Coffee is the black gold that powers up our mornings and fuels us through the day. As the second-highest sought-after beverage (with water being the first), the demand for coffee has grown by many folds in the past few years. This trend is expected to continue as the global coffee shop market is slated to touch a valuation of USD 237.6B by 2025!
Given the lucrative nature of the business, one may be keen on knowing the cost of starting a coffee shop. While there are many moving parts involved, let’s try to demystify the process of calculating the cost of starting a coffee shop, especially as a small business.
If you are thinking about starting a restaurant, read this How Much Does It Cost To Start a Restaurant?
Cost Components of Starting a Small Coffee Business
Before getting into the meat of the matter, here is a quick overview of the types of expenses involved in running a small coffee business:
- Startup Cost – This is the initial cost solely associated with the capital investment required to kickstart your business.
- Operational Costs – These correspond to the routine day-to-day or month-to-month expenses that are necessary to keep your small business in operation. Operational costs are broadly classified into two portions:
- Fixed Operational Costs – This value is mostly constant with frequency. It could include rent, salaries, and wages, taxes, insurance premiums, security payments, etc.
- Variable Operational Costs – Quite often, these are regular and recurring expenses related to consumable items like coffee beans, sugar sachets, tissues, etc. These are proportionate to the product and service you offer.
For simplicity’s sake, we will be focusing on the fixed components of the overall cost of starting a coffee shop.
Factors That Will Affect the Cost of Starting a Coffee Shop
The cost of starting a coffee shop primarily depends on your business plan. It answers critical questions like are you operating a mobile coffee food truck or running a cafe that offers seating? How diverse is your coffee selection? Do you also offer food? Are you taking over an existing small business or starting one from scratch?
Based on such questions, even the fixed elements, such as the startup cost, may vary depending on:
- Coffee shop concept
- Items on the menu
- Equipment and serving wares
- The physical location or online presence
- Branding and marketing costs
- Furniture and fixtures
- Labor costs
- Legal and administrative costs
- Point of Sale System and pos software
Calculating the Cost of Starting a Coffee Shop
The following is a step-by-step breakdown of the process of calculating the cost of starting a coffee shop:
Step 1: Formulate a Business Plan
Writing a formal business plan should be the first line of action to make cost predictions for your small coffee business. It will quantify the total financial liability, budget for fixed expenses, possible overheads, break-even point, and profitability trajectory – all of which will determine your ROI. It will help you track your expenses and ensure that you stick to the prescribed budgets. The business plan will also help you raise funds, if necessary.
Step 2: Determine Your Coffee Shop Concept
Now that you have successfully committed to the business in pen, you will have greater clarity on the business model according to which you will operate. View the concept from the customer’s perspective and identify the core elements that will translate into its success. Remember, for a small business to gain traction, it must resonate with the local community or target audience.
For example, you would not want a layout with copious seating space if your target customers are those picking up their coffee on their way to work!
Step 3: Decide Your Menu
While every business owner may want a rich and diverse menu, each item can accrue to the cost of starting a coffee shop. And before you know it, the unassuming add-ons in the menu could be the ultimate money-guzzlers that add cost-inefficiencies to how you operate your small business!
To prevent that from happening, put yourself in the shoes of your customers. Understand their preferences and price sensitivity to outline a menu that would appeal to them. Additionally, your menu also influences the raw material and equipment that you will have to purchase. This decision will impact the upfront capital cost, space required, installation and maintenance, and operation costs.
In a nutshell, the menu can have far-reaching effects on the cost of starting a coffee shop, so choose your menu wisely.
Step 4: List Out the Equipment Required
Equipment will account for a bulk of the startup costs. Even if you finance these expenses or lease out the equipment, you would still have to make monthly payments on them. Create a list of the coffee shop equipment that is an absolute necessity, and focus on them. Consider the cost of consumables as a component of equipment-related expenses, at least in the initial stages when you will be working on building an inventory.
A coffee shop POS system can be particularly handy in managing inventory. Based on the insights on the consumption patterns that you derive from it, you can make smarter decisions regarding the perishable or consumable items and later phase them out as variable expenses.
Just like your menu, you can expand on these capabilities at a later date.
Step 5: Find an Appropriate Location
While real estate carries enormous weight in the cost of starting a coffee shop, it also determines the expected footfall and the subsequent ROI. As a rule of thumb, your rental expenses should not exceed 15% of your annual sales.
Settle on square footage that accommodates your coffee shop concept while also factoring in the overall design and layout. You will have to pay for utilities, a security deposit, rent, maintenance fees, and other expenditures listed on your lease based on the property. Some commercial properties also demand a percentage of the gross sales.
Step 6: Factor in Your Legal and Administrative Costs
The legal and administrative costs may be nominal but important costs linked to setting up a formal business. Plan your budget as per your requirements, such as the cost of hiring a lawyer, setting up an LLC, obtaining permits and licenses, inspections, etc.
Step 7: Calculate Your Miscellaneous Startup Cost
By this point, you must have already accounted for the high-priority startup costs. However, you must also count other miscellaneous one-time costs, such as the cost for POS system, signage, interior designing, menu boards, furniture and fixtures, security system, website development, etc.
Step 8: Set Aside a Budget for Staff
If you plan on running a small coffee kiosk or a cart, you can pretty much manage your operations single-handedly. However, for a larger setup, you may have to hire servers and baristas. Apart from the hourly compensation, you will also have to extend certain benefits as mandated by the state, such as worker’s comp, medical leave, insurance, etc. Plus, hiring itself can contribute to the cost of starting a coffee shop.
Step 9: Carve Out the Marketing and Promotion Costs
Now that the skeleton of your business is all set and ready, you need to work on spreading the word and attracting a loyal clientele. Whether you go the digital route or market your business using leaflets – include these costs in your budget.
During the initial stages, the marketing will have to be more aggressive, which you can later curtail to 10% of your net revenue. Setting up a POS that integrates with your digital marketing tools can shave off some of the expenses related to marketing to existing customers.
Estimated Total Cost of Starting a Coffee Shop
As per the rough estimates of the individual expenses listed above, the cost of starting a coffee shop can range around:
- USD 80,000 to USD 300,000 for cafes with seating space.
- USD 80,000 to USD 200,000 for drive-thrus only.
- USD 80,000 to USD 300,000 for drive-thru and seating.
- USD 60,000 to USD 105,000 for coffee stands.
- USD 50,000 to USD 154,000 for a mobile coffee food truck.
Calculating the cost of starting a coffee shop is just the tip of the iceberg. You will also have to find ways to streamline and regulate these expenses, which will be possible after some amount of experimentation and trial and error.
Even though the minimum investment of USD 50,000 can be quite daunting, you get the opportunity of earning a significant profit margin with a high potential for returns.