Starting A Coffee Business
by Ed Arvidson
If you are considering starting your own retail Specialty Coffee Business, then there are multiple factors to consider and details to attend to in order to maximize your chances for success. In this article I'll be concentrating on how to develop your idea into an operating business, (how to position your business for success before you ever open your doors). I’ll address how to run that business and achieve profitability in my article next month, “How to add $1,000 to your coffee shop's bottom line.”
Most people begin planning their new coffee business based upon their "dream;" what they would ideally like to own. While this is a normal tendency, it may not be the most prudent way to start. Much time and energy can be wasted working on "your plan," when in reality, you may not be able to afford what you desire.
As a consultant, I've seen this happen many times over the past 20 years. Often, new entrepreneurs get swept away by their dream, and end up over-extending themselves financially, only to run out of money before they can open their doors for business. Those who do manage to get open are typically left with little or no operating capital. Because few businesses open on Monday and are profitable on Tuesday, having sufficient operating capital will be necessary to pay your bills, employees, and yourself, until the business can generate some profit.
How much capital can you raise?
Unless you have substantial personal capital to invest, you would be wise to begin your planning process by taking a trip to see your banker. Discuss the possibility of borrowing money to help fund your future business. Understand that lending institutions typically don't like to loan on food service businesses due to their high failure rate (95%). They are even less enthusiastic if it is your first business.
You will usually have to be willing (and able) to invest a good portion of the required money personally; typically 50% or more of the project cost, before the bank will even consider lending anything to you. Be aware that many times bankers may make it sound as if financing will be no problem during this initial inquiry, but when you come back to actually get the loan, their demeanor may change as if the first meeting had never occurred.
For this reason, when you first meet with them, let them know you want honest answers, and that you will be basing your business concept, planning, and assumptions upon what they are realistically willing to lend you.
What will it cost?
Because I have done financial projections for hundreds of coffee businesses, I can confidently provide you with a realistic range of costs for different coffee concepts. When determining the potential cost, many factors must be taken into consideration beyond the expenses for equipment, fixtures, furnishings, and contractor labor.
There will be expenses for professional services (lawyer, accountant, consultant, space designer, etc.), permits and inspections, small wares, beginning inventory, marketing, pre-opening labor, etc. You'll also need to set aside operating capital to pay bills, your employees, and yourself, until the business can become profitable. A good rule of thumb is to set aside 1/3 of the funds you have to work with as operating capital, and the remaining 2/3rds will be what you actually have to plan and open the business with. So, taking all of these factors into consideration, here are some typical costs (U.S. Dollars):
Espresso Bar/Coffee Shop: $300,000 to $450,000+
Espresso Drive-Thru: $150,000 to $250,000+
Espresso Kiosk: $75,000 to $150,000+
Espresso Cart: $30,000 to $50,000+
Understand that there is not a direct relationship between the cost of a concept, and the income it might potentially produce. One of the most lucrative operations I had ever seen was an espresso-cart that was located in the lobby of a large hospital in a metropolitan area. This business was generating over 1,000 transactions per day, and I estimated that annual sales must have been over 1.2 million dollars, with a bottom line profit probably falling between $250,000 and $400,000!
Creating a Business Plan
When you determine which concept you can afford and would like to develop, the next step will be to create a well thought out, detailed business plan. It is during this business planning process that you will begin to determine the menu items you'll serve, and the other business features you desire to include. Your business plan should consist of 2-parts, a presentation portion, and a financial portion.
A presentation plan should be 10 to 15 pages in length, and describe such things as the type of business you intend to create (cafe, drive-thru, cart, etc.), what you will be serving (sample menu), who your customers will be (your surrounding population to draw from), the state of the industry, why consumers will choose you over your competitors, how you'll market your business, and any experience you possess that might contribute to your success.
This plan should include high quality graphics, and must look professional! If your business plan doesn't look professional, then why would anyone who is looking at it assume that anything else you do, will be done in a professional manner?
The second part of the business plan is the financial projections. This should include detailed information about start-up costs, professional services, and 3 years of projected business performance.
