4 ms·

Coffee shops are pretty much the opposite of sure-fire money losers. This article is a few years old, but: The failure rate for new coffeehouses is a mere 10

by neild 16y ago

Coffee shops are pretty much the opposite of sure-fire money losers. This article is a few years old, but: The failure rate for new coffeehouses is a mere 10 percent, according to the market research firm Mintel, which means the vast majority of cafes stay afloat no matter where Starbucks drops its stores. Compare that to the restaurant business, where failure is the norm. - http://www.slate.com/id/2180301/pagenum/all/#page_start http://www.slate.com/id/2180301/pagenum/all/#page_start There's a reason you can find coffee shops--both franchised and independent--everywhere you go. Selling $.16 of coffee for $4 is quite profitable!

tptacek 16y ago
I see your Slate article quoting a market research report with another Slate article from someone who actually built a coffee shop, and raise you with a question and an observation. First, the article: http://www.slate.com/id/2132576/ http://www.slate.com/id/2132576/ Second, the question: does that "10% failure rate" stat include Starbucks, Seattle's Best, Caribou, Peets, or Tully's? The rest of Mintel's stats do. Finally, the observation: the margin on coffee beans doesn't determine the margin of a coffee house. Coffee beans aren't the dominant expense of a coffee house. Wages, followed by rent, are instead. You'll like that Slate article; it has math, and everything.
- neild 16y ago
  I remember reading the Slate article you're citing when it first came out. It's a fairly amusing one, which can be summarized as: "Wealthy person without a lick of business sense opens the 'café' of his dreams, declines to do any work himself, and goes out of business." It's entirely irrelevant to the economics of the average coffee shop. First off, it's not clear to me whether the establishment the author opened was a coffee shop or a restaurant. The subtitle says "coffee shop", but the article then talks about finding someone to "whip up pretty crepes". I recognize that the dividing line between restaurant and coffee shop can be a bit fuzzy on occasion, but it's there and relevant. Most restaurants fail. The really notable part of the article comes at the end, however: "There was, of course, one way to make the cafe viable: It was written into the Golden Rule itself. My wife Lily and I could work there, full-time, save on the payroll, and gerrymander the rest of the budget to allow for lower sales." Yes, Mr. Michael Idov, you could have done that. You should have done that, from the start. That's what small business owners do: They work. That's what your competitors were doing. The goal may be to eventually make enough money to hire people to do all the work, but that's not where you start. You start by busting your ass. That's the story of a dilettante who opened a restaurant as a fashion statement and went the way of all such fools. Anyway, back to coffee shops. I don't know if Mintel's stats include the chains. They probably do. You might note, however, that the article I referenced is entirely dedicated to the proposition that Starbucks's presence in the market has been good for small, independently-owned coffee shops. Furthermore, even if we assume that no chain stores fail at all, a 10% industry failure rate would still have independent coffee shops doing pretty well. (Back of the envelope calculation: 14,000 independent coffee houses in the US in 2005, 11,000 Starbucks in the US in 2010, so let's say indies are only 25% of the total. If 10% of the total fail and all failures are indies, then 40% of indies fail. 60% success rate isn't bad for small businesses.) And, finally, you're right that the margin on coffee beans doesn't determine the margin of a coffee house. That's what happens when your cost of goods is effectively zero, and I assure you that any restaurant or retail outlet would love for their margin to be solely determined by wages and rent.
  - tptacek 16y ago
    That's a caricature of the article. Here are some salient excepts. Which parts of them do you disagree with? [...] The logistics of a food establishment that seats between 20 and 25 people (which roughly corresponds to the definition of "cozy") are such that the place will stay afloat—barely—as long as its owners spend all of their time on the job. There is a golden rule, long cherished by restaurateurs, for determining whether a business is viable. Rent should take up no more than 25 percent of your revenue, another 25 percent should go toward payroll, and 35 percent should go toward the product. The remaining 15 percent is what you take home. There's an even more elegant version of that rule: Make your rent in four days to be profitable, a week to break even. If you haven't hit the latter mark in a month, close. A place that seats 25 will have to employ at least two people for every shift: someone to work the front and someone for the kitchen [...] Budgeting $15 for the payroll for every hour your charming cafe is open (let's say 10 hours a day) relieves you of $4,500 a month. That gives you another $4,500 a month for rent and $6,300 to stock up on product. It also means that to come up with the total needed $18K of revenue per month, you will need to sell that product at an average of a 300 percent markup. [...] [...] the coffee [ed: with its acknowledged killer margins] needed to account for all of our profit. We needed to sell roughly $500 of it a day. This kind of money is only achievable through solid foot traffic, but, of course, our cafe was too cozy and charming to pop in for a cup to go. The average coffee-to-stay customer nursed his mocha (i.e., his $5 ticket) for upward of 30 minutes. [...]. Since the article both starts and ends with the observation you've tried to damn it with (that the owner of this coffee shop didn't know what he was getting into), I don't think that alone is a compelling response. Finally, your analysis assumes that the coffee shop market is divided between "Starbucks" and "Independents". It is not. Other chain coffee shops account for nearly 30% again as many shops as Starbucks does. PS: Respectfully, I'm not sure the guy who starts a thread with "coffee shops are pretty much the opposite of money losers" and "coffee shops have a 10% failure rate" gets to write smugly when his own revised math reveals his numbers to be wildly off, or his primary data point about coffee shops to be a single study from an industry marketing organization that included Starbucks in its numbers.
    - tptacek 16y ago
      Oh, and in case this helps, a 2005 Cornell study (debunking the "9 in 10 restaurants fail" stat that had been circulating) breaks down restaurant turnover rate by sector, and... wait for it... Segment Year 3 Cum. Turnover Mexican 86.81 Subs and bakeries 76.69 Coffee and snacks 70.00 Pizza 61.25 Chicken 57.88 Casual dining 53.13 Asian 51.43 Family dining 45.00 Steak 42.86 Buffets and cafeterias 38.46 Italian 35.29 Burgers 33.70 Seafood 33.33 These numbers include chains and are derived from health department licensing numbers.

