This is Why Most Coffee Shops Don’t Make Money

Why do so many cafes struggle to make money? Today, we take a crash course in the 3 key costs that make or break every cafe business.

Sections in this video:
0:00 The #1 Problem
0:40 Understanding Profit
2:00 Gross Profit
5:24 Labour Cost
7:19 Occupancy Cost

[anjuro]

Rent is the killer. If you don't own the place, you're basically running your business for the landlord. If it's running well, the rent will keep increasing, eventually to the point it will drive you out of business.

[BluishGnome]

Lol, labor and rent were the two expenses that made my head spin while drawing up a cafe business plan. I ended up scrapping the idea because the initial capital required to get it off the ground with a realistic runway was waaaay out of my budget. But, it’s good to know that my biggest concerns were justified.

[ibizawavey]

This explains why ALL the coffee spots in my city of 600K keep closing down! Not one of them can stay open, then another one takes over, on and on and on. I never understood what was going on.

[dealman]

In Tokyo, many of the cool
Coffee lounges turn into bars after 5pm.
Most of bean drinks start at 650 yen and up

[notroll]

Opening a café has a dangerously low threshhold of entry.
The trouble is that even a café owner who knows what he is doing can fail if some amateur decides to blow his life savings with a café right next door.

[kingk]

When I was a kid a lot of the parents of my school mates had businesses (butcher, hardware etc…) and all of them owned their premises and half of them were living above or at the back of their premises so basically there was not rent to pay in both uses.
None of them setup their businesses, they all get it from their parents who get it from their grand parents etc …and the business model they use was producing very little growth but it was very safe, secure and steady . They were also all couples running them, usually the husband was running the operation side and the wife the admin side . Very simple organisation.

[ronnycook]

People see cafes as busy and therefore "a licence to print money" in part because there are certain times of day (e.g. early morning, mid-afternoon) when many people come in at the same time, and by definition that's when most people actually observe the activity level. They don't see the long periods when there's almost nobody coming to the counter. You can't really roster people out for those 1-2 hour gaps, so they have to be covered by the busy periods.
I suspect a lot of people starting a coffee shop see those peak periods and forget that the business isn't always that busy.

[markliechty]

I would add a 4th item. The buildout cost. I have seen many small cafes fail when they spend so much on furniture and art and fancy displays that they simply cannot ever get to even.

[Noosa]

Very true!!! I used to be a co manager/owner with a mate of mine with a cafe (a few years back) and the money specs are often missed by owners. After we began tracking our sales, spreadsheets etc things got much better. This was in Brisbane in the mid noughties decade. Yes we learnt a lot.

[DJ_BROBOT]

former coffee shop exec here from Seattle...thing is, if youre in business, you better be selling more items outside coffee or youre going to work the shop yourself and just feeding it back into your workers (if you can afford it) and lease. YOU MUST sell beer, serve food, pastries, etc. IF YOU WANT YOUR SHOP TO SURVIVE AND FOR YOU TO MAKE A PROFIT. 

Plus, most people dont place their shop in a high traffic location WHICH CAN KILL YOU ...then there are others who dont take the profits they DO get and re-invest it into their shop to get better gear, ambiance, MARKETING and other items to help the shop grow. Another expense most people dont realize when opening a shop is all the permits you need to get before opening, from Dept.of Health, the Labor Board (if youre hiring), food licenses, food service delivery contracts (unless you get those items yourself from Costco or a food services store) and more...

Then you need plumbers and electricians to get your espresso machines, coolers, fridges, etc on-line before you open also. It's alot and you can easily spend $80-100k + (USD) just to open the doors. And dont let the city/county find issues when they inspect your shop before you open. Because if they have any issues and you need to fix stuff it can set you back months past your launch date and even more thousands of dollars out your pocket. Its almost easier taking over a shop that closed than starting one from scratch

[DougPlunger]

This is the most helpful and simple to understand explanation of the true costs, expectations, suggestions, and realities of running a business I have ever seen. Thank you SO much!

[highstreetkillers]

Basic math. Even if you sell a coffee for an insane $5 a cup you don't have the volume. If it takes someone 2 minutes to make and serve a coffee that means they can at a maximum sell 30 per hour. That's $150/hr. Then you subtract high minimum wage, expenses, and taxes. You're losing money, so you hire more people to try and bring in more per hour. Still will only barely break even

[ardentdrops]

This video feels so close to finished. It feels like we're missing an exercise in fixing a budget at the end. I'd love to see a before/after and the steps to get there.

[christopherort]

Cool video.

As a CPA with over 30 years experience in the manufacturing industry, your video is on point.

You have to know your cost structure, either Fixed, Variable or COGS to know what's financially going on with your company.

I do agree.
Each and every Item needs to have a COGS attached to it.

[alexb]

I work on a target of <5% rent when assessing new venue opportunities. 10% maybe used to be workable, and might still be in busy pubs with a high bev to food ratio, but for a full service cafe and restaurant you’ll struggle to make profits at 10% rent. This is due to the very high wages costs and ‘other’ expenses.
I’m convinced the main driver of businesses failing is they start the business without calculating the rent % - there are many businesses listed for sale with huge rents and they often can’t find a buyer.

[Kcv]

The most important prerequisite to all of this is making sure you actually keep track, accurately, of your expenses. So many businesses don’t realize the importance of tracking the cost of even seemingly minute inconsequential things, but they add up over time and can really eat into your profits.

[raylopez]

Well done. An eight minute video rather than a half hour video that would say the same thing. Might even subscribe though I'm not interested in coffee. Fun fact: in the USA, around 5 out of 6 restaurants fail.

[MrEtnorb]

What I can’t fathom is the fact that there is a lot of poor to average coffee around. Often it’s only lukewarm and the major taste is the sprinkled chocolate. And don’t get me started regarding the serving of teabag tea, which is a disgrace. Re staffing, I always see baristas run off their feet in busy cafes, which results in long waits for takeaway coffee. They can’t afford extra staff so it is a fact of life.

[zacharyhenderson]

Labor in The service sector, like coffee shops has always been a little bit tricky. Post COVID, it costs a lot more to attract and keep people, even more to keep people from calling off, and even more to keep staff who are willing to work extra on busy days.

[kitatit]

I’m not looking a getting into a coffee shop, but this is excellent information presented very well. Subscribed!✊