To estimate possible future business performance, you will need to project an average purchase per customer, and the number of expected customers that will visit your business each day, showing growth month by month and then eventually topping-out. You will need to estimate a realistic cost of goods for your menu, and all your other operational expenses. From this info, monthly financial projections can be created to determine the possible loss or profit that should be expected from the business. It will be critical to set aside a capital reserve to cover any projected monthly losses, so that your business can keep operating as you strive for profitability. Being under-capitalized is the number-one reason I've seen people fail in this business!
Need help putting together realistic financial projections and a stellar business plan? See my business plan creation services at: http://www.coffeebizconsultant.com/financialplanning-businessplan-storedesign-employeetraining.php
It will be during this financial planning process, that you will determine whether all the items and features that you plan on including will be possible with the capital you have available. If you decide to eliminate menu items or features due to budgetary constraints, be sure to analyze the financial impact of eliminating those items before doing so.
Your financial plan should be combined with the presentation plan for distribution to potential lenders and investors. Property managers or leasing agents should only be given the presentation plan. There is no need to show property managers your financial projections, and doing so would probably not be advantageous to you when negotiating a lease.
Securing your financing
After your business plan has been completed, it will be time to revisit your banker to secure your financing. You don't want to actually execute the loan at this point in time, but you do want to get a written commitment for funding. Try to structure the loan as a line of credit if you can, in this way you can draw the money as it is needed, (as opposed to taking out the entire loan up front, and having to make payments on the full amount).
Your banker may be hesitant to approve the loan at this time, because you won't be able to tell them where your business will be located yet, and "location" will be an important factor contributing to your potential success. If this is the case, see if they will be willing to give you conditional pre-approval, with final approval being dependent upon their acceptance of the location(s) you are considering. You will want to make sure that you have secured the funds necessary to develop your project, before you sign a lease on a location!
Finding a location
When you have your financing arranged, then and only then will you be ready to look for a location for your business. Keep in mind that coffee is typically an impulse buy. This means you need to find a location where a large number of people work, reside, or pass by on a daily basis. Locations adjacent to, or in large office buildings, hospitals, college campuses, industrial or business parks, airports, commuter train stations, performing arts centers, sports stadiums, large resorts, shopping malls, and condominium complexes, can all be prime!
Your location should also be highly visible, and easy to access. If your business isn't highly visible, if its hard to find or tucked away in the back of a shopping center, then consumers might not see it. If they don't know you exist, then they won't come into your store to purchase your products. Equally important is ease of access. If consumers can see your business, but it is difficult to get to or has no parking, then once again limited sales will be the result.
Negotiating an advantageous lease
A great location with a bad lease is not a great location! You may find a truly great location, but if the lease rate and terms are not conducive to your financial model, then agreeing to that lease may predestine your business to fail.
The challenge becomes disconnecting your feelings from the process, so that you will make decisions based upon good business sense, and not emotions. Understanding how the lease rate and terms might affect your chances for success is critical. In many cases, break-even monthly business volume will occur around 10 to 15 times the monthly lease rate. Therefore, paying $3,000 a month for a space may require $30,000 to $45,000 a month in sales to debt service the business; $6,000 a month may require $60,000 to $90,000 in sales.
Divide the projected monthly sales that might be needed by 30, and you will see what will be required in sales each day. Divide that daily sales amount by your projected average customer transactions, and you'll now understand how many customers you must attract daily. This is a critical number for you to understand and consider as you select a potential location. If the rent factor on a location you are considering will require 300 customer transactions per day to generate the necessary income to debt service your business, you won't want to accept a location that only has the potential to generate 150 transactions!
A location's potential to attract customers, needs to be considered in order to understand if the location and lease amount will make sense. In other words, a location that cost $10,000 a month to lease might make sense if it will generate 1,000 transactions per day. Conversely, a location that only costs $1,000 a month to lease may not make sense if it only has the potential to attract 50 customers a day!
The terms of the lease can be as important as the rate. Most commercial leases are structured as a 5-year commitment, with an option to renew for 5 more. If your lender will allow it, you may want to try to structure the first term of the lease into smaller time increments, with YOUR option to renew. This will provide you with some opportunities to close or move your business if things don’t work out as planned, without still being responsible for the monthly lease payments.
