This explains why ALL the coffee spots in my city of 600K keep closing down! Not one of them can stay open, then another one takes over, on and on and on. I never understood what was going on.
There’s a fast food place in place of a classic ‘Corner Shop’ near me: it gets ripped apart and reopened by new people almost every year or two. I think over the last 20 years I can remember 10 different chippies / pizza / Chinese places there - no idea why people don’t realise it’s got 0 passing traffic and never works
Rent is the killer. If you don't own the place, you're basically running your business for the landlord. If it's running well, the rent will keep increasing, eventually to the point it will drive you out of business.
Yeap. The only people I know who make decent money with a coffee shop own their location, their parents own it, or they have a coffee truck/wagon/thing. Except for one guy who was one the ground(lol) floor of a hipster food court and got a 25 year fixed rent agreement.
No way it costs $1+ for a shop to brew a cup of coffee. More like .15-20 cents for a plain coffee. The big cost that kills these places is all the free coffee, that their employees drink, and give away to their friends on the side for free.
@wb5mgr Assuming they're making at or near minimum wage a couple bucks worth of free coffee a day shouldn't be bankrupting the entire business and if it is you're doing something wrong.
Because a month's worth of coffee costs less than $10. And an avg coffee maker costs between $20 - $50. You can make 12 to 14 Cups of coffee for about 25 Cents. Why would you pay $8 for 1 cup. When you can make 5 of 6 mugs worth for like a quarter. $40 vs $0.25... Only an Idiot would open a coffee house and expect people to spend their life savings on something they get for free at home.
@@onestopfunstop317 Well, the point of the better equipment is to make a better end result. You're obviously satisfied with what you can get at home. That's great. Nothing wrong with home made coffee. Though the same logic of cost at home VS cost of takeaway/dine-in could also be applied to the majority of dishes available at any restaurant. It's all more expensive at a cafe or restaurant
Because people want coffee where they are, like near their job, or they want to have that coffee with a friend. They're not just paying for the coffee but for the location, convenience, and experience.
Robot labourers are going to change business profitability. Imagine paying $20,000 once-off for a staff member that only costs maintenance thereafter. Coming in the next 5 years.
Yeah but u don't have the right to repair. Now u r a slave to the people selling the robot labourers. They will make sure u only get meager reduction in costs to justify their existence and will never let u see get any meaningful profits.
Lol, labor and rent were the two expenses that made my head spin while drawing up a cafe business plan. I ended up scrapping the idea because the initial capital required to get it off the ground with a realistic runway was waaaay out of my budget. But, it’s good to know that my biggest concerns were justified.
im lucky to know the owners of the 2 best coffee shops in my town personaly(they somehow both ended up in my public DnD group). and they both only make it because they sell the best cookies and cake in town. there is just no money in coffee and you need alot of family members to exploit to keep a shop running.
Good on you for doing the required analysis up front and taking a sober look! Many a failed business have never done this before committing resources...
That used to be $6.50 but now 650 yen is only $4.33, as bad as inflation is in North America, at least we have strong currency, thanks to JPOW and J. Yellen.
Opening a café has a dangerously low threshhold of entry. The trouble is that even a café owner who knows what he is doing can fail if some amateur decides to blow his life savings with a café right next door.
@@chrisschwanger8248 A foolish business owner can effectively subsidize their product with their life savings until they fold, driving down prices for everyone in the process.
@@IVIRnathanreillyWhile that's true, it's also missing the forest for the trees. It may be the case nobody is entitled to business. But the concept of a business has to be viable for there to be anyone willing to stick with it long term. You can have the absolute best paperclips in the world, you can sell them at stellar prices, but you'll never manage to make a business out of that if you open up a storefront trying to sell only paperclips. Similarly, it doesn't matter if your little boutique grocery store is great or not, if a Walmart is build right next to you and the construction blocks all traffic to your store. You can be the best on the planet and you'll still go out of business. That's the point the original comment was making. Cafe's are so beholden to uncontrollable and unmanageable risk that the ones that provide great service and great product and are doing everything right can and will fail constantly. The incentive for a well developed, experienced business to continue running isn't really there because of the slim profit margins and the risks of operation.
A new shop only results in one week downturn before it goes back to normal. If you're that close to collapse a single amateur opening up next door causes you to fail, you were already reliant on never having a bad week. If it doesn't pick back up then it's more than likely your own product and service that's lacking. Established shops that get into danger of failing typically have a history of never investing in shop upkeep until after it's too late, terrible management decisions and/or acting bitter/aggressive towards customers. You can't blame someone moving in next door if you stop putting vigor into your work.
People see cafes as busy and therefore "a licence to print money" in part because there are certain times of day (e.g. early morning, mid-afternoon) when many people come in at the same time, and by definition that's when most people actually observe the activity level. They don't see the long periods when there's almost nobody coming to the counter. You can't really roster people out for those 1-2 hour gaps, so they have to be covered by the busy periods. I suspect a lot of people starting a coffee shop see those peak periods and forget that the business isn't always that busy.
When I was a kid a lot of the parents of my school mates had businesses (butcher , hardware etc…) and all of them owned their premises and half of them were living above or at the back of their premises so basically there was not rent to pay in both uses. None of them setup their businesses, they all get it from their parents who get it from their grand parents etc …and the business model they use was producing very little growth but it was very safe , secure and steady . They were also all couples running them , usually the husband was running the operation side and the wife the admin side . Very simple organisation.
So what you are saying is, the key to becoming wealthy is to start off inheriting money. Thanks for that masterclass of advice. I don't know what we would have done without you. In the meantime us peasants are going to have to figure out this edge case of making money when you are not born into wealth.
