Last Updated on May 11, 2020
Are you one of those who can’t get through their day without a few cups of good coffee or tea? Do your friends love that you can make the perfect coffee, latte, or cappuccino? If you’d like to put your love of coffees and teas to work, starting a coffee shop could be a rewarding business venture.
Coffee shops sell a variety of beverages, including hot and iced coffees, teas, and bottled drinks. Some coffee shops branch out into offering espressos, lattes, cappuccinos, and smoothies. Many shops also offer a variety of foods, including breads, donuts, cookies, and other sweets that pair well with their drinks.
Besides these ready-to-consume options, some coffee shops sell coffee beans, supplies like mugs and coffeemakers, and other take-home items. Many shops offer in-house seating, but coffee shops can also exist as drive-through-only options where customers never enter the interior of the shop.
The Allegra World Coffee Portal’s 2019 Project Cafe USA Report revealed that in 2018, the United States coffee shop industry grew to a $45.4 billion valuation. This was a 3.8 percent growth across 12 months, and at the time the report was written, there were 35,616 coffee stores throughout the country. According to the National Coffee Data Trends (NCDT), 63% of American Adults drink coffee daily.
The report predicted the industry would continue to grow by 2.8 percent across the next five years, with approximately 40,800 stores being in existence by 2023. High staff turnover is likely to continue to be an issue in the industry.
Coffee giants like Starbucks and Dunkin Donuts hold a major share of the market, and according to First Research, the eight largest coffee companies bring in about 70 percent of the industry’s annual revenue. However, smaller stores can compete by offering specialty items and a personal customer service experience. Other competitors to coffee shops include convenience stores, fast-food restaurants, donut shops, and gas stations.
According to Single Platform, there are over 150 million daily coffee drinkers in the United States, and the average coffee drinker consumes three cups of coffee each day. Adding to the income potential for shop owners, Americans are drinking more expensive coffee than they previously did. The ready-to-drink market of bottled, boxed, and canned coffees is growing, and cold brew coffee has become a hit, particularly with millennials.
Specialty coffee shops also continue to evolve. Cat cafes have recently become a big hit, allowing customers to interact with coffee shop cats. These cats are often on loan from local shelters, and cat cafes can help to facilitate adoptions. When planning to open a cat cafe, local health ordinances can be difficult, and most cafes separate the cat area from the dining area for food safety issues.
Who is the target market for your coffee shop?
The target market for coffee shops can vary depending on their specialization and marketing. Most coffee shops target adult coffee drinkers, but a shop offering more expensive specialty coffees will target a different market than your average coffee shop.
Skills, experience, and education useful in running a coffee shop
There’s no need to have a business degree to open a coffee shop, but the following skills and experiences will be helpful.
Coffee appreciation and knowledge. Knowledge of the coffee industry and an appreciation of the drink will help any store owner to select and stock their store with quality products. Experience working in the food service industry is also valuable, and if a store owner has worked in a fast-paced setting such as a fast-food restaurant, they’ll be better able to understand the challenges that they may face when opening their coffee shop.
Customer service skills. Owning and managing a coffee shop requires strong customer service skills. An owner who understands how to provide customers with a positive experience and who can make things right when orders are wrong can build up a faithful customer base. A great owner and manager will also need to teach these same customer service skills to staff.
Management experience. Any coffee shop will need multiple employees, so previous management experience is helpful. An owner will need to interview, hire, and train staff, maintain work schedules, and provide staff with feedback and support.
Marketing skills. Any coffee shop will require marketing, especially during its startup phase. The more marketing skills that an owner has, the more they can save money on marketing, rather than hiring it out.
Costs to Start a Coffee Shop
Many factors affect the overall cost to start a coffee shop. Budget operations that are drive-through-only facilities will cost less to open, while full coffee shops or cafes complete with seating areas can cost much more, especially if they’re located in favored retail areas. Plan to budget between a minimum of $50,000 and $150,000 to start a coffee shop.
Common startup costs for a coffee shop include:
- The purchase and renovation of a building (if you don’t plan on renting)
- Tables and chairs for seating
- Equipment such as coffee grinders, coffee brewers, and dishwashers
- Supplies such as plates, cups, and silverware
- Inventory including coffee, tea, bottled drinks, and baked goods
Steps to Starting a Coffee Shop
Step 1. Write your Business Plan
After coming up with the idea, the next step in starting your business should be to write a business plan. Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.
