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How To Start A Coffee Shop

How To Start A Coffee Shop

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How To Start A Coffee Shop

How To Start A Coffee Shop

There’s nothing quite like the aroma of freshly brewed coffee, except perhaps the satisfaction of serving it from your very own coffee shop. The journey to opening a coffee shop can be as invigorating as a double shot of espresso, but starting a coffee shop is a lot of work.

Fear not, we’ve put together a guide that covers everything from the business, steps to get started, and answers to common questions.

Business Overview

Coffee shops sell a variety of beverages, including hot and iced coffees, teas, and bottled drinks. Some coffee shops branch out into offering espressos, lattes, cappuccinos, and smoothies. Many shops also offer various foods, including bread, donuts, cookies, and other sweets that pair well with their drinks.

Besides these ready-to-consume options, some coffee shops sell coffee beans, supplies like mugs and coffeemakers, and other take-home items. Many shops offer in-house seating, but coffee shops can also exist as drive-through-only options where customers never enter.

Since coffee shops have saturated much of America, it’s important to identify what your shop will do differently than existing coffee stores. This could be something such as sourcing top-quality coffee for a specialty store or coming up with a marketing draw, such as many owners of cat cafes have done.  Also, keep an eye out for changes in consumer consumption as major coffee chains begin offering healthy options.

Industry Summary

The coffee shop industry continues to see steady growth, fueled by increasing coffee consumption and the appeal of coffee shops as informal community gathering places. In 2022, coffee shops generated $40 billion, which was an increase of 2.2% over the previous year.

Coffee giants like Starbucks and Dunkin Donuts hold a significant share of the market, and independent coffee shops struggle to compete against them. In fact, the eight largest coffee companies bring in about 30 percent of the industry’s annual revenue.

Consumer preferences and personal income are key drivers of demand within the coffee shop industry. The profitability of individual companies hinges on securing prime locations, attracting customers, and delivering high-quality products. While larger companies have advantages in purchasing, finance, and marketing, smaller businesses can compete effectively by offering specialized products, catering to local markets, or providing exceptional customer service.

Competition within the coffee shop industry doesn’t just include other coffee shops. It extends to convenience stores, gas stations, quick-service and fast-food restaurants, gourmet food shops, and donut shops. Understanding these competitors will help you identify your unique selling points and carve out your own niche effectively.

Steps To Start A Coffee Shop

Step 1: Market Research

The idea of being your own boss and sharing your love of coffee with others is certainly appealing, but before you start buying equipment and decorating your shop, you need to take an important first step, which is researching the market. Market research involves gathering and analyzing information about your potential customers, competitors, and the industry as a whole. It isn’t an exact science, but it provides valuable insights into whether there’s enough demand for a new coffee shop in your area.

The first reason why you need to do market research before opening a coffee shop is to understand the local market size and demographics. You don’t want to invest time and money in a business that won’t have enough customers to sustain it. To estimate, look at the demographics of coffee drinkers and then use the U.S. Census Bureau to gather information about the population, income levels, age groups, and education levels of your area. This will give insights into how many people might be interested in drinking coffee and how to best position your business to the most lucrative audience. For example, if your town has a high percentage of students or young professionals, you might want to offer convenient and affordable options such as to-go cups, drive-thru, or online ordering.

The second reason why you should do market research is to identify your competitors and their strengths and weaknesses. Unless your coffee shop is the only one in town, you’ll need to differentiate yourself. Do this by visiting other coffee shops, ordering their drinks and food, observing their operations and customer service, and reading online reviews and forums. This information will help you to identify gaps in the market, such as a lack of vegan offerings, slow service, or limited parking. You can then use these insights to design a unique value proposition, such as sustainably sourced beans, handmade syrups, or free Wi-Fi.

The third reason to do market research is to test your assumptions and hypotheses with potential customers. Although you may have a clear vision of what your coffee shop should look like, taste like, and feel like, gather actual feedback from your target audience before investing in it. To do this, you can use surveys, focus groups, or social media polls to ask questions such as: “What kind of coffee do you prefer, and why?”, “How often do you drink coffee during the day?” “What would make you choose our coffee shop over other options?” or “What do you think about our logo and brand colors?”. By listening to your customers’ opinions, preferences, and suggestions, you can refine your business plan, menu, interior design, and marketing strategy.

Step 2: Write a Business Plan

After conducting market research and gaining a better understanding of the market potential, the next step in starting a coffee shop is to develop a solid business plan.