@@LividImp What I am saying is that you need to lower your costs to its minimum when you begin and not trying to expand quickly and being in debt. Best way to start is a market stall or being in a vehicle (ie food truck ) so you have no rent . It will give you the flexibility to see if your idea can work and quickly move its location . Then if one day you want to settle buy your premises like you would buy your home as it is an investment for when you will retire you can rent it out . Also the good thing about doing this is that you will never be in shopping malls which are complete scams in terms of everything (rents , opening hours , running fees etc ….) .
I would add a 4th item. The buildout cost. I have seen many small cafes fail when they spend so much on furniture and art and fancy displays that they simply cannot ever get to even.
Very true!!! I used to be a co manager/owner with a mate of mine with a cafe (a few years back) and the money specs are often missed by owners. After we began tracking our sales, spreadsheets etc things got much better. This was in Brisbane in the mid noughties decade. Yes we learnt a lot.
Basic math. Even if you sell a coffee for an insane $5 a cup you don't have the volume. If it takes someone 2 minutes to make and serve a coffee that means they can at a maximum sell 30 per hour. That's $150/hr. Then you subtract high minimum wage, expenses, and taxes. You're losing money, so you hire more people to try and bring in more per hour. Still will only barely break even
This is the most helpful and simple to understand explanation of the true costs, expectations, suggestions, and realities of running a business I have ever seen. Thank you SO much!
former coffee shop exec here from Seattle...thing is, if youre in business, you better be selling more items outside coffee or youre going to work the shop yourself and just feeding it back into your workers (if you can afford it) and lease. YOU MUST sell beer, serve food, pastries, etc. IF YOU WANT YOUR SHOP TO SURVIVE AND FOR YOU TO MAKE A PROFIT. Plus, most people dont place their shop in a high traffic location WHICH CAN KILL YOU ...then there are others who dont take the profits they DO get and re-invest it into their shop to get better gear, ambiance, MARKETING and other items to help the shop grow. Another expense most people dont realize when opening a shop is all the permits you need to get before opening, from Dept.of Health, the Labor Board (if youre hiring), food licenses, food service delivery contracts (unless you get those items yourself from Costco or a food services store) and more... Then you need plumbers and electricians to get your espresso machines, coolers, fridges, etc on-line before you open also. It's alot and you can easily spend $80-100k + (USD) just to open the doors. And dont let the city/county find issues when they inspect your shop before you open. Because if they have any issues and you need to fix stuff it can set you back months past your launch date and even more thousands of dollars out your pocket. Its almost easier taking over a shop that closed than starting one from scratch
Yeah this drives me crazy. The ccafe downstairs from my apartment doesn't much food. They would literally double what I normally spend if I could grab a snack or light meal.
There are websites that have data on car traffic, foot traffic, visibility from street, etc. Anyone opening up a shop should definitely be using those tools to pick a key location.
What I can’t fathom is the fact that there is a lot of poor to average coffee around. Often it’s only lukewarm and the major taste is the sprinkled chocolate. And don’t get me started regarding the serving of teabag tea, which is a disgrace. Re staffing, I always see baristas run off their feet in busy cafes, which results in long waits for takeaway coffee. They can’t afford extra staff so it is a fact of life.
Cool video. As a CPA with over 30 years experience in the manufacturing industry, your video is on point. You have to know your cost structure, either Fixed, Variable or COGS to know what's financially going on with your company. I do agree. Each and every Item needs to have a COGS attached to it.
Well done. An eight minute video rather than a half hour video that would say the same thing. Might even subscribe though I'm not interested in coffee. Fun fact: in the USA, around 5 out of 6 restaurants fail.
This video feels so close to finished. It feels like we're missing an exercise in fixing a budget at the end. I'd love to see a before/after and the steps to get there.
I don't care what your #s say. I don't feel bad for coffee shops charging $5-9 for coffee. Take out dumb californina labor laws & everyone else should be doing fine.😊😊
@@coffeebusinessbasics or they just think they can make enough money to afford a $80,000pa rent. Not realising that they need to make min $33,000 in gross revenue each week before they even have a chance of making a reasonable profit. The reality is that Cafes need prime real estate to work, but can't afford to pay prime real estate rents...
Most arent fully utilizing the space they rent. Coffee sales and maybe brunch/lunch from 6am to 2pm. Still paying rent for rest of day with little to no sales.
If you only use EBTIDA then you don’t get a clear picture of the business . Capital expenditures which usually means debt ie interest can kill a business that generates low cash flow. Thus ebitda is only 1/2 the story the other is capital expenditures.
1:18 My guy just explained EBITDA clearer than any university! After years, I know so many people who can't wrap their head around it because it was tied to a black and white balance sheet ❤
Labor in The service sector, like coffee shops has always been a little bit tricky. Post COVID, it costs a lot more to attract and keep people, even more to keep people from calling off, and even more to keep staff who are willing to work extra on busy days.
One thing no one ever seems to touch on is the effect of criminality. Coffee Shop 'A' might be VERY well- managed. Coffee Shop 'B" is poorly managed, but charges less. Why? They have a side hustle - selling drugs, laundering money, arranging "dates", etc. THOSE are VERY profitable (but illegal) businesses which allow 'B' to continue to exist even tough it technically loses money. And undercut 'a''s prices until eventually 'A' fails.
The most important prerequisite to all of this is making sure you actually keep track, accurately, of your expenses. So many businesses don’t realize the importance of tracking the cost of even seemingly minute inconsequential things, but they add up over time and can really eat into your profits.
A coffee store doesn't sell coffee but service and ambiance. When a customer enters the store, our goal is to sell as many services, not just coffee but croissant, pie, juices, you name it
If everyone else in the area is selling at $5 and you want to double it to $10, you’d better have the best coffee anyone’s ever tasted if you want repeat customers
Coffee is an impulse discretionary purchase. If customers are themselves feeling economically pinched, $10 lattes will be one of the first things to go.
