How to Open a Financially Successful Coffee, Espresso & Tea Shop: REVISED 2ND EDITION
By Douglas Brown and Elizabeth Godsmark
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About this ebook
In this completely revised new second edition, the author leads you through every fact of the coffee business while providing detailed instructions and examples. This manual includes sample business forms, worksheets and checklists for planning, opening, and running day-to-day operations; sample menus; coffee drink recipes; inventory lists; plans and layouts; and dozens of other valuable, time-saving tools.
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How to Open a Financially Successful Coffee, Espresso & Tea Shop - Douglas Brown
How to Open a Financially Successful
Coffee, Espresso & Tea Shop
Elizabeth Godsmark, Lora Arduser and
Douglas R. Brown
This Atlantic Publishing eBook was professionally written, edited, fact checked, proofed and designed. Over the years our books have won dozens of book awards for content, cover design and interior design including the prestigious Benjamin Franklin award for excellence in publishing. We are proud of the high quality of our books and hope you will enjoy this eBook version, which is the same content as the print version.
How to Open a Financially Successful Coffee, Espresso & Tea Shop
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No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be sent to Atlantic Publishing Group, Inc., 1405 SW 6th Avenue, Ocala, Florida 34471.
Library of Congress Cataloging-in-Publication Data
Brown, Douglas R.
How to open and operate a financially successful coffee, espresso and tea shop : with companion CD-ROM / by Douglas R. Brown. -- Revised 2nd edition.
pages cm
Includes bibliographical references and index.
ISBN-13: 978-1-60138-905-3 (alk. paper)
ISBN-10: 1-60138-905-1 (alk. paper)
1. Coffeehouses--Management. 2. Coffeehouses--Finance. I. Godsmark, Elizabeth. How to open a financially successful coffee, espresso & tea shop. II. Title. III. Title: How to open and operate a financially successful coffee, espresso & tea shop.
TX911.3.M3G63 2014
647.95068--dc23
2013045801
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A few years back we lost our beloved pet dog Bear, who was not only our best and dearest friend but also the Vice President of Sunshine
here at Atlantic Publishing. He did not receive a salary but worked tirelessly 24 hours a day to please his parents.
Bear was a rescue dog who turned around and showered myself, my wife, Sherri, his grandparents Jean, Bob, and Nancy, and every person and animal he met (well, maybe not rabbits) with friendship and love. He made a lot of people smile every day.
We wanted you to know a portion of the profits of this book will be donated in Bear’s memory to local animal shelters, parks, conservation organizations, and other individuals and nonprofit organizations in need of assistance.
– Douglas and Sherri Brown
PS: We have since adopted two more rescue dogs: first Scout, and the following year, Ginger. They were both mixed golden retrievers who needed a home.
Want to help animals and the world? Here are a dozen easy suggestions you and your family can implement today:
• Adopt and rescue a pet from a local shelter.
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• Plant a tree to honor someone you love.
• Be a developer — put up some birdhouses.
• Buy live, potted Christmas trees and replant them.
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• Save natural resources by recycling and buying recycled products.
• Drink tap water, or filter your own water at home.
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• If you eat seafood, make sustainable choices.
• Support your local farmers market.
• Get outside. Visit a park, volunteer, walk your dog, or ride your bike.
