The coffee industry is an exceptionally rewarding one. Starting a coffee shop of your own is a dream to a lot of people. Who doesn’t like coffee? (No friend of ours, we say!) In this article, we will be discussing the elephant in the room when people think about opening their own coffee shop. They oftentimes fail.
When starting a coffee shop, it’s most important to understand: Why do coffee shops fail and how can I be sure mine doesn’t?
The statistics for success rates when starting your own business are not the greatest, and “if it were easy, everyone would be doing it!” In general, an average of 80% of all new businesses fail within the first two year of being open. More specifically, in the restaurant industry this failure rate climbs to 95%.
There hasn’t been much data collected within the specialty coffee industry, but we would have to assume with the simplicity of operations and lower start-up costs that the failure rate for these would be a bit less than that of restaurants. That means that this failure rate would fall between 80-95% and a large majority of those who enter the industry aren’t staying open beyond two years.
That’s why we’re here, to help you understand and calculate these risks so that you have a better understanding of them before entering into your specialty coffee business endeavors.
Why do Coffee Shops (oftentimes) Fail?
There are a number of reasons that could contribute to a coffee business failing. One of the main ones is simply lack of planning or starting a business on a whim. Owners rush out to open a coffee shop with little to no knowledge of the industry, the business they want to create, or the product they’ll be serving.
Without reading industry-related periodicals, attending educational trainings, or making meaningful connections in the coffee world, they feel ready to take on a business they know barely anything about!
Knowledge of the Coffee Industry
Educating yourself is one of the best things you can do to ensure your full preparation before starting a coffee business. Take advantage of any and all information you can get your hands on whether it be workshops, coffee-related books, magazines, or videos.
Go to coffee business seminars, barista workshops, and industry trade shows. (We recommend Coffee Fest – our company, Bellissimo Coffee Advisors, teaches a workshop on (successfully) starting a coffee business at each one). During this time you should be making detailed observations and notes about what you are learning and how it can be applied to your very own shop.
It can also be helpful to visit other coffee shop operations near you to observe their clientele, way of business, how busy their shop is, and what improvements you think could be made. It may also be helpful to consider working part-time at a coffee shop near you to gain hands-on experience and knowledge about how the shop works from the other side of the counter.
A thorough preparation could require six months to a year of research and planning, but it is important to realize that this investment of time will pay off in the end. If you have a busier lifestyle, this preparation stage may take even years of planning or it may be smart to hire a coffee industry consultant to help.
Impatience and Poor Decisions
Another common reason for failure, besides lack of information, is impatience and poor decisions. Too often you can get swept up in owning your dream coffee business and pull the trigger too fast because you just want to get started sooner.
Many times we see people making compromises on very important aspects of their business and, if they had waited a bit longer, might not have had to make those. We see this often when people are trying to find the perfect location. They might run into some problems trying to find that ideal location they had envisioned, but get frustrated when they don’t end up finding that exact location they had imagined.
This frustration leads to settling for a less than ideal or mediocre location which will be detrimental in the long run. The location itself can massively affect the business’s success and, by making a hasty decision, you could be setting yourself up for failure.
Money isn’t everything, but it is something when you are looking to build your coffee business from the ground up. Many people just don’t have enough money to open their doors and keep them open until the business can begin to pay itself off. This idea of under-capitalization is generally due to lack of planning and/or being unable to gather the right amount of money to get off the ground.
Breaking even and then making profit usually takes around nine months to one year to accomplish, if everything has gone smoothly in the beginning stages. Depending on what type of coffee business you’ve started, you may need around $25,000 upwards to $100,000 or more to keep your doors open. This range doesn’t include what amount was required of you to start the business itself.
Poor Management or Understanding of How to Manage Employees Correctly
Many businesses fail due to a lack of management skills. Without these, business owners may not know how to properly motivate and manage their employees which can cause all sorts of problems.
Business owners lacking this previous experience also sometimes have no clue how to track and analyze their business’s performance or how to implement long-term solutions to solve problems.
This can also lead to a lack of understanding of the importance of short- and long-term planning in moving their business forward. There’s a lot to manage and keep track of within a business; if you get too overwhelmed then there’s a good chance you can become overwhelmed and lose sight of the bigger picture: your business’s success.
Failure to Market
Sometimes businesses are able to do a good job at getting their doors open with the proper planning and capital reserves, but fail to complete another step post-opening day: marketing. They may have a working capital reserve, but this can run dry if you fail to properly market your business.
Diligent marketing will draw your target audience into your shop and maintain the appropriate amount of customers to make a profit. It is too easy to think, “Wow. I just opened this amazing store and I have a killer product, there’s no way people won’t come by to check it out.”
Maybe you will get lucky and this will happen naturally, but most business owners find that this “walk-by” customer base is simply not enough to keep their business afloat in the long run. It is very important to build a solid customer base to the point where it will debt service the business on a consistent basis to pay you and your employees a living wage. Each day you don’t market is a day of lost sales and your capital reserve will be one day closer to exhaustion.
Don’t Risk What you Can’t Afford to Lose
There’s one rule of thumb that we always try to tell people to abide by when they’re thinking of starting a coffee business: if you can’t afford to lose the money you’re planning to invest in your business, then you shouldn’t be risking it. The future is a large unknown, so using retirement money or a college fund to put towards your business is not always the best idea.
By no means should this sound discouraging, but rather a warning to be smart about the amount of money and means by which you are investing. You should be risking the amount of money that you’d be comfortable losing without that leading to your total financial ruin.
If your dream coffee shop is going to cost you $250,000 and that’s the total amount of money you have to your name, then you shouldn’t be risking that money! If you can’t find a happy medium between investing too much and not enough, we suggest a few options:
Consider a Lesser Business Concept
Less doesn’t always mean bad! A smaller concept can be just as lucrative and, if it fits better into your budget, then that will always be the option we advise. For example, if a “sit down” coffee bar would cost you around $350,000 and you can’t afford that investment, then maybe consider a $125,000 drive-thru coffee stand, a $50,000 coffee kiosk, or a $25,000 coffee cart.
There has not seemed to be a positive correlation between how much money you invest in your business and how much profit you’ll gain from it. There’s been single location coffee carts that bring in six figure annual incomes, showing that the size of your operation doesn’t always mean you’ll make a significantly less amount of profit.
Obviously, you never want to go into starting a business being satisfied with losing thousands of dollars if it were to fail, but a $25,000 loss is much more survivable than $350,000.
Get an Investor
An alternative to funding your coffee business with solely your own money is to supplement that with someone else’s money. It is important that you are aware of your financial limitations and don’t force yourself into a situation where you’re determined to do it all by yourself even when you don’t have the money to do so.
If funding your business on your own buck will certainly put you under, you need to find investors. To do this, become your business’s promoter. Collect friends and those in your community who believe in your vision and want to help see your business through whether that’s financially or marketing it to others who are able to contribute.
Any help is well worth it to your final product if you continue to promote your dream and find others who want to partner with you to help you succeed.
In whatever coffee business you’re deciding to open, it is vital that you’re honest with yourself about the reality of low success rates in the food-service industry. Those who think they’re the exception to this statistic are usually the first ones to fail. Take time to do the proper planning and decision making with all aspects of your future business. The more informed you are about the risks, the better off you will be in the long run and your business is more likely to succeed as a result.