Your business plan sets the course for your coffee shop. It provides a clear direction and outlines your long-term vision and immediate goals. It should answer questions like: Who is your target customer? Why will they shop at your store versus the competition? What are your growth plans? By setting clear, measurable goals, such as enrollment targets or revenue milestones, you can track your progress and make better informed decisions.

The business plan also has you forecast the financial viability and profitability of the business. In the financial projections, you will estimate the costs of renting or buying a space, purchasing equipment and inventory, hiring staff, paying taxes and utilities, and marketing the business. You will also calculate the potential revenue by assuming the average ticket price and frequency of visits. By doing this, you can create a cash flow projection and a break-even analysis that will help determine if your coffee shop can make a profit and how long it might take to reach that goal.

Also, a business plan will be needed to secure funding. Banks will want to see a plan that shows a strong understanding of the market, a thoughtful business strategy, and realistic financial projections.

Related: How to write a business plan

Step 3: Source Funding

From securing a location to buying equipment and inventory, the costs of starting a coffee shop can add up quickly. Understanding your funding options and making sure you have access to the resources to get your coffee shop off the ground is an important step. Here are some of the most common sources of funding for starting a coffee shop.

The first source of funding to assess is self-funding. Before exploring outside funding sources, consider personal savings to finance the business. The best part of self-funding is that the owner doesn’t have to pay interest on the loan taken or give up equity in the business. However, if personal savings aren’t sufficient to cover the startup costs, outside funding sources will need to be assessed.

The most used outside source of funds is bank loans. Lenders require a borrower to invest a portion of their personal funds towards the total cost of the project, have a good credit score, and have sufficient collateral to secure the loan. One of the major concerns that lenders have is whether they will get their investment back. So, if the bank feels the loan is too risky, it is possible to use a Small Business Administration guarantee that can reduce the lender’s risk and increase the chances of loan approval. SBA guarantees go up to 85% of a small business loan of up to $150K, and the repayment schedules are favorable.

Friends or family is another funding source to consider. Put agreements in writing and agree on terms and conditions for repayment to help prevent misunderstandings and hurt relationships.

If funding needs are low or credit isn’t available through a lender, microloans are another option that could work for entrepreneurs. Microloans are small loans, usually $50K or less, offered by non-profits and economic development organizations that provide funds for starting or expanding a small business.

Related: Finding the money to start a business 

Step 4: Register the Business

Starting a coffee shop business involves more than just brewing the perfect cup of coffee. It also requires navigating the legal landscape to ensure your business is properly registered and complies with all relevant laws and regulations. Here’s a step-by-step guide on how to register your coffee shop business in the United States:

Selecting a business structure: Before you can register your coffee shop, you need to decide on a business structure. The structure you choose will influence your liability, taxes, and day-to-day operations. Here are the four main types of business structures:

  • Sole proprietorship: A common and simple structure where the business is owned and operated by one individual. It offers ease of startup and lower cost, but the owner has unlimited personal liability.
  • General partnership: A structure where the business is owned and operated by two or more individuals. Partners share profits, losses, and liabilities.
  • Corporation: A separate legal entity from its owners, providing limited liability protection. It requires more formalities and administrative requirements.
  • Limited Liability Company (LLC): Offers liability protection like a corporation and the flexibility of a partnership. It’s a popular choice for small businesses due to its simplicity and liability protection.

Related: Comparison of business structures

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.

Some popular LLC formation services include:

IncFile - $0 plus state fees & free registered agent for 1 year!

ZenBusiness - Best for beginners. $0 plus state fees & free registered agent for 1 year!

Northwest - Best privacy protection. $39 plus state fees & free registered agent for 1 year!

Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.

Related: Tips and ideas for naming a coffee shop

During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.

Related: Finding a domain name for your business

Obtain business licenses and permits: Look up and obtain the required permits and licenses to operate a coffee shop in your area. This may include health permits, food service licenses, and zoning permits. Be sure to comply with health and safety regulations, including food handling and preparation standards, to ensure the safety of your customers.

In addition, there will also be a variety of general registrations, such as a business license, seller’s permit, and Employer Identification Number (EIN). These will vary on where the business is located.

Related: What licenses does a coffee shop need?

Step 5: Acquire & Set Up Your Shop

With a solid business plan in hand, funding secured, and business registered, it’s time to move from planning to action and begin setting up the operations for your coffee shop. This phase is where your ideas start to come to life through location scouting, design decisions, equipment purchases, and supplier partnerships.