by neild 16y ago

tptacek 16y ago

I see your Slate article quoting a market research report with another Slate article from someone who actually built a coffee shop, and raise you with a question and an observation. First, the article: http://www.slate.com/id/2132576/ http://www.slate.com/id/2132576/ Second, the question: does that "10% failure rate" stat include Starbucks, Seattle's Best, Caribou, Peets, or Tully's? The rest of Mintel's stats do. Finally, the observation: the margin on coffee beans doesn't determine the margin of a coffee house. Coffee beans aren't the dominant expense of a coffee house. Wages, followed by rent, are instead. You'll like that Slate article; it has math, and everything.

neild 16y ago
I remember reading the Slate article you're citing when it first came out. It's a fairly amusing one, which can be summarized as: "Wealthy person without a lick of business sense opens the 'café' of his dreams, declines to do any work himself, and goes out of business." It's entirely irrelevant to the economics of the average coffee shop. First off, it's not clear to me whether the establishment the author opened was a coffee shop or a restaurant. The subtitle says "coffee shop", but the article then talks about finding someone to "whip up pretty crepes". I recognize that the dividing line between restaurant and coffee shop can be a bit fuzzy on occasion, but it's there and relevant. Most restaurants fail. The really notable part of the article comes at the end, however: "There was, of course, one way to make the cafe viable: It was written into the Golden Rule itself. My wife Lily and I could work there, full-time, save on the payroll, and gerrymander the rest of the budget to allow for lower sales." Yes, Mr. Michael Idov, you could have done that. You should have done that, from the start. That's what small business owners do: They work. That's what your competitors were doing. The goal may be to eventually make enough money to hire people to do all the work, but that's not where you start. You start by busting your ass. That's the story of a dilettante who opened a restaurant as a fashion statement and went the way of all such fools. Anyway, back to coffee shops. I don't know if Mintel's stats include the chains. They probably do. You might note, however, that the article I referenced is entirely dedicated to the proposition that Starbucks's presence in the market has been good for small, independently-owned coffee shops. Furthermore, even if we assume that no chain stores fail at all, a 10% industry failure rate would still have independent coffee shops doing pretty well. (Back of the envelope calculation: 14,000 independent coffee houses in the US in 2005, 11,000 Starbucks in the US in 2010, so let's say indies are only 25% of the total. If 10% of the total fail and all failures are indies, then 40% of indies fail. 60% success rate isn't bad for small businesses.) And, finally, you're right that the margin on coffee beans doesn't determine the margin of a coffee house. That's what happens when your cost of goods is effectively zero, and I assure you that any restaurant or retail outlet would love for their margin to be solely determined by wages and rent.
- tptacek 16y ago
  That's a caricature of the article. Here are some salient excepts. Which parts of them do you disagree with? [...] The logistics of a food establishment that seats between 20 and 25 people (which roughly corresponds to the definition of "cozy") are such that the place will stay afloat—barely—as long as its owners spend all of their time on the job. There is a golden rule, long cherished by restaurateurs, for determining whether a business is viable. Rent should take up no more than 25 percent of your revenue, another 25 percent should go toward payroll, and 35 percent should go toward the product. The remaining 15 percent is what you take home. There's an even more elegant version of that rule: Make your rent in four days to be profitable, a week to break even. If you haven't hit the latter mark in a month, close. A place that seats 25 will have to employ at least two people for every shift: someone to work the front and someone for the kitchen [...] Budgeting $15 for the payroll for every hour your charming cafe is open (let's say 10 hours a day) relieves you of $4,500 a month. That gives you another $4,500 a month for rent and $6,300 to stock up on product. It also means that to come up with the total needed $18K of revenue per month, you will need to sell that product at an average of a 300 percent markup. [...] [...] the coffee [ed: with its acknowledged killer margins] needed to account for all of our profit. We needed to sell roughly $500 of it a day. This kind of money is only achievable through solid foot traffic, but, of course, our cafe was too cozy and charming to pop in for a cup to go. The average coffee-to-stay customer nursed his mocha (i.e., his $5 ticket) for upward of 30 minutes. [...]. Since the article both starts and ends with the observation you've tried to damn it with (that the owner of this coffee shop didn't know what he was getting into), I don't think that alone is a compelling response. Finally, your analysis assumes that the coffee shop market is divided between "Starbucks" and "Independents". It is not. Other chain coffee shops account for nearly 30% again as many shops as Starbucks does. PS: Respectfully, I'm not sure the guy who starts a thread with "coffee shops are pretty much the opposite of money losers" and "coffee shops have a 10% failure rate" gets to write smugly when his own revised math reveals his numbers to be wildly off, or his primary data point about coffee shops to be a single study from an industry marketing organization that included Starbucks in its numbers.
  - tptacek 16y ago
    Oh, and in case this helps, a 2005 Cornell study (debunking the "9 in 10 restaurants fail" stat that had been circulating) breaks down restaurant turnover rate by sector, and... wait for it... Segment Year 3 Cum. Turnover Mexican 86.81 Subs and bakeries 76.69 Coffee and snacks 70.00 Pizza 61.25 Chicken 57.88 Casual dining 53.13 Asian 51.43 Family dining 45.00 Steak 42.86 Buffets and cafeterias 38.46 Italian 35.29 Burgers 33.70 Seafood 33.33 These numbers include chains and are derived from health department licensing numbers.