Interestingly naive...narrowed down to gross profit, Labor, & Rent. How many franchisees get creamed by unreasonable franchisor costs/rules. Internal pirates in charge! I mean, why should they behave instead of wildly profit?
$1.20 for the coffee grounds for one cup? Those coffee shops are getting ripped off, especially since they are buying low mid-tier coffee at best. Buy a single lb of mid midtier coffee from your average grocer, $0.20 tops. Ice, almost free. Milk $5 a gallon tops, $0.20 tops. If your spending more than $0.80 for a cup you should close shop and invest somewhere else.
Rent. Its the people who own the land who make all the money, with no work, and minimal risk. Until we tax wealth vs income, that's the way it's going to be.
cafes, like restaurants, are pretty much a surefire way to lose money... the likelihood of having a profitable business is less than 5%. if you're thinking about it... simply don't! perhaps work part time at one to get this itch scratched... but it's no ride in the park looking at monthly losses.
@@kenichi407 Selling horrible food in an efficient way is not well run... Also yeah stuff can happen, your restanraunt can be hit my a meteor and burn down or your cook gets eaten by catterpillers., Just sell good food with good service and you will be fine...
I got a latte once, it took 12 minutes and tasted like weak Ovaltine. Cost $4.75 or something. You should be able to make better coffee than what a lazy cheap bachelor can do at home with a $4 Melita cone, $5 bag beans, and McDonald's napkin as the filter.
I have no interest in starting a coffee business but wanted to say this thumbnail is incredible. Though i do love business, amazing visual that made me click. As im listening to the vid, this is a great vid too.
What a shock You mean to say those 10 Lycra clad cyclists sitting there for a whole hour with just a single cappuccino each isn’t making the cafe a fortune?
When the landlord sees a busy storefront, he makes the same ignorant assumption made by employees that the owner is getting rich and then raises the rent. The average business within these United States makes only 5% in net profit (50,000 for every 1,000,000 in gross sales), out of which must be deducted things such as interest on loans and income taxes. The owner is lucky to see 3% of gross sales as the actual profit he gets to put in his own pocket. Yes, kids, only about 30,000 in realized profit remains of every 1,000,000 in gross sales. Any restaurant operation can be quickly estimated at 1/3 to labor, 1/3 to material, and 1/3 to gross profit. Out of that last third, all other expenses must be paid, such as rent, utilities, insurance, and everything else that landlords and employees never consider. There is little room for increases in the cost of wages or materials, or for a poorly performing hired manager to fail at controlling waste in purchased materials or scheduled labor. Bankruptcy is always sniffing at the heels of a business like a pack of hungry wolves.
AcKsHuAlLy it's called the "Statement of Financial Performance," not "Profit and Loss." Jokes aside. Fantastic video and in my 10 years business experience, non-financially planning owbers are the death of small businesses. Its always margins or cashflow issues.
This incomplete analysis only considers the direct cost of goods and IGNORES all the other expenses: rent salaries insurance electricity operating cost and most important, Capital amortization. Direct cost by itself is only a fraction of your expenses. Not sure this guy is an experienced shop owner. Any kind, not only coffee shops..
The business is highly profitable. if you own the building and you can get people to work for very low money. yes, these sound like the cornerstones of the American food market.
Caffe owners: its labor and rent bro, theyre so greedy 😢 Workers and landlors: dont worry let me just give away my value for free so you can live your dream of owning a coffee shop 😂
In the US Starbucks does well because a) name recognition and most importantly b) Drive-Thru windows. I've seen constant drive-thru business, especially on the weekends.
Yeah name recognition is huge. When on a business trip recently, I needed a place to do some work on my laptop. So I searched for the nearest Starbucks because I knew they would have wifi. This even though I have all the beverages at Starbucks. Everything tastes fake and gross.
It's not profitable once you consider overhead, tools/machines, labor etc. And how many cups or coffee you truly selling per day? Couple hundred? 500? That's only like $2k gross profit per day before accounting for any other expenses. How you gonna survive on that?
@Coffee Business Basics, Could you do a video about the digital creators who have a cup of coffee or two and hang out in the coffee chop for long periods, taking up the best places? What do you do when you've got one person sitting at a larger table with a laptop and work papers all across the table, and space is limited for others looking for a seat to enjoy their coffee? Thanks Jim
Hi, thanks for that tip. I hadn't thought of it like that. I just see some of the coffee chains where the staff aren't that bothered about some people taking up tables for long periods after buying a coffee. I'd you are looking at the cost of rent per square metre and x meters is occupied each day by digital nomads it might be hard to make the shop pay.
We actually rented out to a coffee shop. Our rent is lower then the average, but a coffee shop still struggles, with often late payments. Lease revenue is not important for my parents, so they give very generous terms. But still, the shop is struggeling: competition is really strong, and after expences and labor the profit margins are razor thin 😢
Have to add my experience (lol) as an extremely attractive guy, the chicks would return relentlessly. When I told them I was leaving to another shop they followed me. The owner was ecstatic and gave me more than one raise...
Great video. But if the seller isn't working out all of their costs and profits on everything they sell, then they are bonkers. Generally, you aren't selling a million products in a coffee shop so it is easy to work out this for each one. Also have to factor in waste-end of the day leftovers and coffees that didn't work and were returned. That needs to be included. Then there are new competitors that suddenly change your turnover, and the list goes on. I have worked out why I would never own a business. I would work out the profit and loss and decide from the start that it won't work. Life is too short...
not knowing the numbers is not just a problem for coffee shops but also to some small-medium self-built businesses... its something that some people that didnt go to a business degree or have a business family background would miss even if they attend some entrepreneurial seminar. they would know about it, but for some, its importance would fly over their heads... for some, they would try to compute for the numbers, compute what their prices should really be, see what competitors are charging, gets confuse on how low the competitors are charging, then assume that numbers they computed are wrong and would just copy the prices of the competitors not knowing that their competitors also got the numbers wrong. because of course, if the prices should be higher, then how come the competitors are doing business on those low prices? then everybody just copy-paste the prices around each other. no one is doing the proper computation, everyone is sinking and its just a matter of when the next shop closes.