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The companion CD-ROM is not available for download with this electronic version of the book but it may be obtained separately by contacting Atlantic Publishing Group at sales@atlantic-pub.com
Table of Contents
Chapter 1: Successful Pre-Opening Activities
Chapter 2: Organizing Pre-Opening Activities
Chapter 3: The Basics of Buying a Coffee, Espresso & Tea Shop
Chapter 4: How to Invest in a Franchise
Chapter 5: Basic Cost Control for Beverage and Food Service Operations — An Overview
Chapter 6: Choosing the Best Equipment, Coffees, Teas and Food Products
Chapter 7: Profitable Menu Planning — For Maximum Results
Chapter 8: Inventory Control — For Maximum Profits
Chapter 9: Successful Management of Operational Costs and Supplies
Chapter 10: The Essentials of Beverage and Food Safety, HACCP, and Sanitation Practices
Chapter 11: Computers and Your Beverage and Food Service Operation
Chapter 12: Successful Employee Recruitment
Chapter 13: Successful Employee Motivation and Training
Chapter 14: Successful Labor Cost Control
Chapter 15: Successful Public Relations: How to Get Customers in the Door
Chapter 16: Internal Marketing: How to Keep Customers Coming Back to Your Establishment
Chapter 17: Internal Bookkeeping: Accounting for Sales and Costs
Chapter 18: Successful Budgeting and Profit Planning — For Maximum Results
Introduction
The market for specialty, gourmet coffees and teas is an exciting growth area of the beverage service industry. Sales of specialty coffees alone increased from approximately $45 million in the early 1960s to more than $10 billion in the United States by 2014, and steady growth is forecasted in this buoyant sector of the beverage market.
Today, the United States consumes more coffee per capita than any other country in the world and consumption is likely to increase at a rate of 2.7 percent per year through 2015 according to the SBA National Information Clearinghouse. According to market analysts, the increase in coffee consumption is entirely attributable to the rapid growth of the specialty coffee segment of the beverage industry. About 37 percent of the U.S. population are regular consumers of gourmet coffee; a remarkable achievement considering that, just over a decade ago, only 3 percent of the population indulged in such delights on a regular basis. The percentage reached a pre-recession peak of 40 percent between 2004 through 2006. In 1991, there were as few as 500 coffee bars throughout the United States, today there are in excess of 20,000!
To succeed, new coffee shops have to offer more than a decent cup of coffee or tea and acceptable service, they need to serve up more than the sum of their individual parts; they need to serve up a gourmet beverage experience. Consumer expectations have never been higher. The demand for quality products, in general, and a willingness to spend more disposable income on small, daily indulgences, such as the perfect cup of coffee or tea, has never been greater.
In response to this growing demand for the espresso experience, a café culture is emerging that offers ambience, buzz, and relaxed social interaction reminiscent of the vibrant European-style coffee houses. Indeed, the desire to linger at leisure over an up-market coffee or tea, in a relaxed and welcoming environment, is hugely appealing to a broad section of the population, not only in the United States but also throughout the Western world. The café culture scene has truly taken hold in the United States, with 27 percent of all coffee now consumed outside the home according to 2011 statistics from the National Coffee Association of U.S.A. More important, this burgeoning trend presents an area of potential opportunity for the prospective coffee, espresso, and tea shop entrepreneur.
How to Open a Financially Successful Coffee, Espresso & Tea Shop offers a wealth of information and practical advice for the prospective specialty beverage operator. From inception all the way to fruition, this comprehensive manual directs you through the various stages of setting up a successful coffee, espresso, and tea shop.
What sets this guide apart is its no-holds-barred
approach to steering the reader through the many pitfalls that the potential coffee and tea shop owner is likely to encounter, en route to success! Its honesty is refreshing — as refreshing, possibly, as the specialty coffees and teas you intend to serve in your unique beverage establishment!
Sincerely,
Douglas R. Brown
Table of Contents
Chapter 1: Successful Pre-Opening Activities
This chapter lists and describes the essential pre-opening activities and procedures which must be completed by any prospective coffee, espresso, and tea shop owner. There are bucks to be made in quality beans and loose tea leaves, but only if you get it right from the start.
Before engaging in any business activity, seek the guidance of a lawyer who can guide you through the many legal issues that are specific to your requirements. You can save yourself a lot of hassle if you seek legal counseling during the early stages of the opening period. The services of a local accountant or CPA also should be retained. The accountant will be instrumental in helping you set up the business, and can provide you with a great deal of financial advice to inform your decision-making.
A carefully structured, formal business plan is fundamental to the setup of any successful venture is; your future success depends upon it. Your formal business plan will be your road map for success.
