Read This Before You Decide to Open a Coffee Focused Small Business in the '20s
According to the ChamberofCommerce.org, approximately 400,000 small businesses opened each year in the United States between 2009 and 2016. Contrary to what the sensationalists out there would have you believe, the vast majority of those small businesses, including cafes and coffee roasting businesses, will NOT close in their first year of business.
In fact, the statistics from the Bureaux of Labor and Statistics (which I analyzed myself and tabulated for our webinar "Navigating a Business and Career as a Cafe Owner" - see Table 1 below) show that not only will approximately 80% of businesses survive their first year, the odds continue to be stacked in your favor for survival up until your fourth year of business. You may be hanging on by a thread those four years, and I'm not sure what state your mental health will be in at the end of that time, but the numbers show that you're more likely than not to still be in business.
Table 1: The percentage of small business that fail over time in the United States. From the MAP IT FORWARD Webinar "Navigating a Business and Career as a Cafe Owner"
The technical definition of a "small business" differs from country to country. In the United States, there are different rules for different business types to determine whether or not you're classed as a small business. I thought it was important to understand this as many first-time business owners in coffee believe their approach to coffee is going to be the one that casts a shadow over Starbuck. This should give you an insight into what kind of numbers you're looking at before you're considered a medium (not even large) sized business.
The electronic Code of Federal Regulations classifies a coffee roastery as a "small business" (Coffee and Tea Manufacturing) if it has less than 750 employees. On the other hand, cafes without full-service staff (classified as Limited-Service Restaurants) are considered a small business if they have an annual revenue of less than USD 12M.
In Australia, a small business is generally defined by ASIC as a business with less than 100 employees and less than AUD 50M in annual revenue. That's a lot of babychinos!
As you can see, it takes a significant number of employees and revenue to get out from under that "small business" banner. An important part of opening a business is managing your expectations from the get-go.
For the 50% of business owners that do manage to stay open longer than five years AND go on to grow those businesses beyond being the small business category in the coffee sector, the stories that come out of those experiences are the kinds of podcast conversations dreams are made of. If you've never listened to the NPR podcast "How I Built This", do yourself a favor and get an insight into the stories of business owners that managed to achieve such heights. Be inspired by their humbled beginning and school yourself on how hard they had to work to build their brands. Most of them slogged it out and lived on the poverty line for decades before they found "success".
Survivability isn't the only thing you need to think about when considering whether or not to become a small business owner in the coffee industry. Profitability is the real challenge in our industry. So while the odds are stacked in your favor for survivability, I'm afraid that the news isn't great about profitability.
The more you poke around on the internet and read blogs that are trying to convince you that they have the "secret to building a successful small business in coffee" (particularly when it comes to cafes/coffee shops) the more you understand how people are tricked into a false sense of security and confidence believing they're going to make millions of dollars as cafe or roastery owners. I can not over-state this enough - THIS IS NOT THE CASE!
You can "aim" to make a 50% net profit margin as much as you want, however, the fact of the matter is you should "expect" to make 3-5% net profit, and that's if you're running a tight ship. Oh, and p.s., you'll still have to pay tax on that!!
If things weren't challenging enough, I'm hearing and reading from multiple sources within the specialty coffee industry this oversimplification of the strategy "the best way to get profitable is to open more than one cafe as quickly as you can". The logic behind this is some variation of, "if you're going to the trouble to place orders to suppliers each day for one cafe, you may as well do it for two at the same time, bro."
Another version of this if you own a coffee roasting business that supplies your coffee shops "you've already invested in the roaster, may as well maximize your return on it, open a second shop and roast for both. Sweat your assets man!".
At face value, this is not illogical, however, it is dangerously oversimplified. Especially when you will need to consider the increase in capital, cash flow, labor, and infrastructure required to support such growth. I'd caution you from taking advice from anyone who doesn't have skin in the game. Too many times I've heard new or soon to be first-time business owners tell me of their plans to open their second location too quickly because so-and-so said they should, all the while completely oblivious to the challenges they're about to encounter as first-time coffee small business owners.
As we move deeper into the next decade, the landscape of the way we do business across the value chain will be shifting not at all, and then, seemingly without notice, very quickly. We are, after all, an industry that seems to follow fads (regardless of how ridiculous they may seem at times). You have a choice as a business owner to either be reactionary to the changes that occur or pro-active from now, setting your business trajectory.
Elixir Specialty Coffee, a genuinely unique tasting ready to drink (RTD) coffee beverage experience
If you're considering becoming a small business owner in any sort of a coffee focused business in the '20s, here are six helpful things to consider before you make the decision to jump in.