The business can not make profit but they are in business for love of the profession and friends and educate children because we always put in more money than get paid with electron credit card or paper money
Labor costs are nothing, renting the space is usually the problem. Any employee you hire is going to pay for themselves, assuming you get any kind of reasonable customer flow. To lose on employees, you'd need to have a bunch of employees sitting around doing nothing.
I am told that Costa (a truly massive coffee chain in the UK) actually pay about about 10% of the cost of goods going stated here: literally pennies for a cup of coffee (which they sell for £3-£4) Seems I’ve been misinformed !
Costa is owned by Coca-Cola and has a highly vertically integrated supply chain, so you would expect their numbers to be radically different to a single shop or small chain.
@@GoldenDragoon yeah but an order of magnitude is an economy of scale on a whole new ….scale. I did not know they were owned by Coke and just thought they were a UK juggernaut !
I appreciate the content. But the fact is even in our market (not Australia), the rent is astronomically high for good spot. No way it's only take 10% of sales. Mine is about 30%
Most people ignore expenses - rent,renovation,supplies,waste,utilities,labor,insurance,depreciation,repairs,etc. - and don't forget to pay taxes on what's left. Small business seems to be be a write off or money laundering front for the wealthy - can't survive on the profit margin
Years ago, when I found out that coffee is the second most traded thing on the stock market, I’ve been wanting to open up my own café! I always thought coffee is like fishing with dynamite, because people can make it at home, but they choose to buy it when they’re out of the house. After watching this video, I realize I was out to lunch. I think a little coffee booth with one person running it is the right idea. I’ve seen those before, rent is like $1000 or $1200 a month.
@@lurekayaklrf because….. it’s a popular product that people are consuming, so I would assume there’s money to be made with coffee. However this is something I’m looking to debate a stranger about, If you feel that I’m wrong, I accept that!
@@LordDockerton that sounds fine, don’t understand what that has to do with anything that I said. I see a popular product, and feel like I could make money off of it, simply because a lot of people are purchasing it. But I think in simple terms of supply and demand.
This explains why ALL the coffee spots in my city of 600K keep closing down! Not one of them can stay open, then another one takes over, on and on and on. I never understood what was going on.
There’s a fast food place in place of a classic ‘Corner Shop’ near me: it gets ripped apart and reopened by new people almost every year or two. I think over the last 20 years I can remember 10 different chippies / pizza / Chinese places there - no idea why people don’t realise it’s got 0 passing traffic and never works
@@intruder313It's heartbreaking to see these locations that seem to exist just to separate people from their life savings.
@@DJ_Force A fool and their money are easily parted.
@DJ_Force worker got fed communist propaganda telling business is easy to run than labor. Business risks rarely understood by average people
@@IVIRnathanreilly
I think it’s “A fool and HIS money are soon parted.”
Rent is the killer. If you don't own the place, you're basically running your business for the landlord. If it's running well, the rent will keep increasing, eventually to the point it will drive you out of business.
So true landlords are the real killers of the economy and local businesses. Landlords are always rich and always will be for this reason
Yeap. The only people I know who make decent money with a coffee shop own their location, their parents own it, or they have a coffee truck/wagon/thing. Except for one guy who was one the ground(lol) floor of a hipster food court and got a 25 year fixed rent agreement.
Why not just rent it out and save the hassle?
Especially in the USA as of 2010's.
yeah the best would be is to buy a building and have someone else run the coffee business.
We all have different capitals my dude
The business to be in is renting out property to coffee shops and the like.
What was that first software that you showed before Excel?
This video is spot on.
You mean people are bad at maths?
No. Bad at thinking outside the square, and keeping their finger on the pulse, and calculus.
More like most people don’t the math to start with.
@@W1LLi4m_ Or don't the read n rite aye.
No way it costs $1+ for a shop to brew a cup of coffee. More like .15-20 cents for a plain coffee.
The big cost that kills these places is all the free coffee, that their employees drink, and give away to their friends on the side for free.
It's the cost of cup and lid that bring the number up that high.
@wb5mgr
Assuming they're making at or near minimum wage a couple bucks worth of free coffee a day shouldn't be bankrupting the entire business and if it is you're doing something wrong.
Because a month's worth of coffee costs less than $10.
And an avg coffee maker costs between $20 - $50.
You can make 12 to 14 Cups of coffee for about 25 Cents.
Why would you pay $8 for 1 cup. When you can make 5 of 6 mugs worth for like a quarter.
$40 vs $0.25...
Only an Idiot would open a coffee house and expect people to spend their life savings on something they get for free at home.
The coffee maker doesn’t cost anywhere near $20-50 for restaurant quality, and it needs maintenance every 6 months.
@@emberguard5009 .. I guess Restaurant Quality Hot Water is Completely Different from everyone else's Hot Water.
@@onestopfunstop317 Well, the point of the better equipment is to make a better end result. You're obviously satisfied with what you can get at home. That's great. Nothing wrong with home made coffee.
Though the same logic of cost at home VS cost of takeaway/dine-in could also be applied to the majority of dishes available at any restaurant. It's all more expensive at a cafe or restaurant
Because people want coffee where they are, like near their job, or they want to have that coffee with a friend. They're not just paying for the coffee but for the location, convenience, and experience.
Imagine thinking people spend time in a coffee shop for the coffee. 😂🤣😂
Robot labourers are going to change business profitability. Imagine paying $20,000 once-off for a staff member that only costs maintenance thereafter. Coming in the next 5 years.