You'll always want to secure the option to renew your lease for a second 5-year term. I advise my clients to not even consider a 5-year lease without an option to renew for 5 more. If you do not have a renewal option, two unpleasant things might happen when your lease expires. First, if you have developed a successful business, and do not have the rate pre negotiated beyond the first lease period, I can almost guarantee that your lease rate will go up after that first term has expired; perhaps significantly. Second, and worse yet, the property manager may decide to not grant you another term. In this case, you may have to close or move your business.
One final thought on lease negotiations: never sign a lease without having your professional team (attorney, accountant, consultant, etc.) review it first.
Design, Layout, and Equipment Selection
As soon as you have a signed lease on a space for your coffee business, developing construction plans for bureaucratic approval will come next. Warning: do not spend any money on a space designer until you do have a signed lease!
The design stage will be where the physical means and procedures required to prepare your menu items will be determined and developed. It is also when the other business features you desire to include need to be taken into consideration, and worked into the design.
You'll need to start making decisions about the equipment you will purchase at this time as well. As plans are created for your future coffee shop, equipment and fixtures will have to be included on those plans, and specified by manufacturer and model number. Knowing which equipment you will be using will be essential to the design process, because equipment dimensions, and electrical and plumbing requirements will all need to be known, before a space design can be completed. Also, your local bureaucracy will most likely want to see the manufacturer’s specification sheets for the equipment you are considering, to make sure it meets UL and NSF (National Sanitation Foundation) requirements.
When your plans have been approved by your bureaucracy, you should then put your list of needed equipment out for bid with several coffee and food service equipment companies. When you find the companies you want to purchase from, inquire as to the lead-time required for delivery, and place your order coordinating the arrival of your equipment to coincide with the completion of construction. Some equipment may take as long as six weeks to receive, so be sure to place your order early enough to insure for timely delivery and installation, before you begin employee training.
While I do not have the space within this article to go into all the factors associated with good design and its' importance, check out my article, "Designing a Specialty Coffee Shop” for detailed information.
Obtaining Bureaucratic Approval and Selecting Your Contractor
Once you, your coffee shop space designer and architect have come to a consensus on a design and layout, you will need to submit your proposed remodeling drawings to the appropriate local bureaucracies for approval. Upon receiving approval, also secure and purchase your building permit.
At this same time, you should be distributing sets of your plans to a number of reputable, local construction companies or general contractors to obtain some bids for your project's construction needs. You'll want to select contractors who are large enough to have dependable network of subcontractors for such things as electrical, plumbing, flooring, HVAC, and custom cabinetry. An established firm will have associations with these other construction professionals, saving you the hassle of trying to find and qualify them on your own.
Finding a contractor with previous experience in building or remodeling commercial food service businesses can also be a real advantage. There are many special requirements and construction techniques that need to be understood when working on a commercial food service business. Someone with experience in these matters will have a greater idea of what's involved, and will be less likely to make costly and timely mistakes.
The final decision about the contractor you will use should be based upon a combination of factors, including: price, past experience, availability, references, a physical inspection of other work they've done, their network of subcontractors, etc. Be sure that the general contractor you select is licensed, insured &/or bonded, and will handle all needed permits and inspections.
Finalizing Your Menu, Product and Vendor Selections, and Creating your Office
If you are remodeling an existing space for your future coffee business, the process will typically take about 6 to 8 weeks once construction has begun. During this period you will have a lot of things to decide, create, and complete prior to your business opening, so don't waste this time!
While menu planning actually began way back with the first thoughts of your business, and developed through the business planning and design phase, now is when you must solidify all of your menu offerings on paper, with descriptions and prices, so that a sign company can be contracted to create your menu boards. It may take a sign company a month or more to fabricate your menu boards, so start early, you must have menu boards to open for business!
As you create your menu offerings, you will also need to create recipes for each item, and from those recipes calculate your exact cost for each, (once you have products prices from all your future purveyors). This will be essential information for menu pricing, and for monitoring actual monthly food production performance against an "ideal."
The prices you ask for your menu items must be a calculation between what competitors in your market are charging, and what the actual cost of the item will be, based upon your recipes and the cost of the ingredients you will use. If you underprice your menu items, your cost of goods will be high, and profitability will be difficult to achieve. If you set your prices too high, you'll leave consumers with options and justification to look for places with lower-priced products.