Step 2. Form a Business Entity
A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from which include the sole proprietorship, partnership, corporation and LLC. Each type of entity has its own pros and cons such as liability exposure, costs and administrative requirements.
Related: Comparison of Business Entities
Step 3. Select your Location
The cost of leasing a building will vary according to the building’s size and location. A building lease in a retail location that receives heavy traffic will command higher lease fees, but the walk-in traffic that a store gets may justify the higher price.
Related: Choosing a business location
Step 4. Apply for Business Licenses and Permits
To serve food, you will need to have a food service license from your local health department. Fees for this license can range from $100 to $1,000, and a few different license types are available, including a mobile and temporary license. The health department will visit the store when first approving the license, and will then visit periodically again for future inspections. If the store ever fails an inspection, you can lose your food service license.
Some of the common local, state and federal registrations most coffee shops need include a sales tax permit, Employer Identification Number, and Occupancy Permit among others.
Step 5. Find Financing
Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a coffee shop is another. Funding to start a coffee shop business can be difficult. In order to get a loan, the borrower(s) will need to have good credit and be able invest 15-25% of their money towards the total start-up costs.
Step 6. Get your Marketing Plan in Place
Marketing a coffee shop is often an ongoing task, but it’s particularly important to have a good marketing plan in place when starting the business. Marketing costs will vary according to the activities being performed. Many coffee shops include social media, print advertising, and special in-store events in their marketing plans.
Pay attention to managing online reviews from sites like Yelp and Google Business.
Step 7. Get Insurance
Most coffee shops will need several different types of insurance in order to fully protect the business and its owner.
- General liability insurance can help to pay for expenses like medical bills or legal bills if a customer is ever injured while in the shop, such as if they burn themselves on a hot cup of coffee or trip and fall.
- Commercial property insurance helps to cover the cost of the store, its equipment, and its inventory if the property is ever damaged by a fire or other event.
- Workers comp insurance is a must-have for any shop with employees. It can cover costs such as an employee’s lost wages or medical bills in case they’re ever injured while working.
Policy costs will vary according to many factors, such as the value of the building, the cost of the equipment, and the number of employees on staff. To find the best policy, request quotes from multiple companies and compare the coverage offered. Don’t forget to factor in the difference in deductibles and coverage limits when determining which policy truly offers the best value and coverage.
Step 8. Hiring Employees
Even a small coffee shop will need a few employees. PayScale identifies the average salary for a coffee barista as $10.07 per hour or $23,740 per year. Besides budgeting for staff salaries, other employee-related expenses include paid time off, contributions to health insurance, unemployment insurance costs, and workman’s compensation insurance.
Related: Hiring your first employee
Every state has specific requirements and regulations when starting a business. Select your state below to find the guide to starting a business in your state.
How much can you potentially make owning a coffee shop?
A coffee shop’s income will vary according to its size, location, and the number of years that it’s been in business. Shops that are small to medium-sized can make as much as $60,000 to $170,000 each year. The amount of money that you’ll take home, yourself, will depend on product pricing and profits, the number of staff you have, and other business expenses.
Things to consider before starting a coffee shop
Identify what your shop will do differently than existing coffee stores. This could be something such as sourcing top-quality coffee for a specialty store, or coming up with a marketing draw, such as many owners of cat cafes have done. Also, keep an eye out for changes in consumer consumption as major coffee chains begin offering healthy options.
When opening a coffee shop, don’t be afraid to start small. Stores with less square footage bring lower leases, and it’s always possible to expand into a new space as the business grows.
Atmosphere is important in drawing customers into your shop and in getting them to stick around. Coffee shops tend to be areas where customers come to socialize, meet up with friends, or even meet with business partners. While creating a warm, welcoming space will take some additional money, this investment can be well worth it in drawing customers in. If you offer comfortable seating, free internet, and an enjoyable atmosphere, your coffee shop may quickly become the new hot spot in town.
Additionally, Amazon has several good books for starting a coffee shop such as:
From a Great Dream to Grand Opening: How to Start Your Very Own Coffee Shop (Free on Amazon Kindle Unlimited)
The Daily Grind: How to open and run a coffee shop that makes money (Free on Amazon Kindle Unlimited)
How To Start A Coffee Shop in 2020: How To Turn Your Passion Into A Profitable Business