Yeah but u don't have the right to repair. Now u r a slave to the people selling the robot labourers. They will make sure u only get meager reduction in costs to justify their existence and will never let u see get any meaningful profits.
Companies suppling the robots will move to a subscription model very quickly to milk more money out of businesses.
Would you want to buy your coffee from a machine?
@@1zzyp as an introvert, yes
Coffee machines already exist though???
Great Video! But do you have a course? 🤌
Lol, labor and rent were the two expenses that made my head spin while drawing up a cafe business plan. I ended up scrapping the idea because the initial capital required to get it off the ground with a realistic runway was waaaay out of my budget. But, it’s good to know that my biggest concerns were justified.
im lucky to know the owners of the 2 best coffee shops in my town personaly(they somehow both ended up in my public DnD group). and they both only make it because they sell the best cookies and cake in town. there is just no money in coffee and you need alot of family members to exploit to keep a shop running.
Good on you for doing the required analysis up front and taking a sober look! Many a failed business have never done this before committing resources...
In Tokyo , many of the cool
Coffee lounges turn into bars after 5pm.
Most of bean drinks start at 650 yen and up
That used to be $6.50 but now 650 yen is only $4.33, as bad as inflation is in North America, at least we have strong currency, thanks to JPOW and J. Yellen.
@@ianglenn2821 true.
I don’t even think about it.
Trunk Bar is amazing in Harajuku
Opening a café has a dangerously low threshhold of entry.
The trouble is that even a café owner who knows what he is doing can fail if some amateur decides to blow his life savings with a café right next door.
The amateur can become a pro, that's how business works.
@@chrisschwanger8248 A foolish business owner can effectively subsidize their product with their life savings until they fold, driving down prices for everyone in the process.
@@chrisschwanger8248 Yup, you aren't entitled to business. It's about overcoming challenges and adapting.
@@IVIRnathanreillyWhile that's true, it's also missing the forest for the trees. It may be the case nobody is entitled to business. But the concept of a business has to be viable for there to be anyone willing to stick with it long term. You can have the absolute best paperclips in the world, you can sell them at stellar prices, but you'll never manage to make a business out of that if you open up a storefront trying to sell only paperclips. Similarly, it doesn't matter if your little boutique grocery store is great or not, if a Walmart is build right next to you and the construction blocks all traffic to your store. You can be the best on the planet and you'll still go out of business.
That's the point the original comment was making. Cafe's are so beholden to uncontrollable and unmanageable risk that the ones that provide great service and great product and are doing everything right can and will fail constantly. The incentive for a well developed, experienced business to continue running isn't really there because of the slim profit margins and the risks of operation.
A new shop only results in one week downturn before it goes back to normal. If you're that close to collapse a single amateur opening up next door causes you to fail, you were already reliant on never having a bad week.
If it doesn't pick back up then it's more than likely your own product and service that's lacking.
Established shops that get into danger of failing typically have a history of never investing in shop upkeep until after it's too late, terrible management decisions and/or acting bitter/aggressive towards customers. You can't blame someone moving in next door if you stop putting vigor into your work.
People see cafes as busy and therefore "a licence to print money" in part because there are certain times of day (e.g. early morning, mid-afternoon) when many people come in at the same time, and by definition that's when most people actually observe the activity level. They don't see the long periods when there's almost nobody coming to the counter. You can't really roster people out for those 1-2 hour gaps, so they have to be covered by the busy periods.
I suspect a lot of people starting a coffee shop see those peak periods and forget that the business isn't always that busy.
When I was a kid a lot of the parents of my school mates had businesses (butcher , hardware etc…) and all of them owned their premises and half of them were living above or at the back of their premises so basically there was not rent to pay in both uses.
None of them setup their businesses, they all get it from their parents who get it from their grand parents etc …and the business model they use was producing very little growth but it was very safe , secure and steady . They were also all couples running them , usually the husband was running the operation side and the wife the admin side . Very simple organisation.
So what you are saying is, the key to becoming wealthy is to start off inheriting money.
Thanks for that masterclass of advice. I don't know what we would have done without you.
In the meantime us peasants are going to have to figure out this edge case of making money when you are not born into wealth.
@@LividImp What I am saying is that you need to lower your costs to its minimum when you begin and not trying to expand quickly and being in debt.
Best way to start is a market stall or being in a vehicle (ie food truck ) so you have no rent . It will give you the flexibility to see if your idea can work and quickly move its location . Then if one day you want to settle buy your premises like you would buy your home as it is an investment for when you will retire you can rent it out .
Also the good thing about doing this is that you will never be in shopping malls which are complete scams in terms of everything (rents , opening hours , running fees etc ….) .
@@kingk2405 Then you should have said that and you'd have got a thumbs up from me instead of snark.
And then someone invented a supermarket, doing 10 times more sales per worker. All stability instantly perished.
@@antontsau These shops in big cities are doing well because they sell stuff in a quality you cannot find in supermarkets.
I would add a 4th item. The buildout cost. I have seen many small cafes fail when they spend so much on furniture and art and fancy displays that they simply cannot ever get to even.
Very true!!! I used to be a co manager/owner with a mate of mine with a cafe (a few years back) and the money specs are often missed by owners. After we began tracking our sales, spreadsheets etc things got much better. This was in Brisbane in the mid noughties decade. Yes we learnt a lot.
Basic math. Even if you sell a coffee for an insane $5 a cup you don't have the volume. If it takes someone 2 minutes to make and serve a coffee that means they can at a maximum sell 30 per hour. That's $150/hr. Then you subtract high minimum wage, expenses, and taxes. You're losing money, so you hire more people to try and bring in more per hour. Still will only barely break even
This is the most helpful and simple to understand explanation of the true costs, expectations, suggestions, and realities of running a business I have ever seen. Thank you SO much!
Glad it was helpful!
agreed. this is amazing! @coffeebusinessbasics any chance you would be willing to share a template of the labour cost excel file?
