Withing rising energy and food costs, you may be wondering whether opening a coffee shop is still a profitable investment in 2023. We’re here to turn your dreams into a reality, and help you make a coffee shop more than just a profitable business idea.
It’s important to understand the costs involved and profit margins before heading into any investment, so let’s take a look at whether investing in the coffee shop sector is still worthwhile.
Costs of Opening a Coffee Shop
Whether you are looking at opening a small and intimate coffee shop with a few seats or a café, you will still need specialised coffee equipment and a building to serve from.
Consider the upfront costs to open the coffee shop business, along with the monthly overheads that you will need to take into account.
If you are a brand new business, it make sense to keep your coffee drinks menu small to begin with, and if you are offering food items, to keep the selection limited. This is so you can test which items on the menu are most popular, and get customer feedback to see what they want more of.
Doing this can avoid unnecessary costs buying equipment and food products that end up not being used. It also means your business model is more flexible in the beginning, so you can adapt to your customer base.
On average, startup costs for a new coffee shop tend to vary anywhere between £20,000 and £100,000 – this figure depends on the location, equipment and specification of the shop fitout.
Lease Costs
To open a successful coffee shop, you need to think about the location that you want to open and the size and space you will need from the shop. Are you looking for somewhere small and cosy in a little village, or do you want to open a bustling coffee shop business in the city centre?
The location that you choose, will have a direct impact on your monthly overheads. Think about who your target market is.
Choosing a location for an independent coffee shop is likely one of the bigger decisions that you will make in this business. Many people who are starting a new business are dictated by their budget. If you are struggling to afford the upfront costs and deposit in your ideal location, consider waiting a little longer to build up funds.
If you want to open a coffee shop in London, it will cost an average of £49.64 per square foot. These costs vary depending on which area of the UK you decide to open. On the other end of the spectrum, if you wanted to open a coffee shop in Blackpool, the lease would be an average of £12.45 per square foot.
Many coffee businesses start with a mobile set up, attending markets or temporarily taking over empty units. This can be a great way to build up capital and reach potential customers.
Forecasting Monthly Costs
Forecasting how much your monthly outgoings can be difficult, especially if this is your first bricks and mortar business.
Here are some of the costs that you are liable to pay on a monthly basis:
- Rent
- Business Rates (if applicable)
- Waste collection
- Insurance
- Energy bills
- Water bills
- Staff costs
- Accountancy fees (many offer a monthly payment schedule)
- Stock
If you have found a commercial space and you’re unsure whether you are liable to pay Business Rates on the unit, you can use the Business Rates Checker. If the property’s rateable value is less than £15,000 and you only have one property, you can claim small business relief.
If you are eligible to pay Business Rates, you may still be able to gain some discount. The government have launched Retail, Hospitality and Leisure Relief, ad if you’re eligible you could receive 75% off your Business Rates bills for the tax year 2023 to 2024 (1st April 2023 to 31st March 2024). Be aware that no government grants for the following year have been announced as of yet, so take that into consideration before signing a lease.
Try to keep rent and business rates to less than 15% of your projected sales to increase your chances of being profitable.
Typical Profit Margins for Coffee
The coffee industry has higher than average profit margins, so it’s no wonder why owning a coffee shop can turn into a very successful business.
The average mark up on coffee is 80%, but it can be higher or lower. If you are struggling with costings, this could be a good place to start. Work out how much it will cost you per cup to make, and add 80% to that figure.
It is more than the cost of the coffee and milk that you have to take into consideration. Think about staff costs, energy bills, rent charges etc.
The profit margin on your coffee can depend on lots of factors that go into pricing your coffee. It may not be right for your business to simply add 80%. Think about the following:
- What are you competitors charging?
- Will you add extra for alternative milks or different coffee blends?
- Is the cost reasonable for the area that you live in?
These things can affect your prices or your profit margins. If you are selling artisan coffee which would mean selling coffee’s for more than your competitors, think about whether you have the right target market for that product. Or, consider having it as an upsell option and not as the standard option.