Do you really, actually, truly, definitely want to open a business? Everyone knows someone who was in a miserable marriage and thinks that taking the next natural step, having a baby, will somehow make everything better. It doesn't! The next natural step should be therapy. Instead, we choose to have the baby and that stress only puts more strain on the marriage, in turn, breeding resentment and causes what was already damaged to become even more fractured. Far too many times, people working in the coffee industry think that the solution to an unhappy career or a shitty employer is to have their own "baby" and open their own business. I assure you, opening a business before you're skillfully and financially ready to do so will only amplify your stress, anxiety, and frustration. Get better mentors around you and work on yourself (check out this video 12 Rules For Life) rather than creating distractions that will add more chaos in your life. Your reasons for opening a business should include things like being passionate about the product you have chosen to deliver, you've researched the need for your product and see a somewhat clear path (all be it challenging) to get your product into your pre-defined market, you understand how to access your market, you've got the necessary capital to start and run your business for the first 12 months, and you've done the work to learn what you need to know about running a business or have projected adequate cashflow to hire the resources to take care of the things you don't know. p.s. Going into business because you "love coffee" is a terrible reason for opening a business. Watch this if you want to know more. (There's also a fun little reference below to drive the point home #anthonybourdain)
The next decade will not be "business as usual" for the coffee industry. In an article released in September 2019 by ReportLinker titled Global Coffee Shops Industry, the author writes "Coffee Shops market worldwide is projected to grow by US$58.7 Billion, driven by a compounded growth of 4.1%." This is encouraging news for anyone considering opening a coffee shop in the '20s as the article goes on to say "Poised to reach over US$143.4 Billion by the year 2025, Coffee will bring in healthy gains adding significant momentum to global growth.". This article does not consider, however, that as we move deeper into the '20s, several dynamic variables of the industry are likely to exhibit signs of greater instability and thus challenge these projections. These variables include (but are not at all limited to) the longer-term ramifications of a continuing months-long coffee price crisis, concerns over the availability and accessibility of coffee as increasing numbers of producers tend towards choosing more profitable crops over producing coffee, the unpredictable effects of climate shifting on coffee agricultural practices and regions, an aging population of coffee producers and pickers, the attraction of automation in cafes and roasteries to increase profit margins, the ever-more expensive marketing budgets required to compete for attention in a world ignited by marketing AI, and ever-evolving technologies (e.g. apps and vending machines) for customers to purchase coffee. Adaptability will be a determining factor of success for business owners as these aspects shift and evolve and while business is projected to grow at the rates quoted above, it may be stifled from doing so because of these variables. Interestingly, the longer a business can survive into this new decade, the more susceptible it will be to the effects of these shifting variables. Consider your ability to compete and adapt as a business owner before you decided whether or not you're ready to jump into any new venture.
There's more to a business than a great product. As the creator and owner of Elixir Specialty Coffee, a genuinely unique ready to drink (RTD) coffee beverage experience that, upon its release in 2015, received a barrage of hate mail from specialty coffee professionals from around the globe who thought it was their duty to write to tell me that they could do Elixir "better" than we could and would be "taking me down by releasing their "better" version of Elixir soon". Five years in, we're still growing steadily with exactly 0% of those people making it to market. "Soon" for them never came. There's so much more to a successful business than having a great product. Starting and working capital, marketing, customer acquisition and conversions, branding, infrastructure, supply chain management, legal, permits, intellectual property, financing and accounting, cash flow and so much more. Very little of it, building a business is as sexy as you think it's going to be and the shine wears off very quickly.
Do you understand the complexity of how coffee is grown and the coffee supply/value chain? Knowing the complexity of how coffee is agriculturally transformed from a cherry to a green bean that's ready for export should be a necessary barrier to entry into our industry. It's not, but it should be. So too should understanding the different mechanisms by which coffee is traded, (exported and imported) around the world. Without this knowledge, business owners cannot have an appreciation of the real cost of producing and transporting coffee and will continue to take the commodity for granted. Despite the approximate 4% growth predicted by the article mentioned earlier in this post, the current economic and geopolitical challenges within many coffee-growing regions are added variables that stand to challenge whether or not that 4% growth comes to fruition. Understanding the intricacies of the supply chain in which you'll be engaging gives you the advantage of being pro-active to the inevitable shifting within the value chain that will happen this decade. The alternative is to become reactive to sudden price increases and supply challenges that will most likely burn through cash and accelerate the demise of your business. Investigating how to secure your supply chain as a part of considering whether or not to open a business is wise.