Most don’t make money because coffee shops are a bad business model.
former coffee shop exec here from Seattle...thing is, if youre in business, you better be selling more items outside coffee or youre going to work the shop yourself and just feeding it back into your workers (if you can afford it) and lease. YOU MUST sell beer, serve food, pastries, etc. IF YOU WANT YOUR SHOP TO SURVIVE AND FOR YOU TO MAKE A PROFIT.
Plus, most people dont place their shop in a high traffic location WHICH CAN KILL YOU ...then there are others who dont take the profits they DO get and re-invest it into their shop to get better gear, ambiance, MARKETING and other items to help the shop grow. Another expense most people dont realize when opening a shop is all the permits you need to get before opening, from Dept.of Health, the Labor Board (if youre hiring), food licenses, food service delivery contracts (unless you get those items yourself from Costco or a food services store) and more...
Then you need plumbers and electricians to get your espresso machines, coolers, fridges, etc on-line before you open also. It's alot and you can easily spend $80-100k + (USD) just to open the doors. And dont let the city/county find issues when they inspect your shop before you open. Because if they have any issues and you need to fix stuff it can set you back months past your launch date and even more thousands of dollars out your pocket. Its almost easier taking over a shop that closed than starting one from scratch
Yeah this drives me crazy. The ccafe downstairs from my apartment doesn't much food. They would literally double what I normally spend if I could grab a snack or light meal.
There are websites that have data on car traffic, foot traffic, visibility from street, etc. Anyone opening up a shop should definitely be using those tools to pick a key location.
What I can’t fathom is the fact that there is a lot of poor to average coffee around. Often it’s only lukewarm and the major taste is the sprinkled chocolate. And don’t get me started regarding the serving of teabag tea, which is a disgrace. Re staffing, I always see baristas run off their feet in busy cafes, which results in long waits for takeaway coffee. They can’t afford extra staff so it is a fact of life.
Cool video.
As a CPA with over 30 years experience in the manufacturing industry, your video is on point.
You have to know your cost structure, either Fixed, Variable or COGS to know what's financially going on with your company.
I do agree.
Each and every Item needs to have a COGS attached to it.
Well done. An eight minute video rather than a half hour video that would say the same thing. Might even subscribe though I'm not interested in coffee. Fun fact: in the USA, around 5 out of 6 restaurants fail.
This video feels so close to finished. It feels like we're missing an exercise in fixing a budget at the end. I'd love to see a before/after and the steps to get there.
This is taught to 2nd year apprentice Chefs and you want the "plated cost" to be 33% all told, including labour...
How can we access the labour cost excel file?
I don't care what your #s say. I don't feel bad for coffee shops charging $5-9 for coffee. Take out dumb californina labor laws & everyone else should be doing fine.😊😊
I love coffee but only go to a cafe once or twice per year. Too expensive.
I work on a target of
so true, not enough people run the numbers before signing the lease.
@@coffeebusinessbasics or they just think they can make enough money to afford a $80,000pa rent. Not realising that they need to make min $33,000 in gross revenue each week before they even have a chance of making a reasonable profit. The reality is that Cafes need prime real estate to work, but can't afford to pay prime real estate rents...
Most arent fully utilizing the space they rent. Coffee sales and maybe brunch/lunch from 6am to 2pm. Still paying rent for rest of day with little to no sales.
If you only use EBTIDA then you don’t get a clear picture of the business . Capital expenditures which usually means debt ie interest can kill a business that generates low cash flow.
Thus ebitda is only 1/2 the story the other is capital expenditures.
1:18 My guy just explained EBITDA clearer than any university! After years, I know so many people who can't wrap their head around it because it was tied to a black and white balance sheet ❤
Labor in The service sector, like coffee shops has always been a little bit tricky. Post COVID, it costs a lot more to attract and keep people, even more to keep people from calling off, and even more to keep staff who are willing to work extra on busy days.
Very interesting video.
How much impact do people
Who hang around on their laptop for hours have on the profitability?
One thing no one ever seems to touch on is the effect of criminality.
Coffee Shop 'A' might be VERY well- managed.
Coffee Shop 'B" is poorly managed, but charges less. Why? They have a side hustle - selling drugs, laundering money, arranging "dates", etc. THOSE are VERY profitable (but illegal) businesses which allow 'B' to continue to exist even tough it technically loses money. And undercut 'a''s prices until eventually 'A' fails.
I’m not looking a getting into a coffee shop, but this is excellent information presented very well. Subscribed!✊
If your baristas are all smokin hot babes, you might be surprised how fast you hit your numbers.
The most important prerequisite to all of this is making sure you actually keep track, accurately, of your expenses. So many businesses don’t realize the importance of tracking the cost of even seemingly minute inconsequential things, but they add up over time and can really eat into your profits.
They don't make money because on all videos about money management, first advice is:cut expenses on ☕ coffee shops 😅
So basically, it's a shit business.
Prices are too low.... A independent coffee shop selling coffee for 5 bucks is headed for BK... They need to twice that.
A coffee store doesn't sell coffee but service and ambiance. When a customer enters the store, our goal is to sell as many services, not just coffee but croissant, pie, juices, you name it
If everyone else in the area is selling at $5 and you want to double it to $10, you’d better have the best coffee anyone’s ever tasted if you want repeat customers
Coffee is an impulse discretionary purchase. If customers are themselves feeling economically pinched, $10 lattes will be one of the first things to go.
Interestingly naive...narrowed down to gross profit, Labor, & Rent. How many franchisees get creamed by unreasonable franchisor costs/rules. Internal pirates in charge! I mean, why should they behave instead of wildly profit?
I was always under the impression that buying oneself a franchise was just buying oneself a job.
rent at 10%? ???? ROFL... rent is 30% most of the time.