The first task in setting up operations for your coffee shop is finding the perfect location, but don’t limit yourself to thinking a storefront is your only choice. You also have coffee kiosks or mobile coffee carts that can be located in malls, college campuses, or office spaces. When choosing a location, consider factors like visibility, accessibility, parking availability, and proximity to other businesses that can complement yours. A drive-through window might be another feature to consider.

Once you’ve secured your location, it’s time to think about the interior design of your coffee shop. The layout of your shop should optimize the flow of customers coming in and out. Identify the points of sale and create spaces for people to line up without getting in the way of other customers. When it comes to décor, try to create a cozy and welcoming atmosphere. Think about the color scheme, furniture, lighting, and artwork that will best suit your coffee shop’s personality. This phase also includes identifying and finding the right place for all of the equipment.

Last, establish relationships with suppliers for key items like coffee beans, dairy products, baked goods, cups/lids, and other necessary supplies. Coffee shops are only as good as the products they serve and setting up accounts reliable suppliers to have high-quality and fresh items is important.

Related: Choosing a business location

Step 6: Hire Staff

As a new coffee shop preparing to hire employees, you’ll become not just a business owner but also an employer. This role carries with it a range of responsibilities and legal obligations to address before you welcome your first team member.

Before hiring, you must obtain an Employer Identification Number (EIN) from the IRS, which is necessary for tax purposes and for reporting information about your employees. Ensuring employment eligibility is another task, which means verifying that your employees are allowed to work in the U.S., typically through Form I-9.

You’ll also need to familiarize yourself with the hiring requirements specific to your state. Each state has different laws concerning new hires, and it’s your responsibility to report new employees to the designated state agency.

Most states require employers to carry worker’s compensation insurance, which provides benefits to employees who get injured or sick from their job. Last, you’re required to adhere to labor laws that cover everything from minimum wage to overtime and breaks.

Related: State guides for hiring your first employee

Step 7: Prepare to Open!

The journey of starting a coffee shop involves numerous steps, from planning and registering your business to setting up operations. As you near the finish line, there are still several areas to address. While the needs of each coffee shop will vary, here are a few of the tasks to address before opening:

Business insurance: Acquiring business insurance protects your coffee shop from potential risks, such as property damage, liability claims, and employee-related risks. Depending on your needs, you may require different types of insurance policies, such as general liability insurance, property insurance, or workers’ compensation insurance.

Setting up bookkeeping: Implementing a robust accounting system is used to manage your financial transactions, prepare taxes, and generate financial statements. Hiring an accountant or using accounting software, such as Wave Accounting (FREE) or Quickbooks, can simplify this process and provide valuable insights into your business’s financial health.

Menu development: Develop a menu that showcases your coffee offerings and food items. Make sure to consider a variety of options to cater to different preferences, including specialty drinks, pastries, sandwiches, and healthy alternatives.

Opening a business bank account: A separate business bank account is necessary to keep your personal and business finances separate, making it easier to manage cash flow and comply with tax obligations.

Purchasing industry-specific software: Consider investing in management or point of sale (POS) software tailored for coffee shops. Some popular options include Square, Toast, and ShopKeep. These tools can help streamline operations, track sales, and enhance customer experiences.

Marketing and branding: Develop a marketing strategy to generate awareness and attract customers. Create a compelling brand identity with a captivating logo, appealing signage, and consistent branding across your online presence. Utilize social media platforms, local advertising, collaborations, and promotions to engage with your target audience.

Joining industry associations: Consider joining industry associations such as the Specialty Coffee Association (SCA), National Coffee Association (NCA), or local coffee shop owner networks. These associations provide opportunities for networking, professional development, and staying updated on industry trends.

Preparing for the grand opening: Finally, plan a grand opening that will make a splash in the community. This could include special promotions, live music, or free samples. It’s an opportunity to showcase your unique brand and start building a loyal customer base.

Greg’s Tip: As an independent coffee shop, it’s important to stand out, so don’t try to copy big chains. Be unique with things like your drink menu, interesting decoration or mixology style.

Greg's Business Tip

Common Questions When Starting A Coffee Shop

How much does it cost to start a coffee shop?

Many factors affect the overall cost of starting a coffee shop. Budget operations that are drive-through-only facilities will cost less to open, while full coffee shops or cafes complete with seating areas can cost much more, especially if they’re located in favored retail areas.

