If you have decided to open your own independent coffee shop, you are investing in a vehicle that may well deliver a significant return over time.
With cafe culture booming in the UK, last year saw brits spend a staggering 6.3 billion on takeaway coffee alone.
While these figures reflect well on a growth industry, this is also an extremely competitive marketplace that is deceptively complex and challenging.
Not only do major brands such as Starbucks, Caffe Nero and Costa control more than half of the market, for example, but almost four in ten coffee shops exist in non-specialist sectors and outlets such as pubs and hotels.
This means that the opportunity for independent chains is far smaller than it may initially appear, while marketing competition and the dominance of major players also contribute to a challenging sector.
Understanding the Key considerations when launching a Coffee Shop
If you love a challenge, this market remains extremely appealing as it offers the ideal balance between risk and reward.
The key is to minimise your risk from the outset, primarily by reducing costs and overheads without compromising on the quality of your value proposition as a brand.
The first stage to this process is understanding the costs associated with launching a coffee shop, and the amount of money that you will need to invest to become operational.
So let's explore the costs you will face when opening a coffee shop.
Your Fixed Coffee Shop Start-up Costs
Regardless of the nature of your brand or its philosophy, there are certain fundamental costs that must be met when launching a coffee shop.
These include a location from which to sell, which can cost anywhere between £12,000 and £250,000 depending on the precise type of unit that you choose to operate from.
From coffee carts to drive-through locations and permanent outlets in central regions with high footfall, it is imperative that you have a base from which to sell and distribute your products.
Aside from the cost of renting or procuring a retail unit (which should never exceed 15% of your projected sales), there are other costs that will require your attention.
These include basic beverage making and food production equipment, along with license agreements to drive compliance.
If you wish to serve hot food on the premises, for example, you will need an A3 Planning License that usually carries a high price premium (starting at a minimum of £5,000).
You will also need to pay for one or more cash registers (at £500 per unit) along with basic administration tools.
Similarly, you will also need to invest in recurring costs such as utilities, business rates, buildings insurance and the maintenance of both your premises and commerical coffee machines.
Some of these costs can quickly accumulate in a short space of time, so it is important to consider the type of establishment that you are able to operate so that you can produce accurate costings from the outset.
Food, Drink and Variable Costs
This also leads us on to variable costs, while will be influenced heavily by your business plan and the vision that you have for your model and retail outlet.
One of the most common variable costs revolves around staffing your coffee outlet, including salaries, payroll taxes, benefits and insurance liabilities.
These costs will be minimised or amplified depending on the type of outlet that you set-up, so this requires careful thought in line with your budget and growth projections.
As a general rule, however, even ambitious start-ups should never commit in excess of 35% of the sales revenue into staffing and recruitment.
Then we come to the staple of any thriving coffee shop, which of course is the food and drink that you will serve.
While these represent essential costs and components in any coffee outlet, they will vary hugely depending on the size, scope and scale of your start-up venture.
As a general rule, standard coffee shops would expect to spend between £5,000 and £7,000 on their initial inventory, enabling them to meet their operational needs without committing too much of their capital in stock.
This is a hard balance to achieve, but one that is crucial if you are to consolidate a start-up in its early months.
In addition to the staple ingredients for the drink and primary food items on your menu, you will also need to consider other variables.
These include the provision of cold snacks and treats that are marketed at the checkout, with a view to driving impulse purchases that compliment a specific beverage.
You may also want to sell cold drinks to diversify your product range, while cups and napkins will also need to be provided to customers.
The last two items will shift in high volume so you will need to invest heavily in these from the outset, with a spend of £500 likely to meet the early demands of trading.
How to Minimise these Expenses to create a cost-effective Coffee Shop
With a clear vision for your venture and an understanding of the cumulative expenses in mind, the next step is to focus on minimising these creating a cost-effective model.
Here are some ideas to help you in this endeavour, while also ensuring that you do not compromise on the quality of products or service: -
Start Small in a bid to Minimise Fixed Start-up costs
When it comes to fixed start-up costs, you may feel as though you have little choice but to take the plunge and make an initial financial commitment.
However, this is not necessarily the case, particularly if you are able to think creatively and have the patience to start small before scaling your business.
Modest start-ups may want to consider the recent innovations in the retail sector, which have seen the emergence of temporary stores and pop-up spaces throughout the UK.
From those located in existing stores to units based in busy shopping precincts, these outlets can be leased on flexible, monthly contracts meaning that they minimise your short-term investment.
They also enable you to sell products to generate additional capital and growth, while helping to establish your coffee brand among local consumers.
Similarly, it may be wise to refrain from investing in an A3 Planning License when you launch your start-up.
While you may want to sell hot food alongside your chosen beverages, this will not necessarily contribute heavily to your turnover and may even be considered as a luxury (particularly when you consider the cost of the license and the required equipment).
Given this and the limited space that you may have in your first retail unit, it may prove cost-effective to strip back your original menu and focus on beverages alongside simple, cold snacks.
Such an ethos has numerous benefits, particularly if you have the vision to scale your business as it experiences organic growth.
Not only does it enable you to prioritise quality over quantity and build a reputation for excellence, for example, but it also impacts positively on your bottom line profits.
This creates higher levels of disposable revenue, which can be gradually reinvested over time into the diversification, expansion and marketing of your venture.
Managing Variable Costs to your Advantage
As a general rule, variable costs such as food and beverage will be determined by the products that you buy, the containers that they are sold in and the nature of the items that are on your menu.
Let's say that a gallon of milk costs £3 per gallon, for example, which equates to approximately £0.02 pence per ounce.
If you then sell a latte with approximately nine ounces of milk per serving, you will incur an initial unit cost of £0.21 pence.
By performing similar measurements with espresso and coffee beans, you can determine a fixed cost for every beverage that you sell.
So, even the most intricate details of your menu will impact on cost, which is why operating a simple and stripped back choice of beverages will serve start-ups well.
This makes it far easier to create accurate costings from the outset, while helping you to identify the most cost-effective beverages.
You can then focus on tailoring recipes to create the highest possible quality of drink, driving higher sales and profits in the process.
In terms of other variable costs, a similar attention to detail can help you to operate profitably.
We have discussed procuring napkins and cups, for example, and while many believe that these items carry standard costs there are in fact subtle differences to consider.
Black napkins actually cost marginally more than white napkins, so you can make a significant saving by purchasing the latter in bulk.
The most important thing to consider here is your mind-set, as adopting this throughout the business will lead to cumulative savings and organic cost-cutting measures.
It can even be applied to marketing your brand and products, as taking the initiative to offer free samples to potential customers requires only a marginal financial sacrifice and can help to secure long-term custom.
The Last Word
With these points in mind, you can hopefully create a viable business plan for your coffee shop. Above all else, these steps should enable you to understand the potential start-up costs that relate to your chosen model, while identifying opportunities through which you can save money while maintaining quality.