10% is what you should aim for. If you have 30% occupancy cost, you’re doing something wrong.
30% is absolutely insane. For food businesses that level is structurally unprofitable
$1.20 for the coffee grounds for one cup? Those coffee shops are getting ripped off, especially since they are buying low mid-tier coffee at best. Buy a single lb of mid midtier coffee from your average grocer, $0.20 tops. Ice, almost free. Milk $5 a gallon tops, $0.20 tops. If your spending more than $0.80 for a cup you should close shop and invest somewhere else.
Not sure how Australian currency compares to US
Rent. Its the people who own the land who make all the money, with no work, and minimal risk. Until we tax wealth vs income, that's the way it's going to be.
Spoken like a progressive malcontent.
When you no longer have anyone to rent to you, enjoy your mom's couch. 🇨🇦
This envious mentality will keep you poor & miserable your whole life. Be grateful & hardworking instead and you will be successful.
I think two of the main reason many coffee shops fail to turn a profit is excessively high shop rentals and high wages, particularly in weekends
cafes, like restaurants, are pretty much a surefire way to lose money... the likelihood of having a profitable business is less than 5%. if you're thinking about it... simply don't! perhaps work part time at one to get this itch scratched... but it's no ride in the park looking at monthly losses.
You can lose money with a well run cafe, you cant with a restaurant....
@@nox5555 bold statement, as I've seen plenty of super efficiently run restaurants go out of business. too many factors beyond your control.
@@kenichi407 Selling horrible food in an efficient way is not well run...
Also yeah stuff can happen, your restanraunt can be hit my a meteor and burn down or your cook gets eaten by catterpillers.,
Just sell good food with good service and you will be fine...
Cost of goods sold will go up the more you sell, but rent generally doesn’t. Wages may or may not increase. So the goal is to increase sales.
Don’t underestimate the hidden costs of complexity in your offerings. Starbucks apparently is looking at this as well.
I got a latte once, it took 12 minutes and tasted like weak Ovaltine. Cost $4.75 or something. You should be able to make better coffee than what a lazy cheap bachelor can do at home with a $4 Melita cone, $5 bag beans, and McDonald's napkin as the filter.
I have no interest in starting a coffee business but wanted to say this thumbnail is incredible. Though i do love business, amazing visual that made me click. As im listening to the vid, this is a great vid too.
What a shock
You mean to say those 10 Lycra clad cyclists sitting there for a whole hour with just a single cappuccino each isn’t making the cafe a fortune?
When the landlord sees a busy storefront, he makes the same ignorant assumption made by employees that the owner is getting rich and then raises the rent. The average business within these United States makes only 5% in net profit (50,000 for every 1,000,000 in gross sales), out of which must be deducted things such as interest on loans and income taxes. The owner is lucky to see 3% of gross sales as the actual profit he gets to put in his own pocket. Yes, kids, only about 30,000 in realized profit remains of every 1,000,000 in gross sales.
Any restaurant operation can be quickly estimated at 1/3 to labor, 1/3 to material, and 1/3 to gross profit. Out of that last third, all other expenses must be paid, such as rent, utilities, insurance, and everything else that landlords and employees never consider.
There is little room for increases in the cost of wages or materials, or for a poorly performing hired manager to fail at controlling waste in purchased materials or scheduled labor. Bankruptcy is always sniffing at the heels of a business like a pack of hungry wolves.
AcKsHuAlLy it's called the "Statement of Financial Performance," not "Profit and Loss."
Jokes aside. Fantastic video and in my 10 years business experience, non-financially planning owbers are the death of small businesses. Its always margins or cashflow issues.
…..because most of them are money laundering operations, making a profit on coffee and croissants isn’t the priority. I’m (half) joking.
Most don’t know how to make a very good coffee here in Melbourne
Well I had a lousy bullshit coffee in Italy once! (Florence). Best coffee I have ever tasted is right here in NZ.
This incomplete analysis only considers the direct cost of goods and IGNORES all the other expenses: rent salaries insurance electricity operating cost and most important, Capital amortization. Direct cost by itself is only a fraction of your expenses. Not sure this guy is an experienced shop owner. Any kind, not only coffee shops..
The business is highly profitable. if you own the building and you can get people to work for very low money. yes, these sound like the cornerstones of the American food market.
Thank you for this great video. Those basics don’t just count for Cafés, they work for every food service business.
Caffe owners: its labor and rent bro, theyre so greedy 😢
Workers and landlors: dont worry let me just give away my value for free so you can live your dream of owning a coffee shop 😂
There didn't use to BE coffeeshops except in cities with lots of foot traffic. Now you know why.
It became popular to open coffee shops. People can get coffee at every convenience store, gas station, and most fast food place.
In the US Starbucks does well because a) name recognition and most importantly b) Drive-Thru windows. I've seen constant drive-thru business, especially on the weekends.
Starbucks is -18% stock value in the last 6 months, wtf r u talking
@sivasankar2784 stock value are pretty meaningless in the short term, especially when your company is making billions and you’re growing each year.
Yeah name recognition is huge. When on a business trip recently, I needed a place to do some work on my laptop. So I searched for the nearest Starbucks because I knew they would have wifi. This even though I have all the beverages at Starbucks. Everything tastes fake and gross.
Each store doesn’t have to make money, because the stock market subsidizes them.
I’m 15 years old this what learn in business class that I took 😂
I have a cafe for a year, rent is over 50% (crazy good location)
I still am not in profit yet but almost!
Net profit does not equal EBITDA....
They don't make money because they make coffee... Duh
the market is saturated! and the rents are too expensive...
thats it...
It's not profitable once you consider overhead, tools/machines, labor etc. And how many cups or coffee you truly selling per day? Couple hundred? 500? That's only like $2k gross profit per day before accounting for any other expenses. How you gonna survive on that?