While knowing the cost for every item you will be serving is essential, a quick way of setting some prices is to simply take the prices that Starbuck’s is charging, and back off a nickel or a dime. This will leave you with good gross margins, and provide you with a slight price advantage as well.
Next, you will need to determine the vendors you will be purchasing your products from, and open an account with each of them. Create order sheets for each one of your future suppliers, listing all the products you will be purchasing from them, along with other important info like the case/pack size, and current price. This paper tool will be essential for analyzing the amount of each item you are using weekly, and will allow you to order to meet anticipated needs.
Beyond paper controls for ordering, you'll need to develop tools for receiving product, recording vendor purchases and payments, recording sales, taking month-end inventories, budgeting and recording labor, creating month-end financial statements, just to name a few. You will want to have all your office forms and systems developed before you open for business. It will be difficult to find the time to develop these things if you wait until after you open.
Interviewing, Hiring, and Training Employees
When you get to about 3-weeks prior to your projected opening date, you will need to place "help wanted" ads, interview, hire, and train your employees.
Determine your tentative staffing needs by defining how many employees will be required to staff your store at various levels of business volume. For example, on a busy morning you may require 2-cashiers, 2-baristas, a person to bus tables, and perhaps a cook if you are serving made-to-order food. But, during a slow afternoon period, you may only require a cashier and barista, or perhaps someone who can take on both functions.
While there will be no way to know exactly how many people might be needed until you actually open for business, the key is to hire enough people to cover any potential staffing needs. You (the owner) want to avoid having to take on an hourly-employee job function because you are under-staffed. Always remember, you need to be the "captain of your ship," and not the "deckhand!"
As you hire individuals, write down when they are available to work on a piece of schedule paper, along with info such as how many hours a week they are willing to work. When you finish a day of interviewing and hiring, you can see how close you are to being fully staffed by trying to piece together an employee schedule with the people you have hired thus far. If you can't fill all the shifts shown on your schedule, you'll need to keep hiring people until you can. When you have hired enough employees to cover all the shifts on your weekly schedule, hire about 25% more employees.
It is not uncommon to have one of your new-hires not show up for the very first day of training! And undoubtedly, it will become all too apparent that some of the other people you hired may not work out as well. Take it from me, you are much better off to have a few more people than you actually need, than to find yourself a few short. If you don't have extra employees, and one leaves, or you have to let one go, guess who gets to work their shift? You do! And, there will be no relief from that responsibility until you interview, hire, and train a replacement. So my advice, over hire by 25% or more!
About 3 or 4 days before you open, you will need to bring in (and pay) all your employees for several days of education and training. You would be wise to break down your training into different components, and to create a training checklist for each. This will allow you to systematically teach your current and future employees the same knowledge and skills each time, and will ensure that you are covering everything they need to know. Training checklists might cover the following areas:
• General company philosophy and policies/job descriptions
• Safety, sanitation, and security
• Customer service principals and procedures
• Suggestive selling, up selling, and promoting
• Cash register operations/policies
• Espresso extraction and milk steaming fundamentals
• Hot drink preparation (including brewed coffee, tea, etc.)
• Iced and blended drink preparation
• Food preparation and service
• "Front of the House" Maintenance
• Understanding the retail merchandise you have for sale
• Dishwashing, equipment maintenance, and end of day
cleaning
Once your employees have had a chance to get some practice at their craft, split your employees into a couple of groups, and conduct a mock service by having one group work behind the counter, and the other group act as customers. They should take turns playing "customers" and "workers," and practice taking orders, ringing them up on the cash register (in a practice mode), and making the beverages.
Last Minute Tasks
You will need to place all opening orders for consumable products, and coordinate the delivery of most items, to occur within 3 to 5 days before your opening (but after your final health inspection prior to opening).
