This is Why Most Coffee Shops Don’t Make Money
Summary
TLDRThe 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.
Outlines
☕ Why Many Cafes Struggle to Make Money
Despite selling coffee for $5, which only costs around $1.20 in ingredients, many cafes struggle to make money. The problem often lies in not understanding financials, especially the profit and loss (P&L) report. P&L divides into sales and gross profit, minus operating expenses like labor and rent. This leads to the operating profit, crucial for evaluating business health. To make money, cafe owners need to focus on controlling gross profit, labor, and rent, the key costs that determine success.
📊 Understanding Gross Profit for Cafes
Gross profit is the difference between the selling price and the cost of goods sold (COGS), such as ingredients. For a $5 coffee, after deducting taxes and ingredient costs, a cafe might make a gross profit of $3.31, about 73%. However, overall gross profit fluctuates depending on the products sold. Aiming for a lower COGS percentage (30-35%) can improve profitability. Calculating profit for each menu item is crucial for managing gross profit, though it may involve trade-offs, such as balancing in-house production with pre-made food costs.
💡 Managing Price Increases and Gross Profit
Cafe owners should monitor gross profit and be open to adjusting prices regularly to combat rising ingredient costs. Many owners avoid price hikes, fearing customer loss, but small, periodic increases can help maintain a healthy gross profit. For example, when considering pre-made items like cookies from suppliers, tripling the wholesale price is a rough method to determine profitability. Aiming for over 65% gross profit is a good target to ensure financial sustainability in a cafe business.
👨💼 The High Cost of Labor in Cafes
Labor costs, including wages, benefits, and taxes, are often the biggest expenses for cafes, particularly in regions with high minimum wages like Australia. Labor costs can exceed 40% of sales. Unlike COGS, labor costs do not adjust with sales fluctuations, making it challenging to manage. Many cafes stick to a fixed staff roster, leading to inefficiencies on slower days. To control labor costs, owners should write rosters based on projected sales, using software or spreadsheets, and adjust staffing to maintain target labor percentages.
🏢 Occupancy and Rent Management for Cafes
Rent, or occupancy costs, is another major expense for cafes, especially in prime locations like shopping centers. Rent is often a fixed cost, paid regardless of sales. To keep rent manageable, it’s recommended that occupancy costs stay around 10% of sales. This percentage is typically higher for new businesses but should decrease as sales grow. If rent is too high, increasing sales is often the only solution. Finding the right balance between rent and location is essential for long-term success.
Mindmap
Keywords
💡Profit and Loss (P&L)
💡Gross Profit
💡Cost of Goods Sold (COGS)
💡Labor Cost
💡Rent or Occupancy Costs
💡Operating Profit
💡Inflation
💡Gross Profit Margin
💡Menu Engineering
💡Staff Scheduling
Highlights
Many cafes struggle financially due to a lack of understanding of their financial numbers.
Profit and loss (P&L) reports are crucial for understanding a cafe's financial health.
Gross profit is the direct profit made on the product itself, excluding other expenses.
Labor costs, including wages, salaries, benefits, and taxes, can be a significant expense for cafes.
Rent and occupancy costs are often high for cafes located in prime locations.
Controlling gross profit, labor, and rent are key to a cafe's financial success.
Gross profit can be influenced by the sales mix of various products.
Tax considerations, such as GST in Australia, affect the real price of products.
Cost of goods sold (COGS) includes ingredients and materials used in products.
Benchmarking against industry averages can help set targets for COGS.
Adjusting prices annually can help maintain gross profit margins.
Labor costs can be managed by aligning staff rosters with projected daily sales.
Using software or spreadsheets can help manage labor costs effectively.
Occupancy costs should ideally be around 10% or less of sales for a new business.
Increasing sales can be a strategy to offset high occupancy costs.
Cafe owners should regularly review and adjust their pricing strategy to account for cost increases.
The video offers 10 cafe marketing ideas to help increase sales.
