Waking Up to the Reality of Running a Coffee Shop

I have written a business plan for a café and shown it to an official in my town who discounted the profitability of the business. It is my dream and passion to operate this kind of business and I believe that location is the key. Please enlighten me as to some of the elements I can highlight in my business plan to improve it. —C.B., submitted online

If your underlying business model is not financially sound, there's little you can do to improve it. Dressing up a business plan—or even finding a great location—cannot save a business that simply won't bring in enough revenue to cover expenses and turn a profit.

The first difficulty with running a successful, independent coffee shop in most places is that the competition from large chain operations, such as Starbucks (SBUX) and Peet's Coffee (PEET), is fierce—and their customers are fiercely loyal.

The second problem is that the staple sale—a cup of coffee—is basically a low-ticket item, with the average check between $2.50 and $4. And your window for daily sales is short: Studies show that 90 percent of American coffee drinkers get their daily caffeine fix before 11 a.m., says Bob Phibbs, a small business consultant and principal at The Retail Doctor.

"Your business is 6 a.m. to 11 a.m., with the bulk between 7 a.m. and 8 a.m. If you don't have enough staff at that time, the line gets too long and people won't come back. If you're overstaffed, it will eat you up in labor costs because your business stops at 11," says Phibbs, who was chief operating officer of the It's A Grind coffeehouse franchise in the late 1990s.

Independent coffeehouses often add baked goods, specialty drinks, and sandwiches or salads to their menus in order to increase revenues. Hosting special events in the evenings, such as karaoke, entertainment, and fundraisers, is another possibility for extending your operating hours.

Plan Again

Look over your business plan again, perhaps with the help of an experienced businessperson. Make realistic projections for daily and weekly transactions and revenues. Visit your competitors and watch how much business they do. Have they established a drive-through window that brings in additional customers? How much are they selling add-on items? How will your business differentiate itself from theirs?

Total up your projected expenses, making sure you include often-overlooked items such as insurance and taxes. Don't forget that coffee businesses need to keep dairy products in stock, commodities that are expensive and perishable, Phibbs says.

Investigate prime locations in your area and what they cost to rent or lease, plus whether they will need to be renovated and at what cost. Many times the best locations for drop-by and drive-through businesses are expensive, but you must have sufficient parking and access for cars in order to succeed.

"Count up your costs for food and labor vs. how much traffic you think you can get, then cut that figure in half for startup and figure out how long it will take you to break even and be profitable," Phibbs suggests. "If you've already gotten a thumbs-down, take that as a warning sign. It may not be the plan that's giving you problems, it may be the reality."

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