Last year I spent quite a bit of time studying various models of building business plans. I’m a huge fan of Eric Reis’ The Lean Startup, and that actually lead me to Alexander Osterwalder and his Business Model Canvas. Both are great resources, and though they tend to lean towards software and technology types of businesses, the principles are still the same. I would recommend both to someone considering opening a coffee shop, and specifically trying to understand the cost of opening a coffee shop.
Getting a sense of what the true costs are can be difficult, especially if you haven’t ever worked in a coffee house or owned one before. You have to consider things like:
- How high end do you want to be?
- What will make you stand out?
- How will you attract customers and keep them?
Though these are generic questions, they really drive the types of equipment that you buy, the location that you put your shop, and the types of employees that you hire. Lets look at a few key items to consider:
- Startup Costs. Unfortunately, there isn’t a manual that covers everything (well, there kind of is) that will tell you all of the costs. The greatest cost is in R&D … the research into every product you have to purchase, from the chairs to the grinders to the type of sink that you’ll purchase? This is a massive investment of time that is critical to your success. Once you get all of that sorted out, you could be looking at anywhere from $100k to $500k in setups. Again, this depends a lot on your location and on the atmosphere you want to provide. One of the ways to avoid having to make all of these decisions is to “buy off the shelf”, or purchase a coffee house franchise instead of having to test everything yourself. Good franchises provide operations manuals that not only list what you need, but how many, the model numbers, the costs and where to purchase. In addition, some franchises offer a ‘startup kit’ that supplies everything at a discount.
- Staffing. We run a minimum of three staff per shift, plus a manager. One of the big challenges is finding the right balance between number of staff and busyness. Another key with staffing is determining the level of skill that you need for what you are trying to accomplish. Some volume stores require little more than brewing and pumping coffee. If you decide that you want to provide a higher end taste, you may also have to invest in a staff member with roasting skills, as well as higher end baristas.
- Cost of Goods Sold. There is no hard and fast rule for cost of goods sold, but a good number in the restaurant industry is to try and get as close to 35% as you can. Getting those margins requires knowing who the good food service vendors are in your area and building a relationship with a strong representative. That representative should keep you up to date with new options in the food market, as well as different coffee options available.
- Marketing. You can build the greatest store ever, but if no one knows you are there it doesn’t matter. Marketing is often looked down upon because typical marketing companies do not hold their marketing efforts accountable to revenue. Its critical that you manage the return on investment (ROI) for dollars spent in direct marketing and brand awareness. Marketing should, at a minimum, have a first year spend of 4% of gross revenues and 2% thereafter. Again, if you are in franchise you are able to benefit from the prior brand awareness and marketing that the company has already invested in on your behalf.
Spending adequate time to understand the cost of opening up a coffee house is invaluable to the process. Make sure to understand clearly what your business plan is or connect with a franchisor who already has a proven model for you to use.
What part of the research process seems most vague to you? We’re happy to answer any specifics.