Generation Z is here and you'd better be ready: Something further to consider regarding the importance of having the necessary insight into how coffee is priced, bought, and sold is the way this information will impact your employees (if they're not all robots). The first of Generation Z (born 1995-2015) are graduating from college/university and entering the workforce - and ours is the first workforce many of them will enter. Todd Corley, Chief Diversity & Inclusion Officer at OhioHealth, and Chairman of the National Society of High School Scholars Foundation is quoted in a 2017 article as saying “[Generation Z] wants places that are purpose-driven, workplaces that really promote how they’re giving back, and are connected with bigger life missions.” The article goes on to say "Because of this, employers need to understand the causes that are important to this cohort.". Needless to say, if you care at all about keeping your Gen-Z employees, they're going to be attracted to working for your business if you can demonstrate your commitment to engaging in sustainable coffee trade practices that benefit the producer and the entire value chain with net positive social and environmental impact. This article will give you insight into how Generation Z free underprepared to enter the workplace. They are seeking leadership and unlike their millennial predecessors, are seeking to be mentored by potential employers. I'll be doing a full-day leadership workshop at each of the Coffee Fest tradeshows happening in New York, Chicago, Anaheim and Washington 2020 and one of the things we'll be covering will be "leading for different generations". Tickets will be available soon here (and use our 50% off code "mapitforward" when getting your tickets into the actual Coffee Fest Trade show)
Do you have the emotional bandwidth for what's coming? No matter how challenging you think owning a business is going to be, I assure you, nothing can compare you for what's coming. This sentiment is echoed by even the most successful, strongest, most competitive business owners. Recently in a conversation on The MAP IT FORWARD podcast with Los Angeles based cafe and roastery co-owner Steve Chang of Copa Vida Coffee, we went deep on this very subject. Before starting Copa Vida, Steve's wife's family sold the most successful noodle manufacturing company in America. After the sale of the noodle company, Steve and his wife Elena, both highly competent and successful business people each within their own right, decided to venture into the world of coffee having had no previous experience in the industry. During the podcast, Steve discusses how they could never have envisaged the challenges ahead of them as they quickly grew to six stores in six years. As we explored in our conversation, aside from the practical skills needed to keep a business afloat, the emotional intelligence, tenacity, patience, community and sheer grit required to nurture and cultivate a growing business are skills that are highly underestimated by most people considering going into business for the first time. I regularly encounter business owners in the coffee industry that tell me "I had no idea it was going to be this hard". If you're thinking of going into business and thinking "It will be different for me", please take a read of this fabulous account by Michael Idov from 2005 about his experience as a cafe owner in New York's Lower East Side. That quote by Anthony Bourdain at the end (I eluded to it at the top of this article) about getting "into the business for love" is golden, and ever so true.
I've said it before many times, "Having a business will teach you everything you never wanted to know about yourself" - emotionally, behaviorally and intellectually. If you're ready to deal with what comes from going on that journey, you'll be a significantly more well rounded and capable human for having done so. For me, being in business is a way of growing as a person. It opens my mind, makes me more compassionate, makes me smarter, teaches me what kind of people I do and don’t want in my life, and helps me make the kind of impact I personally want to make in this world. Being in business is hard and hard things create a useful kind of friction in your life that, when dealt with well (and sometimes not well), teach you exactly how capable you are. Learning how much friction to serve yourself is a necessary skill. Too much and it will break you, not enough and it's too easy (and not really friction).
This article isn't meant to stop you from opening a business in the coffee industry. I'd simply rather you take some time to understand the amount of friction you're setting yourself up for, prepare for it and ultimately give yourself the best chance to conspire to your own success. The world doesn't need more coffee businesses, it needs more SUCCESSFUL coffee businesses.
Additional material: We're running a series of 5 episodes of The Daily Coffee Pro coffee podcast by MAP IT FORWARD as additional content to this post, recorded live on our Youtube channel and released as regular episodes of the DCP podcast. Click here to get access to the whole series as they're released.
Also, ever considered hiring a monthly coffee business coach to help you launch or grow your business? Click here to explore this and other consulting options.
This article was written by Lee Safar. Lee is the founder of MAP IT FORWARD and the CEO of Elixir Specialty Coffee Inc. An 18-year veteran of the Australian Specialty Coffee industry, Lee is now based in San Diego, California where she runs both businesses and records daily episodes of The MAP IT FORWARD Podcast featuring guests from around the world specializing in all sectors of the coffee value chain. Lee travels the world doing professional business and career development focused workshops and consultations for the global coffee industry.
Lee has a bachelors degree in Science (Genetics) from the University of NSW, an associate diploma in counseling and interpersonal skills, extensive experience in project management and business analysis in the corporate sector, and was a releasing music artist and record label owner.