Pricing can be difficult. If you set your prices too low, you are doing yourself a disservice. But set your prices too high, and you will fail to get customers through the door. Do some costings and market research for a clearer idea on what is appropriate to charge.
Paying Taxes
It can be confusing when it comes to paying tax. For example, coffee beans are 0% VAT-rated, yet when you sell them ground up as a hot drink, it is charged at the standard rate of 20%. If you sell an iced-coffee, it is 0% VAT-rated. See…we told you it was confusing!
Consider what else you will sell in your shop alongside coffee. For example, a cold croissant is 0% VAT-rated, but if you keep it warm in a heated cabinet, you will be charged the standard rate of 20% VAT. Keep this in mind when it comes to choosing what products you sell, you don’t want to be stung for it later down the line.
You can claim back a lot of VAT when you are buying equipment and stock, so remember to keep those receipts as it will help when your VAT-return is due.
You might be wondering whether you are eligible to pay VAT?
If your turnover is expected to be over £85k over a 12-month period, you need to register for VAT. Or, if you expect your turnover to exceed 85k within the next 30 days.
The amount of tax you pay can depend on how you set your business up. It is worth speaking to an accountant who can help you come up with a financial plan. Taxes are something that any successful business (like yours) will have to deal with.
When looking for an accountant, it may be helpful to speak to one who has had experience with independent coffee shops in the past to provide you with the best advice!
Unexpected Costs
Like with any business, there are guaranteed to be some unexpected costs pop up every now and again. Life is filled with both bad, and good, surprises!
As a coffee shop owner, you may have to pay for a coffee machine repair or replace an espresso machine. There might be stock increases that you weren’t expecting or increased staff wages to cover illnesses.
You cannot plan for every eventuality, but you can ensure that you are prepared. To do this, keep some cash reserves aside and, where you can, pay for regular services on your equipment to avoid them suddenly failing.
How to Increase Turnover
There are many ways that you can increase revenue when running a coffee shop. There are plenty of options outside of normal trading activities, such as:
- Trading at Festivals and Markets
- Holding Classes and special events
- Use premises as an event space to be hired out
- Pop-Ups
- Extend opening hours
- Add food items or alcohol to the menu
- If you have an upstairs or basement, you may be able to sub-lease the space
Try to get creative and take a look at where there’s gaps in the market that you may be able to fill. This can contribute to your monthly revenue and help your business be as profitable as possible.
To compete with coffee chains like Costa Coffee and Starbucks, you may decide to create a seasonal menu. Think Pumpkin Spice Latte’s in Autumn and Peppermint Mocha’s at Christmas time. Seasonal menu’s can be a great selling point, and it can offer variety to loyal customers who purchase from you every week.
Keeping Costs Low
Overheads and monthly outgoings are something that cannot be avoided, but you can try to keep them as low as possible to keep your profit margins healthy. Here are some examples how you can do this yourself:
- Negotiate your lease – this is usually the largest expense!
- Be smart with staffing levels
- Keep coffee and food menu small – crossing over ingredients where you can
- Negotiate costs with suppliers – often there is room to barter down the costs and don’t forget to shop around
- Pay yourself what you need to live – this isn’t music to everyone’s ears, but if you want to reduce outgoings, then you may have to look at the wage you pay yourself
- Look for grants to help with costs – speak to your local council and enquire about government grants
Take a look at your outgoings and see where you can cut costs where you can, especially if times are hard. When it comes to certain parts of your business, like staffing levels, it makes sense to review what hours staff work across the year. Some months of the year will naturally be busier than others, so this staffing levels and buying stock should be reduced in reaction to this.
Key Takeaways
- Coffee has huge profit margins – but negotiate with suppliers to get the best deal!
- Research which parts of your menu will be eligible for VAT, even if you are not VAT- registered yet, factor this into your costings so you don’t get stung down the line.
- Think about other ways that you can utilise your coffee shop space to get the maximum return on your investment.
- The coffee sector in the UK is still profitable, but be smart and keep overheads and monthly outgoings low.
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