In a “Start-up Strategies” column for CoffeeTalk magazine, Crimson Cup Founder and President Greg Ubert addressed one of the first questions potential business owners ask: “How much will it cost to open my coffee shop?”
As he writes, “Because every specialty coffee business is different, there is no simple answer. Your costs will depend on the type of business, the price of retail space in your community and many other variables.”
Follow the formula outlined in the column below to calculate start-up costs for your coffee shop.
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The first step in calculating start-up costs is to decide what kind of business you want to open. Some common types include a coffee house with drive-thru, a walk-in coffeehouse, or a strictly drive-thru coffee bar. Generally, the more square footage, the higher the cost of build-out.
At the same time, consider where you will operate. Location can make or break your business. In most cases, your coffee shop should be on the drive side of a road with heavy morning traffic.
Tailor your location search to the type of business. A coffee house with drive-thru requires up to 1,500 square feet in a retail strip or standalone building. For a walk-in coffee house, you may need as little as 300 square feet in high-density location to 1,800 square feet with easy access to automobile or walk-up traffic. For a coffee drive-thru, usually 100-300 square feet will suffice.
Calculate Projected Sales
Once you’ve found potential locations, it’s time to run some numbers. Calculating projected sales weans out unprofitable options. Count the number of cars passing during peak morning hours. In a good location, you can expect about 1.5 percent of cars on the drive side to stop at your shop.
You can also expect visits by five percent of those passing by on foot. So if 10,000 cars and 500 pedestrians pass each morning, expect visits from 175. For this article, we’ll use $4 as a conservative estimate for each purchase. (In reality, this figure varies by market.) Daily sales would be $700, with monthly sales averaging $21,000.
Identify Rent, Mortgage and Build-out Expenses
As a rule, rent or mortgage should take up no more than 15 percent of monthly sales for your start-up business. For a location generating $21,000 in monthly sales, this means a maximum of $3,150 in rent.
You must also account for build-out and equipment costs, which will be depreciated over time. It’s a good idea to hire an architect or contractor for the build-out. These professionals can estimate costs of plumbing, electrical, heating, and air conditioning systems, and they can help you negotiate to see whether the landlord will finance any of the remodeling expenses.
Choose Top-of-the-Line Coffee Shop Equipment
In terms of equipment, you’ll need a top-of-the-line espresso machine, espresso and coffee grinders, blenders, coffee brewers, refrigerator, etc.
Don’t be tempted to save money by buying cheap or used equipment. Your espresso machine is the lifeline of your business. If it breaks, you’re out of business. Buy the best you can find, learn how to use it, and follow the suggested maintenance schedules rigorously.
Drink Ingredients: Your Largest Operating Expense
Drink ingredients such as coffee, milk, and syrups will be your largest operating expense, accounting for up to 40 percent of sales, or up to $8,400 monthly in the scenario above. Never scrimp on ingredients. Serving the best is the only way to attract and keep specialty coffee customers. You can keep inventory costs low by partnering with a supplier that makes frequent deliveries.
Your next-largest operating expense, payroll costs, should account for 30 percent or less of sales. These include wages, benefits, payroll taxes, worker’s compensation, and costs of payroll processing. For our scenario, you would budget no more than $6,300 – including your salary, if you plan to work in the shop.
Calculating “Other” Expenses
Rent, drink ingredients, and payroll costs can account for 85 percent of expenses in the beginning coffee shop. This leaves 15 percent to cover all other expenses, including:
1. Professional fees for architects, attorneys, accountants, and business consultants
2. Training costs
3. Principal and interest costs (if you plan to borrow money)
4. Income taxes (usually about 35 percent of operating profit)
5. Other expenses, including business insurance, supplies (cups, napkins, stir sticks, etc.), licenses and permits, office supplies, utilities, advertising, and repairs and maintenance
6. Your profit
After you’ve done your homework, add up all these projected expenses. You should have cash on hand to cover your initial build-out as well as operating expenses for the first six months. That’s what it will cost to open your coffee shop.
Greg Ubert, founder and president of Crimson Cup Coffee & Tea, has taught hundreds of business owners how to run successful independent coffee houses.
For more advice on opening and running a profitable coffee shop, see Greg’s book, Seven Steps to Success: a Commonsense Guide to Succeed to Specialty Coffee. Among many other features, the book includes a full coffee shop business plan.
If you have questions about opening a coffee shop, we’re here to help! Call us at 888-800-9224 or fill out this form, and we’ll be in touch.