This is Why Most Coffee Shops Don’t Make Money

Summary

The video explains why many cafes struggle to make money despite selling high-margin products like coffee. The main issue is that cafe owners often don't understand their financials. The video breaks down three key cost areas that can make or break a cafe business: gross profit, labor costs, and rent. It provides tips on calculating profit margins, controlling labor costs through efficient staffing, and managing rent expenses to keep the business profitable. It emphasizes the importance of tracking these costs and adjusting prices and operations to maintain profitability.

Takeaways

• 📈 Many cafes struggle financially despite selling profitable products because owners often lack a deep understanding of their financial numbers.
• 💼 The profit and loss (P&L) statement is crucial for understanding a cafe's financial health, showing profit or loss over a period and dividing into sales, gross profit, and operating expenses.
• 💰 Gross profit, which is the profit made directly from the product itself before other expenses, is a key area to control for a successful cafe business.
• 📊 Labor costs, including wages, salaries, benefits, and taxes, can be a significant expense for cafes, often constituting a high percentage of sales.
• 🏠 Occupancy costs, which include rent and associated outgoings, are typically high for cafes located in prime locations and should be managed carefully.
• 🔍 Controlling gross profit involves understanding the profit on every item sold, which can be time-consuming but is essential for financial success.
• 📊 Benchmarking is important, with average cost of goods (COGS) for coffee shops typically ranging between 35% and 40% of sales.
• 📈 To improve gross profit, cafes can either cut costs by finding cheaper suppliers or increase prices strategically without compromising quality.
• 📋 Labor management is challenging and requires careful rostering to align staff hours with sales to control labor costs effectively.
• 💼 Rent is often a fixed cost, so increasing sales is the primary way to manage high occupancy costs and maintain a healthy business model.

Q & A

Why do many cafes struggle to make money despite selling a profitable product?

Many cafes struggle to make money because the owners often don't understand their financial numbers, which are crucial for managing costs and ensuring profitability.

What is the importance of a Profit and Loss (P&L) statement for a cafe business?

A P&L statement is essential as it shows the profit or loss over a period, divided into sales and gross profit, and then operating profit after deducting other expenses. It helps in understanding the financial health of the business.

What are the three key cost areas that can make or break a cafe business?

The three key cost areas are gross profit, labor, and rent. Controlling these areas is critical for the financial success of a cafe.

How does the cost of goods sold (COGS) affect the gross profit of a cafe?

COGS, which includes the cost of ingredients like coffee, milk, and packaging, directly impacts gross profit. A lower COGS percentage is ideal, aiming for 30-35%, to ensure a healthy gross profit margin.

What is a practical approach to managing gross profit in a cafe?

A practical approach is to calculate the profit on every item sold, especially when adding new products to the menu. This helps in maintaining a healthy gross profit range.

Why is labor cost a significant challenge for cafe owners?

Labor cost is a significant challenge because it can be as high as 40% or more of sales, and it's difficult to manage. Unlike COGS, labor cost does not automatically adjust with sales fluctuations.

How can cafe owners manage labor costs more effectively?

Cafe owners can manage labor costs by writing rosters based on daily budgets and using software or spreadsheets to allocate staff shifts, ensuring labor costs align with sales.

What is occupancy cost in the context of a cafe business?

Occupancy cost refers to rent and associated costs. It's typically a fixed cost and can be high for cafes located in prime locations. Aiming for an occupancy cost of around 10% or less of sales is ideal.

How should cafe owners approach increasing prices to improve profitability?

Cafe owners should consider increasing prices annually to account for inflation and ingredient cost increases. This can be done discreetly without major announcements to maintain customer loyalty.

What is the role of sales in managing occupancy costs for a cafe?

Increasing sales is crucial for managing occupancy costs, especially when rent is high. A higher sales volume can offset the fixed cost of rent, improving the overall profitability of the cafe.