Move over, big chain coffee shops. All the Starbucks and Costas out there are getting some stiff competition from smaller, leaner, hungrier players, and they’re slowly gaining ground. The relatively new kid on the block is specialty coffee, aka Third Wave cof
A definition of terms: what are coffee ‘waves?’
Coffee has what its more devoted fans call “movements,” or “waves.” The first wave happened with the commoditization of coffee in the early 19th century, when it began to be exported all over the world, and established its foothold on the global consciousness as a drink to be consumed regularly, and in increasingly large amounts.
The second wave was marked by the rise of big brands like Starbucks in the 1970s, which introduced the world to espresso, frappucino, and marketed coffee as a high-end product, with more elaborate architectural and interior design in cafes, and introducing more exotic blends and flavors. This also marked the rise of expensive coffee, where before it was something Americans had in donut shops, diners, and at home.
The third wave began in the early 2000s and is still ongoing. This is where specialty coffee shops like Blue Bottle, Stumptown, and Intelligentsia came onto the scene. These shops focus on getting the best beans and roasting them to perfection, focusing on quality, handcrafting, and emphasizing the source of the beans. This wave came with pour-overs, Chemexes, and other brewing ways that prioritize the coffee’s quality over everything else. They also often have extremely knowledgeable staff about every aspect of coffee, from farming to roasting to brewing.
The big question is: does all this current obsession quality and care translate into better ROI for specialty coffee shops? Are they worth the investment, especially since starting one up is not cheap?
Is opening a specialty coffee shop a sound investment? Let’s take a look.
Revenue and costs
Revenue. Two main factors to consider when determining ROI for any business are revenue and costs. When it comes to revenue, specialty coffee shops have a definite edge over their big chain competitors. The average price of a cup of coffee at a specialty shop is $4.24, while the average price of a cup at a big chain is just $2.99. That may not seem like much, but given the high rate of turnover at a cafe, it adds up very quickly.
On average, a small coffee shop may have a monthly gross revenue of about $16,000 a month. For midsize stores serving about 20 customers an hour, this goes up to $42,000 a month, and for bustling stores with more than 30 customers served an hour and operating 12 hours a day, it can go up to almost $98,000.
Specialty coffee shops generate a profit margin of about 3% to 6%, which is better than some full-service restaurants. Add in high-value items like pastries and other specialty/gourmet items from wholesale drinks suppliers and bakeries, and you could be turning a healthy profit.
Cost. As for costs, the story is much the same. The initial investment for opening a specialty coffee shop is higher than that of opening a big chain store— the starting inventory alone can cost anywhere between $5,000-10,000, and you’re looking to spend a total of $80,000 to $300,000 on startup costs. Depending mostly on factors like rent and the cost of skilled labor at the store location, your specialty cafe operating costs can range from $13,000 to $68,000 a month.
The biggest difference here is in labor costs; because specialty coffee shops place such an emphasis on customer service, they require more staff than their big chain counterparts, and the cost per head is significantly higher than the big chains, who do all their recruitment, training, and HR at scale, not to mention the lower per-unit cost of buying their beans and equipment on large volumes.
There is a caveat to these projections about specialty coffee ROI: the market is becoming increasingly saturated. In 2020, there were 37,189 coffee shops in the U.S. In major metropolitan areas, it’s not uncommon to find a dozen or more specialty coffee shops within walking distance of each other. This level of competition makes it difficult for any one shop to maintain a significant market share and can quickly eat into profits.
Additionally, the third wave of coffee is still ongoing, and it’s unclear how long it will last. The current trendiness of specialty coffee may not be sustainable in the long run and could eventually give way to something else. This could have a serious impact on shop revenue if it were to happen.
So while there are definite upsides to investing in a specialty coffee shop, there are also some risks that should be considered. It’s important to do your research and understand the local landscape before making any decisions.
And, as in any business that depends on foot traffic, your sales will always be heavily dependent on location, location, location.
So what does all this mean for ROI? Despite the higher initial investment and ongoing costs, specialty coffee shops offer a significantly higher return on investment than big chain stores; in fact, the average ROI for a specialty coffee shop is 12%, while the average ROI for a big chain store is just 6%. If you’re looking to open a coffee shop with high ROI potential, specialty is the way to go.