The average profit for a small cafe is about 5 percent, but large coffee operations tend to earn much higher profits. Direct costs average about 15 percent, so most of a small coffee shop’s expenditures go toward overhead expenses. Building sales volume makes a small cafe more profitable.
After owning several cafes, we’ve managed to get to the perfect formula to improve your coffeeshop profit. It is comprised of four components:
- Increasing cafe revenue;
- Controlling the cost of goods;
- Managing staff wages effectively;
- Correct product pricing.
IMPROVE YOUR CAFE PROFIT: HOW TO INCREASE REVENUE
We meet hundreds of cafe owners over the last 12 years in the business. One of the things we saw, cafe owners tired of doing business. They were mostly focused on coffee sales rather than a product mix.
We saw many operators trying to set up a cafe simply focused on coffee sales.
Nevertheless, most of them failed by lack of product mix or volume. Despite being a much easier operation than a full coffee shop,it does not always bring enough revenue. The way of how to improve cafe profit would be adding more offerings to the menu.
In these cases, the only way to improve cafe profit is by being located within an extremely high foot traffic area, it won’t work.
In most venues, the food side of the business is a very important piece of the revenue stream, and most importantly, we have seen in most cases, considerably pushing the coffee sales as well.
We recently wrote about the best cafe model for 2021. In that post, we’ve talked about the tendencies and the best ways to increase revenue, it is worth checking it out.
Another important element that will most definitely help you to improve cafe profit is adding takeaway operations if you don’t have one. Ask yourself as a consumer, how easy, how accessible is my cafe if I was going to grab a takeaway coffee?
HOW TO CONTROL COST OF GOODS FOR EFFECTIVE RESULTS
Firstly, let’s have a quick look at what actually is “cost of goods”.
As cafe owners ourselves, in order to succeed, we found it critical to understand the cost of goods, simply because it was tied directly to the profit margins of our businesses, revenue, and inventory management. We believe that cafe owners that don’t have control of their Cost of Goods and don’t monitor it, regularly put their business at financial risk. When the coffee shop sells an espresso, for example, the cost of good account for the price of the to-go cup, includes the take way cup, the way lid, the coffee amount used, milk amount used, taxes and the labour directly tied to production.
In order to lower the cost of goods in a cafe, the owner may consider the following steps:
- Always keep a close eye on inventory;
- Buy large quantity or in bulk in order to have the economy of scale;
- Compare suppliers price list, there is a big difference in price from one supplier to another;
- Reduce food waste by redesigning the cafe menu that uses the same ingredients across several items;
HOW TO CONTROL OPERATING EXPENSES TO INCREASE YOUR COFFEESHOP PROFIT
What are the operating expenses?
Well, operating expenses in a cafe refers to all expenditure that is not directly tied to the production of goods and services, the list below is a summary of operating expenses:
- Office Supplies
- Subscription fees
- Sales and Marketing
- Wages or salary
- Accounting and legal costs
Now, how did we improve the operating expenses in our cafes? The more you sell the more you will dilute the operating cost.
It is common knowledge that staff wages are one the biggest expenses in any business, hence we always focused on how to improve and reduce the overhead in our cafes. Other ways we found to be cost-effective with payroll was by ensuring to have less high performers in higher wages than several rather than several low performers earning small money and not motivated enough in the team.
Afterward, there is nothing wrong with pushing high-performing workers to outperform their activities, they are super motivated and willing to contribute. On the other hand, we found that it was a nightmare to push low performers to work hard in the busy times, there was always a complaint or two. We also found the more staff we had the less productive the team was and the more it was weighing on the cafe’s payroll.
We tended to hire people with a healthy lifestyle and passion for hospitality, they are much more likely to outperform in the job. If the payroll cost is exceeding 30% of the total revenue, then the business margin is starting to be compromised.
HOW TO PRICE YOUR WAY TO SUCCESS
There are 3 direct elements that will affect the margin in a business: product price, volume, and mix.
How many times have you seen a cafe selling Coffee + Bacon egg roll under $10? Years ago, it was a common practice, about 10-15 years ago when cafes had much lower operating costs.
Nowadays, “Cost of Goods” and “Operating Expenses” are very high, and not having the correct pricing strategy will directly harm the profit of the business. We are strong believers that if the product is great people will pay the price.
If we were to create a business to sell cheap products, we would have to have an obscene volume to offset. Which is usually not feasible for a local cafe, such as a coffee shop. Otherwise, we would be better off getting ourselves a job, we thought. People selling products at very discounted prices are jeopardizing their businesses.
Besides, from a consumer perspective cheap discounted deals pass the perception of a not-so-good business, struggle survive.