Transcripts
why do so many cafes struggle to make money when you see a busy coffee shop with a lineup of
people paying $5 for a coffee that costs around a $1.20 in ingredients it seems like a money-making
machine so what is the problem why do so many cafes fail when they're selling a profitable
product that people are literally addicted to well in my experience for a lot of Cafe owners it comes
down to one thing they don't know their numbers yes I'm talking about financials those annoying
details that can bring down even the busiest Cafe business so today I'm going to give you a crash
course in how these numbers work and show you the three key costs that can make or break every
Cafe business now buried away in your accounting software or in the paperwork that your accountant
sent you that you pretended to understand is a report that is really really important to get
familiar with if you actually want to make money it's called a profit and loss or p&l for the cool
kids now the p&l shows how much profit or loss you've made over a period of time like a month or
a year and it's divided into two sections the top section shows sales and gross profit now
gross profit is the profit we make directly on the product itself now it doesn't factor in other
expenses like labor rent or the repayments on the company yacht now those costs are shown in
the section below the line so once we deduct these costs we're left with operating profit
or what is sometimes called EBITDA you know if you like wearing power suits whatever you call
it this is an important number because part from making money this is the number used to
calculate the value of the business when you want to sell it okay so that's a lot of jargon what do
we actually do with this information how do we use this to make money and for a coffee shop
profit almost always comes down to controlling three key areas gross profit labor and rent if
you can't get these three areas under control then all the other details usually aren't going
to make much difference so let's get a closer look at these three starting with gross profit
consider the average cost for a cup of coffee that a coffee shop might sell for $5 for example
a takeaway flat white in a 12 oz cup now to start with we need to deduct tax in Australia GST is 10%
so we divide by 11 to take that right off the top and we're left with $4.55 which is the real price
that we'll need to work with to calculate profit now ingredient costs include coffee milk paper
cup and the lid these are called cost of goods or cogs if you want to sound like a business pro
in this example based on typical ingredient costs these add up to $1.24 which leaves us with $3.31
in what's known as gross profit that's 73% of the price so the theory is good so far but the reality
is that on the monthly profit and loss you're not looking at one product you're looking at a
combination of all the products you sell not only that but there's always some products that sell
really well and a whole lot of others that sell a lot less so this pushes the overall gross profit
up or down depending on the profit of each item so if we take a look at the benchmarks from the
tax office overall cogs for coffee shops average between 35 and 40% now it's not always helpful to
work in averages cuz every business model and region is different but ideally I think best
practice is to aim for a lower range closer to 30 to 35% so step one to control and gross profit is
to work out the profit on every single item that you sell yes this can be timec consuming if if
you've got a big menu so my tip is to do this when you add a new product to the menu grab a set of
scales measure each ingredient enter this into a spreadsheet and then compare margins across your
menu now there's always a bit of a trade-off here for example if you're buying food items pre-made
from A supplier then they'll cost more than if you make them in house but you'll end up spending
Less on labor cost the same is true with retail products like bags of coffee or bottle drinks the
percentage gross profit will be lower but they're usually simple add- on sales that don't add to
labor cost there's no one answer I can give you on the right gross profit but here's a quick hack
I used when considering ready to serve food items like cookies or croissants from A supplier I would
start with the wholesale price and triple it if I thought I could sell it at that price then I knew
I was in a workable range it's a rough hack so use with caution now the goal of all of this is to get
your overall gross profit into a healthy range it varies by country and by business model but
my goal is to get it above 65% if it drops below 60% and it's going to be hard to hit a decent net
profit for most coffee shop businesses now at this point a lot of people will go straight to cutting
costs finding cheaper suppliers and ingredients and that's one way to approach it but there's
another quick and relatively easy way to fix the problem one that doesn't compromise quality you
can increase prices now I've met a lot of Cafe owners who rarely increase prices because they're
scared of losing customers ingredient costs creep up every year eating away at their gross profit
but they keep holding off instead my process was that I would adjust prices every year so I would
check competitors and I would already be keeping an iron gross profit and then would simply make
the change no big announcement no Manifesto on how heartbroken I was just inflation it's a fact of
life now I know it's not always easy there's only so much you can increase prices but holding off
making the change is usually not the solution no that's not a typo we really do spell labor
with a you where I'm from whatever the spelling what I'm talking about here is the cost of paying
staff this includes wages and salaries as well as benefits and taxes if I had to pick one cost
that's the killer for most coffee shop businesses I've seen this is it first of all it's a big cost
here in Australia it's common to see labor cost as high as 40% or more of sales now this will
vary by country and region due to differences in the minimum wage but it's typically going to be
one of if not the biggest cost on your p&l and the second problem is that it's really hard to
man manage now unlike cost of goods it doesn't automatically increase and decrease along with
sales for example if you have an unusually quiet Day sales will be lower but you'll also use less
ingredients so the overall gross profit will stay roughly the same but if you've rosted the same
number of Staff as usual you don't pay them less you pay them the hours they work and so your labor
percentage will be higher leaving less net profit at the end of the day this is a problem many cafes
simply run the same roster every week regardless of sales which means that they effectively have
no control over the biggest cost in their business now the alternative is to write your roster to a
daily budget there are some great software systems that can help with this but a basic spreadsheet
can do the job if you've got a small team and you don't mind a DIY approach so you start by entering
projected daily sales and then start allocating staff to shifts as you complete each day you can
see the expected labor percentage and tweak things until you hit your target okay so I know all that
sounds simple on paper and sometimes there's no way to hit the number unless you cut staff
to zero but at least you know where the problem is and you can start addressing the root causes
like maybe you need to find ways to increase sales on these days or adjust the service model
or your menu so you can operate more efficiently with less staff occupancy is just a fancy way of
saying rent including the costs that are attached to it often called outgoings now for a coffee shop
this can be one of the biggest expenses and that's because they're often set up in Prime locations
like street corners and shopping centers which have really high rents now paying more rent is
not a problem on its own if that location helps deliver lots of customers what really matters
is the percentage of sales so a good Target to aim for an occupancy cost of around 10% or less
of sales for a new business that percentage will usually start out a lot higher and come
down as sales grow but it's really important to know what you're aiming for to have that
in mind when you're considering whether the lease is worth it in the first place now unlike labor
cost rent is usually a fixed cost that is you pay a certain amount every month whether
sales are high or low now some locations pay a percentage of sales or a combination but a fixed
rent is typical that means if your occupancy cost is too high then the only way to fix it
is to increase sales and speaking of increasing sales it just so happens that I've got 10 Cafe
marketing ideas waiting for you you in this video right here it's okay you can click it now I'm done
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