Rent is too damn high and you have to pay rent even when no one is buying
This has to be a satire or troll video. What kind of business owner doesn't know per unit cost ?
Many more than you think.
@Coffee Business Basics, Could you do a video about the digital creators who have a cup of coffee or two and hang out in the coffee chop for long periods, taking up the best places? What do you do when you've got one person sitting at a larger table with a laptop and work papers all across the table, and space is limited for others looking for a seat to enjoy their coffee? Thanks Jim
Invite them to gtfo and not coming back.
You rent the tables. Like a coworking space.
Hi, thanks for that tip. I hadn't thought of it like that. I just see some of the coffee chains where the staff aren't that bothered about some people taking up tables for long periods after buying a coffee. I'd you are looking at the cost of rent per square metre and x meters is occupied each day by digital nomads it might be hard to make the shop pay.
Coffee shops in Amsterdam are profitable, though. :D
They figured out selling coffee isn’t profitable a long time ago.
We actually rented out to a coffee shop. Our rent is lower then the average, but a coffee shop still struggles, with often late payments. Lease revenue is not important for my parents, so they give very generous terms. But still, the shop is struggeling: competition is really strong, and after expences and labor the profit margins are razor thin 😢
Have to add my experience (lol) as an extremely attractive guy, the chicks would return relentlessly. When I told them I was leaving to another shop they followed me. The owner was ecstatic and gave me more than one raise...
Great video. But if the seller isn't working out all of their costs and profits on everything they sell, then they are bonkers. Generally, you aren't selling a million products in a coffee shop so it is easy to work out this for each one. Also have to factor in waste-end of the day leftovers and coffees that didn't work and were returned. That needs to be included. Then there are new competitors that suddenly change your turnover, and the list goes on. I have worked out why I would never own a business. I would work out the profit and loss and decide from the start that it won't work. Life is too short...
How can it be 1.24 for ingredients if beans cost $15/kg and milk in bulk is inexpensive?
not knowing the numbers is not just a problem for coffee shops but also to some small-medium self-built businesses...
its something that some people that didnt go to a business degree or have a business family background would miss even if they attend some entrepreneurial seminar.
they would know about it, but for some, its importance would fly over their heads...
for some, they would try to compute for the numbers, compute what their prices should really be, see what competitors are charging, gets confuse on how low the competitors are charging, then assume that numbers they computed are wrong and would just copy the prices of the competitors not knowing that their competitors also got the numbers wrong.
because of course, if the prices should be higher, then how come the competitors are doing business on those low prices?
then everybody just copy-paste the prices around each other.
no one is doing the proper computation, everyone is sinking and its just a matter of when the next shop closes.
$1.24 in ingredients for a 12 oz cup of jo? That sounds high, even in Australian dollars.
The business can not make profit but they are in business for love of the profession and friends and educate children because we always put in more money than get paid with electron credit card or paper money
Can I get a copy of that excel template?
Because most coffee shops make coffee.
Given the huge labour costs in Australia you'd have to be nuts to open a small business in Australia.
Labor costs are nothing, renting the space is usually the problem. Any employee you hire is going to pay for themselves, assuming you get any kind of reasonable customer flow. To lose on employees, you'd need to have a bunch of employees sitting around doing nothing.
Mostly because cafe owner "needs" that BMW 7 right away and let the others work on it.
Australian gst is 10% 😮
Canadian gst is 8% + provincial sales tax
In PEI these are combined as the harmonized sales tax (hst) @ 15%
Socialism is expensive. Canadians give over 50% of their income to the parasitic class.
rent is EXPENSIVE
It all boils down to FC + VC = TC and controlling costs vs revenue ratio.
I definitely agree about don’t post those sap stories about inflation.
I am told that Costa (a truly massive coffee chain in the UK) actually pay about about 10% of the cost of goods going stated here: literally pennies for a cup of coffee (which they sell for £3-£4)
Seems I’ve been misinformed !
Costa is owned by Coca-Cola and has a highly vertically integrated supply chain, so you would expect their numbers to be radically different to a single shop or small chain.
@@GoldenDragoon yeah but an order of magnitude is an economy of scale on a whole new ….scale.
I did not know they were owned by Coke and just thought they were a UK juggernaut !
Much success, health, happiness and blessings to all.
Have to be a good business person
I appreciate the content.
But the fact is even in our market (not Australia), the rent is astronomically high for good spot. No way it's only take 10% of sales. Mine is about 30%
first a coffee is not 1.20$ in ingredients...
LABOUR still the same in Canada.
Most coffee shops make coffee I think.
Yes ! But ?
of Course !
great video!
Most people ignore expenses - rent,renovation,supplies,waste,utilities,labor,insurance,depreciation,repairs,etc. - and don't forget to pay taxes on what's left. Small business seems to be be a write off or money laundering front for the wealthy - can't survive on the profit margin
Years ago, when I found out that coffee is the second most traded thing on the stock market, I’ve been wanting to open up my own café! I always thought coffee is like fishing with dynamite, because people can make it at home, but they choose to buy it when they’re out of the house. After watching this video, I realize I was out to lunch. I think a little coffee booth with one person running it is the right idea. I’ve seen those before, rent is like $1000 or $1200 a month.
Financial professional here. The liquidity of bulk dry commodity coffee beans and cafe profitability have absolutely nothing to do with each other.
I don’t get your connection with coffee on the stock market and running a cafe? There’s no relation.
@@lurekayaklrf because….. it’s a popular product that people are consuming, so I would assume there’s money to be made with coffee. However this is something I’m looking to debate a stranger about, If you feel that I’m wrong, I accept that!
@@LordDockerton that sounds fine, don’t understand what that has to do with anything that I said. I see a popular product, and feel like I could make money off of it, simply because a lot of people are purchasing it. But I think in simple terms of supply and demand.