The potential investment to start a coffee shop will often range anywhere from $80,000 to $300,000.

Here’s a breakdown of these categories:

Equipment: Quality coffee shop equipment, like espresso machines, grinders, blenders, refrigeration units, and POS systems are typically the largest cost. Expect equipment costs to be between $30,000 and $60,000

Location & renovations: Securing a spot and setting up your coffee shop is another significant expense. Rent varies greatly by city and neighborhood, but initial deposits typically require the first month’s rent plus a security deposit. For a desirable urban location, this could easily range from $3,000 to $20,000 or more. Also, transforming a space into your ideal coffee shop may require significant renovations. Costs here can range from $2,000 for minor updates to $30,000 for extensive remodels.

Business registration: The cost to register your business can vary depending on your state and the structure of your business, but generally, you can expect to pay around $50 to $500

Insurance: The initial cost for insurance policies like general liability, property, and workers’ compensation for the first year can range from $1,000 to $3,000.

Inventory: Your starting inventory of coffee beans, dairy, syrups, snacks, and paper goods will likely cost between $5,000 and $10,000.

Marketing: Initial marketing efforts, such as a grand opening event, initial promotional materials, website setup, and social media campaigns, can cost between $2,000 and $5,000.

Training: Initial training costs, including wages and resources, can run from $500 to $2,000.

It’s important to note that in addition to these initial costs, having three to six months of operating expenses on hand is recommended as a buffer for any unforeseen circumstances or slow periods. This extra funding can help cover rent, utilities, salaries, inventory, and other ongoing expenses.

How profitable is a coffee shop?

The profitability of a coffee shop can vary widely based on factors such as location, size, and business model. However, by examining industry statistics and making reasonable assumptions, we can estimate the potential profitability of a typical coffee shop.

According to the National Coffee Association, independent coffee shops sell an average of 200-300 cups of coffee per day (compared to large chains that sell 700 cups per day). If we assume 250 cups a day at an average price of $3.25 per cup, this equals daily revenue of $812.50. Over a 30-day month, the monthly gross revenue would be $24,375.

On the expense side, the cost of goods sold (COGS), which includes coffee beans, milk, and other ingredients, typically accounts for about 30%-40% of revenue. Let’s use the mid-range of this figure, and assume a COGS of 35%, or $8,531.25 per month.

Labor costs, including wages, taxes, and benefits, often make up around 25% of revenue, which would total $6,093.75 per month.

Rent for a coffee shop can vary widely depending on location and size, but a rough estimate might be $2,000 per month. Utilities, insurance, and miscellaneous expenses could add another $1,000 per month.

Subtracting these expenses from gross revenue, we get:
$24,375 (gross revenue)
$8,431.25 (COGS)
$6,093.75 (labor)
$2,000 (rent)
$1,000 (utilities, insurance, and miscellaneous)

= $6,850 monthly profit

Over a year, this equates to a net profit of $82,200.

Keep in mind that this is a generalized estimate, and actual profits can vary based on a range of factors.

What skills are needed to run a coffee shop?

There’s no need to have a business degree to open a coffee business, but the following skills and experiences will be helpful.

Coffee appreciation and knowledge: Knowledge of the coffee industry and an appreciation of the drink will help store owners select and stock their stores with quality products. Experience working in the food service industry is also valuable. If a store owner has worked in a fast-paced setting such as a fast-food restaurant, they’ll better understand the challenges they may face when opening their coffee shop.

Customer service skills Owning and managing a coffee shop requires strong customer service skills. A coffee shop owner who understands how to provide customers with a positive experience and who can make things right when orders are wrong can build up a faithful customer base. A great owner and manager will also need to teach staff these same customer service skills.

Management experience: Any coffee shop will need multiple employees, so previous management experience is helpful. An owner will need to interview, hire, and train staff, maintain work schedules, and provide feedback and support.

Marketing skills: Any coffee shop will require marketing, especially during its startup phase. The more marketing skills an owner has, the more they can save money on marketing rather than hiring it.

What is the NAICS code for a coffee shop?

The NAICS code for a coffee shop is 722515, which is classified under Snack and Nonalcoholic Beverage Bars.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code and how to find yours

The Barista Guild
International Coffee Association
National Coffee Association
Roasters Guild
Specialty Coffee Association
Tea Association of the U.S.A.

How To Start A Coffee Shop

How To Start A Coffee Shop

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