You’ll need to do some homework. (But you knew that, right?)
There are a lot of people in coffee who’d like to make their own business a reality. A trend is bubbling up, one that might lead to more roaster-retailers opening in both hot and untapped cities in the years ahead—that is if potential business owners can raise capital and make their concepts work. But how did we get here, from Starbucks opening the market, to smaller roasters and retailers breaking into the business, then some of them growing by leaps and bounds into new cities, and now, back to a yearning among younger coffee folks for small roaster-retailer ownership?
A bit of backstory: People entered the coffee business maybe five or 10 years ago, starting out as baristas. They got hooked on coffee as a nuanced, exotic, versatile-yet-tricky beverage, one that has a huge capacity for teaching creativity, science and discipline all in one cup, and connects them with like-minded consumers. These hungry baristas moved on to barista competitions to show of their skills, became leaders as trainers of other baristas, and maybe traveled to origin to learn all they could about farming coffee. Some were also drawn to roasting, which only makes sense, as a coffee’s roast affects its taste as much or more than the brewing process.
So what’s a highly skilled, managerial-level, 10-year-veteran barista to do with all those skills and knowledge? Open a coffeehouse or roaster-retailer business, of course. Coffee’s allure, plus baristas who have seen their hometown employers grow and expand their businesses into other cities and even across the country, creates a pretty good case for, “Hey, I could do that.” And who can blame them? The chance to expand one’s skills (and income) is motivating.
If you are among these baristas who are eyeing a roaster-retailer future, you’ll need to find out, to the best of your ability, if your concept and location will actually bring you enough customers to keep you in business. The challenge is to prove the value of your plan to those who do not yet see it or appreciate its differentiation.
To find out if your business idea is a smart bet or a risky proposition, you’ll naturally need a solid business plan. Writing this plan, and learning about business finance in general, will be the first of a few upgrades to your current skill set. Anyone who has been down this path can tell you, it is a tough and enlightening voyage.
And if you want to attract investors or really impress the banks, you’ll do some serious due diligence in the form a feasibility study (which also feeds into your business plan). This invaluable tool evaluates the probability of success and risks associated with your prospective business. You’ll need to compare your unique value proposition (what you’re going to offer people that the competition down the street does not) with the attributes of your location, to come up with a financial forecast of your business. Typically, you’d hire a consultant to do this for you. The study should:
Start with a few site visits to inspect nuances of potential area locations, the local community, traffic and location barriers. keep in mind the proximity of the competition. Traffic counts, available through your state department of transportation, are the percentage of people who walk or drive by. Typically, around one percent of walkers will come into a business, and three percent of drivers will use a drive thru. In addition, know the three- and five-year plan for the area. Do not take the word of developers or anyone with a conflict of interest; honest insights about these matters is where consultants with proven experience pay off. A miss here is almost impossible to recover from. It may sound cheesy, but “location, location, location,” is a big factor in your success. It has a huge impact on your sales.
For the retail side: Determine the dominant demographics and lifestyle preferences in your area, which you’ll need to serve. Also, figure out the size of these demographic groups. This will help you write your menu, since we know the types of coffee drinks and other menu items each group tends to prefer. And if you know what drinks you’re serving, you’ll be better able to hone in on your average ticket price or average sales. Keep in mind what your target audience will prefer, resist making decisions based solely on your own preferences to start, especially if you don’t fall into the target demographic where your café will be located.
For wholesaling: Determine if there’s a need for your coffee at restaurants, coffeehouses and high-end grocers. What are these establishments currently paying for good coffee? Can you compete with that and still make money? (Your unique value proposition comes into play here, too. Maybe you can sell more on quality and less on price, if your UVP is on target.) Wholesalers who choose to lure customers with free equipment and other bright, shiny objects may be masking a lack of coffee quality, so don’t try to play their game. Lead with coffee. If a potential customer isn’t a match for your product, or they don’t see your expertise as enough of a value-ad, then move on.
Review your competition and how they serve the local market. There could be over-served and underserved concepts, which help identify any holes in the market. Figure out what makes other local coffee businesses unique, and compare these qualities to your concept. Consumers will make their own assessment soon enough, so try to be objective, and be sure your plan includes a refreshing customer experience. Once your shop is open and subject to public opinion, your reputation will likely stick. Focus on repeat sales built on relationships that will grow over time. This is also known as confidence in product.
Evaluate sales performance of other area coffee businesses versus national averages. Hint: tax liabilities for publicly-held companies are public record.
A feasibility study will give you the most accurate annual sales projections possible for your concept, which is huge because investors want to know what their return on investment will be. Their bottom line is: how much time will it take for you to pay them back? (See sidebar at the end of this post on paying back investors.)
As mentioned at the outset, your business plan will include important data from your feasibility study. It is the formal presentation of your business goals, the reasons you believe they are attainable, and your plan for making a profit. Done right, it can greatly improve your ability to establish and meet objectives in a way that best serve you, your employees, and your investors. Some common elements of business plans are listed here. The highlighted points are directly informed by from your feasibility study:
Assumptions and Explanations
Products and Services
Management and Ownership
Funds Required and Their Uses
Year 1 Sales and Profit Projections & Breakeven
Return on Investment Analysis
If you’re a coffee geek, like most everyone reading this magazine, and you’re ready to make your mark on the industry, get cracking on your homework. Your feasibility study and business plan go hand in hand, giving you confidence in your potential venture, helping you attract investors, and getting you on a clear, well-considered path that will keep you in business for the long haul.
A quick way to figure out when you’ll pay back investors: Take the monthly traffic count at your location, and determine the percentage of that traffic that is projected to walk into your shop. Multiply this percentage by what you’ve determined your average ticket will be, to get your projected retail sales for a month. Add your wholesale sales and then subtract your expenses. Your basic expenses are: cost of goods (in the 30-percent range), labor (low 30s), rent (maybe 12 percent), and administrative tasks (roughly three percent). Whatever is leftover, you can realistically pay to your investors.
Your operation will likely run at a loss for 12 to 18 months, so you’ll start paying back investors after this period. And once you start writing those checks, eliminate your debt to them as soon as possible. You don’t want to pay any more interest than you have to. You’ll also need at least a month of sales in the bank for your rainy day fund. Even if you have flood, fire and earthquake insurance, you’ll need money to stay open (say, by opening a cart outside your shop) while your business is being rebuilt. Investors often want to see that you have reserve funds. Banks may even require you to have three months of sales in the bank, to show that you’re not just making money and burning through it.