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How to Start a Coffee Shop

Overview

How to Start a Coffee Shop

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 bread, 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.

Since coffee shops have saturated much of America, 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.

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 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 significant share of the market and independent coffee shops struggle competing against them. 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. Local health ordinances can be complicated when planning to open a cat cafe, and most cafes separate the cat area from the dining area for food safety issues.

Target Market

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.

Checklist for Starting a Coffee Shop

If you’re thinking about starting your own coffee shop, there are a few things you should keep in mind. Here is a checklist of the essentials to get started.

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

Step 2: Name the Business

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

Related: Tips and ideas for naming a coffee shop

Step 3: 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 Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a coffee shop, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay. The corporation can be a good choice because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

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 mobile coffee cart. The cost of leasing a building will vary according to the building’s size and neighborhood.

Considering the small cost per cup of coffee, having a location with high traffic and even a drive-through window is critical.

The atmosphere of a coffee shop is essential in drawing customers in and 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.

Related: Choosing a business location

Step 6: Apply for Business Licenses and Permits

You will need to have a food service license from your local health department to serve food. A few different license types are available, including mobile and temporary licenses, and fees can range from $10 to hundreds of dollars a year. The health department will visit the store when first approving the license and then periodically visit 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 business registrations most coffee shops need include a sales tax permit, Employer Identification Number (EIN), and Occupancy Permit.

Related: What licenses does a coffee shop need?

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.

If the cost of starting a coffee shop is out of your budget, consider starting with a coffee roasting business for a lower-cost startup option. Once you build up a consistent clientele, you can open your own coffee shop with a built-in customer base.

Related: Finding the money to start a business 

Step 8: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your 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.

Also, pay attention to managing online reviews from sites like Yelp and Google Business as many potential new customers will check ratings before trying a new business.

Related: Low-cost ideas to market a new business

Every business is going to need a logo. Make a professional logo in no time with the free Canvaa logo maker!

Step 10: Get Business Insurance

There are several types of small business insurance to consider when starting a coffee shop. A few of these include:
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

Labor will be the highest overhead cost, even for a small coffee shop business.

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

Step 12: Set up an Accounting System

Setting up an accounting system for your coffee shop is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost 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. In contrast, 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.

Some of the typical coffee shop startup costs include:
– The purchase and renovation of a building (if you don’t plan on renting)
– Tables and chairs for seating
– Coffee shop 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.

How profitable is 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. Small to medium-sized shops 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.

Are there grants to start a coffee shop?

It’s extremely rare to find a grant to start a coffee shop. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov and you can check on your state’s economic development office to see if they have any grants available.

What skills are needed to run 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 store owners select and stock their stores with quality products. Experience working in the foodservice 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 staff these same customer service skills.

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 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.

What is the NAICS code for a coffee shop?

The NAICS code for a coffee shop is 722515, which is classified under Snack and Nonalcoholic Beverage Bars.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code and how to find yours

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

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