Profit and Risk in the Coffee Shop Business

Profit and Risk in the Coffee Shop Business

While many people are drawn to the coffee business out of love for the bean, others are driven by the profit motive. A successful coffee business owner is both a lover of fine coffee and a person who recognizes the realities of business and how they affect profitability. Here’s a quick rundown on the risks and profit potential in each of the most popular types of coffee business.

Cafe

Cafes resemble restaurants more than they do typical coffee shops, and the risk profile for a cafe is similar to that of a small restaurant. Your startup costs are typically high — $75,000 to $195,000 depending on where you choose to locate, and the risk are high. According to a study conducted by Cornell University and Michigan State University, 50% of restaurant startups fail within three years.

Coffee Bar

Plan on putting up $45,000 to $125,000 to open a coffee bar, with the bulk of that going to purchasing high-end coffee equipment. The profitability profile for coffee bars is excellent — as long as you have a good location and little competition, you can expect to clear a healthy profit. Bottom line: coffee bars are relatively low risk, low cost and have a high profit potential.

Coffeehouses

Startup costs for a coffeehouse can run $95,000 to $275,000, according to Marybeth Harrison and Tom Matzen, who wrote “Start & Run a Coffee Bar.” The range of costs represents the differences you’ll find in rent, size and needed equipment. The profitability factor and chance for success depends so heavily on where you choose to locate and how well you market your business, that it’s hard to assign a risk potential. More than any other coffee business, success is largely a matter of what you put into it.

Retail Coffee Shop

Plan on putting up $55,000 to $125,000 to get a retail coffee shop off the ground, with a healthy portion of that devoted to inventory and rent. With the right location, you can do quite well, but everything depends on finding a location with good foot traffic.

Drive Thru

The cost of starting up a coffee drive thru business vary wildly, depending on size and location. A franchise drive-thru on a busy, sought-after traffic route can cost you up $300,000 in startup costs, but your success potential is proportionally higher than putting $55,000 into a coffee drive-thru that takes people even slightly out of their way.

If you’re looking for a business with a low startup cost, low risk and high profitability potential, a coffee cart is the way to go. At $30,000, the high end startup cost for a coffee cart is lower than the low end of every other type of coffee business. The biggest drawback of a coffee cart business is that you won’t build much equity in a coffee cart.

Roaster/Retailer

A coffee roasting/retailing business offers strong, long-term potential. With startup costs ranging from $95,000 to $225,000, it’s on the high end of the scale for investment costs, but the profit potential is high and the long-term prospects even higher.

Of course, the numbers are only one of the factors to consider when you’re trying to decide what type of coffee business to open. You should also take into account what Harrison and Matzen call the “fun factor” — how much will you enjoy running each type of business? How much work will each require? What will you get out of your business other than money? Explore all of your options, including franchises, before you make your decision and you’ll increase your chances of success enormously.