(This post originally appeared on Entrepreneur)
Ever wonder how that local coffee shop owner makes money? The fact of the matter is…she isn’t. Does that surprise you? It shouldn’t. Just think about the numbers.
Let’s suppose you’re running a single coffee shop in an average American town or city. I’ll be generous and assume you have about 200 customers coming in your store daily and each spends, on average, about five bucks. I’ll even assume that you’re working six days a week for 52-weeks a year, which means you’re taking no vacation and busting your you-know-what. I’ll also assume that you’re getting those 200 customers every day, even on the weekends or slow holiday weeks. That’s a gross revenue of $312,000.
I’ve done the research. The typical cost of coffee is about 20 percent of your sales price and the typical cost of labor is about 60 percent. Using those numbers you’ve got profits before rent, utilities, equipment lease payments, marketing and…oh, your salary…of about $47,000. According to many of the reports I’ve read — like this one — the average net profit of a coffee shop, excluding the owner’s salary, is about 2.5 percent of sales. So your $312,000 coffee shop is netting you about $8,000…before taxes! Did I mention that you’re working six days a week and 52 weeks a year?
Sure, you can play with my numbers. Maybe you open your coffee shop in the one town in America that doesn’t have a Starbucks or Peet’s or any other competitors, where people are craving for caffeine and you can sell more than 200 cups in a day. Or you get extra revenues from baked goods, breakfast foods and lap dances. But even if you add in these amounts you’re still not making a killing. In fact, you’re barely (and I mean barely) making a living. Oh, you love what you do? Ask your spouse and kids if they love you working 60 hours a week and still not being able to afford a decent flat screen TV. But at least we’ve got lots of great coffee, right honey?
Which bring me back to my local coffee shop. I see the owner inside and she’s working hard. But again…how is she getting by? The answer is important not only for her, but for any person running or thinking of running a coffee shop, a small restaurant or a retail store. It’s scale. With it, you can make it. Without it, you will not.
If you’re really, really good at what you do you can maybe eke out a passable living running a coffee shop or store. But the revenue from that one location is limited. To really make money — and I mean private school tuition money — you’ve got to own multiple shops. When you own multiple businesses all doing the same thing you benefit from the economies of scale. You can spread overhead, labor and — oh yes, your salary — across a bigger revenue base. Your marketing dollars have more impact. Your net profits can be multiplied by location.
That’s why, as I walk around my city, I see lots of independent coffee shops that are successfully competing with the big chains. These local business owners are competing because they’ve got multiple locations.
Ever heard of Good Karma Cafe or Rival Brothers? Ever get a La Colombe coffee? These are all local (Philadelphia), independent coffee stores with multiple locations (La Colombe is in a class by itself – it’s now a chain with 30 stores in five cities and also sells its own line of food products). Other cities sport their own mini-chains of local coffee shops, grocery stores and retailers — chains people outside the area have never heard of. Those business owners are not satisfied with just eking out a living. They’ve figured out that to profit they need be bigger.
Are you thinking of opening up your dream little coffee shop this year? Do you envision a place where you serve Ristrettos or Piccolo Lattes to authors, poets and other intellectuals who meet to discuss art, science and current affairs? I admit you probably won’t find me there. But I’m rooting for you. Just make sure you’re not expecting just one shop to pay your bills. It won’t.