Ratio by at least 20 percent. If you have 200 customers per day, an inefficient layout could be costing your business roughly $20,000 in profit per year.
4. The Menu – When I walk into a coffee house, I can generally determine The Ratio just by looking at the menu. Drip and flavored coffees near the top left of the menu are a dead giveaway to a poor ratio.
Why? Most people read from left to right and top to bottom. Putting your espresso-based drinks at the top left of your menu places your most profitable drinks in the most valuable real estate.
Probably the best thing you can do is take drip coffee off your menu entirely. Customers who want it will still ask for it.
Giving coffee away kills your ratio. So never advertise or offer free refills.
5. Marketing Via Weekly Specials and Seasonal Promotions. How do you sell more espresso-based drinks? By having customers try them.
Weekly specials and seasonal promotions are two of the most effective methods of increasing drink trial, which leads to increased drink preference – and profits.
To be effective, the Special of the Week must be changed weekly. Additionally, it should be good only for a regular-sized beverage – served hot, iced or frozen—sold at the same price every day.
Begin advertising your weekly special at the front of your shop. Simply take a chalkboard, write up what the special is and set it up on an easel by the front door.
Seasonal promotions are drinks that are available for a limited time. Think Pumpkin Latte and Peppermint Mocha. In-store materials such as posters, counter mats and table tents that feature a picture of a delicious drink will entice your customers to try something new. I recommend that you feature about eight seasonal drinks each year.