How to Start a Coffee Shop

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Quick Reference

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.

Business Overview

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 various 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 shop.

Industry Summary

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. 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.

Related Industries

Bakery
Doughnut Shop

 

Industry Trends

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 are 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 business, 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. If a store owner has worked in a fast-paced setting such as a fast-food restaurant, they’ll better understand the challenges they may face when opening their coffee shop.

Customer service skills. Owning and managing a coffee shop requires strong customer service skills. A coffee shop 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 an owner has, the more they can save money on marketing rather than hiring it.

Educational Resources

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

 

Costs to Start a Coffee Shop

Many factors affect the overall cost of starting 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 a POS system (Point of Sale system), coffee roasters, refrigerators, coffee grinders, blenders, coffee brewers, espresso machines, and dishwashers
  • Supplies such as plates, cups, napkins, and silverware
  • Inventory including coffee beans, tea, bottled drinks, syrups, and baked goods
  • Working capital for the first three to six months of payroll, rent, utilities, internet, etc.

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 coffee shop business plan.  Not only will a bank or investors 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.

Related:
How to write a business plan
Free sample business plans

Step 2: Form a Business Entity

A business entity (sometimes called a legal entity or business structure) 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 Limited Liability Company (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: Name the Business

Finding the perfect name for a business can be challenging. Not only does the name have to resonate with your customers, it also has to be available to use.

Related: Tips and ideas for naming a coffee shop

Step 4: Create a Menu

Your menu is a critical component of any coffee shop. It needs to be created early because, without it, you won’t know what equipment is needed, space requirements, inventory needs, etc.

A common mistake with new coffee shops is having too many choices. Keep it as simple as possible as too full of a menu increases the time a customer takes at the counter and increases the inventory expenses.

Product pricing needs to be evaluated as well to ensure profitability. You will want to be sure the ingredients cost no more than 30%-35% of the retail.

The menu design should also reflect the theme of your coffee shop and the right fonts and colors.

Step 5: Select your Location

Coffee shops can be located in a traditional storefront, coffee kiosk, or a mobile coffee cart.

The cost of leasing a building will vary according to the building’s size and neighborhood. A building lease in a retail location that receives heavy foot 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 6: 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 then visit periodically again for future inspections. If the store ever fails an inspection, you can lose your food service license.

Some of the general local, state, and federal registrations most coffee shops need include a sales tax permit, Employer Identification Number (EIN), and Occupancy Permit.

Related: Common business licenses, permits, and registrations by state

Step 7: 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. The borrower(s) will need to have good credit and personally invest 15-25% towards the total start-up costs to get a small business loan.

Related: Finding the money to start a business 

Step 8: Open a Business Bank Account

Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the income and expenses of the business.

Step 9: 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 when starting the business. Marketing costs will vary according to the activities being performed. Many coffee shops include social media, print advertising, sponsoring local events, and special in-store events in their marketing plans.

Pay attention to managing online reviews from sites like Yelp and Google Business.

Related: Low-cost ideas to market a new business

Step 10: Get Insurance

Most coffee shops will need several different types of insurance to fully protect the business and the business owners.

  • General liability insurance can help pay for expenses like medical bills or legal bills if a customer is ever injured while in the shop, such as burning 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 a fire or other event ever damages the property.
  • 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 if they’re ever injured while working.

Policy costs will vary according to many factors, such as the building’s value, the equipment’s cost, 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 11: Hire 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, health insurance contributions, unemployment insurance costs, and workman’s compensation insurance.

Related: Hiring your first employee

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.

The atmosphere is important in drawing customers into your shop and in getting them to stick around. Successful 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.

 

Resources
The Barista Guild
International Coffee Association
National Coffee Association
Roasters Guild
Specialty Coffee Association
Tea Association of the U.S.A.