You will probably find yourself with a few days between when you finish hiring your new employees, and when their training will begin. Ask your new employees if they would be willing to come in and work (you will pay them) to help clean and ready the place for opening. When construction has been completed, a thorough cleaning of the entire store will be necessary. Counter tops, inside cabinets, floors, light fixtures and windows will all have to be cleaned to remove construction dust and residues. Also, storage racks may need to be set up, furniture assembled, refrigerators wiped out, and equipment turned-on, tested, and calibrated. Arriving food and paper products will need to be opened and stored in their proper places. New food storage containers, coffee bar tools, and other small wares will need to be washed before they can be used. Use your new employees to help with all of these tasks, and you will save yourself from significant anxiety and exhausting, dirty work!
Make sure you and your contractor review a list of all needed final inspections, permits, and licenses, and schedule the completion of all of those to determine when you might be ready to open to the public.
Finally, think about holding an invitational grand opening an evening or two before you will open to the public. You'll want to send out invitations about 10 to 7 days before the event. Invite your friends and family, the contractors who did the work, the owners of surrounding businesses, the chamber of commerce, the local newspaper and television station, the police chief, the mayor, etc.
A Friday or Saturday tend to be good days to hold this event. Make it an open house, say: "drop by anytime between 4PM & 8PM for free menu sampling." You won't want everyone to arrive at the same time because your employees will still be fairly inexperienced in making drinks and servicing customers. Cut up cookies, dessert bars, desserts, and panini into bite-size pieces, and place them on serving trays around the dining room. Welcome guests when they arrive, and instruct them to order any beverage off the menu that they would like, and to help themselves to your food samples.
As the owner, this is a valuable chance for you to network with potential future customers, and prominent individuals from your community that might be able to help spread the word about your new business. This is also a great chance for your employees to get some hands on experience, with some brisk intervals of business, which will better prepare them for when you open to the public. Your guests will be forgiving if it takes a little longer than expected for their beverages to be made, because it's all free! Make sure each guest is given a take home menu and a coupon for a free drink before they leave. You should be able to turn some of these first night guests into your first regular customers.
Your Opening Day
With your opening to the public just around the corner, be sure that all the final details have been attended to. Do you have change for your cash register drawers, and a back up change bank? Do your employees all know when they are working, and do they have a copy of their schedule? Have you placed a bakery order to be delivered on the morning of your opening?
If you will be working with a computerized cash register system, and its' operation is new to you, it might be wise to pay for on-site assistance for the first day you're open. If employees have questions, or get bogged down during a transaction, having someone there to tell them what to do can be invaluable.
When you finally open, realize the first two weeks will be the most difficult, and the most important. You'll need to spend almost every hour you are open for business, for the first 7 to 10 days, standing between you cashier and barista, listening to everything they say, and watching everything they do.
You job is to provide them with intense, relentless, detailed instruction, and to help them when necessary. You will want to make sure your cashier is following your customer service and suggestive selling protocols, and that they are handling cash and making change correctly. And, you'll need to supervise your barista to make sure they are following all the procedures necessary to produce excellent beverages, and that they develop a sense of urgency to do that in an efficient and time-effective manner.
New employees are malleable, so it is important to refine and correct everything they do over the first week(s). If they learn good habits to begin with, then with minimal management, they will continue to employ those habits, because it's the only way they were taught. But, if they are left alone, with minimal or no supervision for the first week or two, then they will undoubtedly develop their own habits, and those might be less than desirable, and prove difficult to change.
Your first week of business will be a time of excitement, and apprehension. You will look forward, dreaming about your businesses' potential, yet face challenges as you refine your operation, deal with employee issues, and settle in to the day to day routines and disciplines required to run a successful store.
Ed Arvidson is President of E&C Consulting, and the Coffee Business School of the Cascades, where he teaches monthly classes to those aspiring to start their own coffee business.
The article you've just read is a brief summary of the subject matter taught in the first 8 hour day of Ed’s 4-day school. Day 2 covers the "how-to" of running a store, and building your business to profitability. Day 3 is devoted to gaining a strong understanding of coffee, and hands-on education in properly extracting espresso, and steaming perfect milk micro-foam. Day 4 covers making a wide variety of beverages commonly served from coffee bars, and the fundamentals of latte art. All students receive a class notebook, and a CD containing all class power point slides, plus sample menus, recipe guides, store operational forms, an employee policy manual template, and much more.