Business Plan Outline
Elements of a Business Plan
I. Cover sheet
II. Statement of purpose
III. Table of contents
A. The Business
1. Description of business
2. Marketing
3. Competition
4. Operating procedures
5. Personnel
6. Business insurance
7. Financial data
B. Financial Data
1. Loan applications
2. Capital equipment and supply list
3. Balance sheet
4. Break-even analysis
5. Pro forma income projections (profit and loss statements)
a. Three-year summary
b. Detail by month, first year
c. Detail by quarters, second and third years
d. Assumptions upon which projections were based
6. Pro forma cash flow
a. Follow guidelines for number 5
C. Supporting Documents
1. Tax returns of principals for last three years
2. Personal financial statement (all banks have these forms)
3. Copy of proposed lease or purchase agreement for building space
4. Copy of licenses and other legal documents
5. Copy of resumes of all principals
6. Copies of letters of intent from suppliers, etc.
What to Include in Your Business Plan
It is vital that your business plan shows clearly where you want to go with your coffee, espresso, and tea shop business; the plan must include immediate and short- and long-term goals. You also must indicate that you are prepared to cope with the challenges and setbacks that will inevitably occur at various stages along the route to success. Questions need to be asked, and answers provided to cover all likely eventualities.
The body of the business plan can be divided into four distinct sections: 1) the description of the business, 2) the marketing plan, 3) the management plan, and 4) the financial management plan. Addenda to the business plan should include the executive summary, supporting documents and financial projections.
Business Plan: Section 1 Description of Your Coffee, Espresso & Tea Shop
In this section of the business plan, provide a detailed description of your shop. Ask yourself, What business am I in?
and What makes my coffee and tea shop special?
In answering these questions, include your products, market and services, as well as a thorough description of what makes your coffee, espresso, and tea shop unique. As you develop your business plan, be prepared to modify or revise your initial questions.
The business description section is divided into three primary sections: Section 1 actually describes your business; Section 2, the product or service you will be offering; and Section 3, the location of your business and why this location is desirable (if you have a franchise, some franchisers assist in site selection). When describing your coffee, espresso, and tea shop, you should explain:
• Legalities. Business form: proprietorship, partnership, or corporation. What licenses or permits you will need?
• Business type
• What your product or service is. Perhaps sample beverages and food menus could be included.
• Type of business. Is it a new independent business, a takeover, an expansion, a franchise?
• Why your business will be profitable. What are the growth opportunities? Will franchising impact growth opportunities?
• When your business will be open. What days? Hours?
• What you have learned about your kind of business from outside sources (trade suppliers, bankers, other franchise owners, franchiser, publications)?
Cover Sheet
Place a cover before the description. Include the name, address, and telephone number of your shop and the names of all principals.
Description
In the explanation of your business, describe the unique aspects of your shop and how or why they will appeal to consumers. Emphasize any special features that you feel will particularly appeal to customers and explain how and why these features are appealing. The description of your business should clearly identify goals and objectives. It should also clarify why you are, or why you want to be, in business.
Products and Services
Try to describe the benefits of your products and services from your customers’ perspective. Successful coffee, espresso, and tea shop owners will have carefully researched what their prospective customers want or expect from them. This anticipation can be helpful in building customer satisfaction and loyalty. And, it is certainly a good strategy for beating the competition or retaining a competitive edge. You will need to describe:
• What you are selling — include your beverage and food menus here.
• How your product or service will benefit the customer
• Which specific products/services are in demand and whether these products or services can maintain a steady cash flow
• What is different about the product or service your shop is offering.
Location
The location of your coffee, espresso, and tea shop can play a decisive role in its success or failure. Your chosen location should be customer-centered; the location should be accessible and provide a sense of security. Consider these questions when addressing this section of your business plan:
• What are your location needs?
• What kind of space will you need?
• Why is the building or area desirable?
• Is it easily accessible? Is public transportation available? Is street lighting adequate?
• Are market shifts or demographic shifts occurring?
Finally, make a checklist of questions you identify when developing your business plan. Categorize your questions and, as you answer each question, remove it from your list.
Business Plan: Section 2 The Marketing Plan
How well you market your coffee, espresso, and tea shop, along with a few other considerations, will ultimately determine degree of success or failure for your business. The key element of a successful marketing plan is to know your customers — their likes, dislikes, and expectations. By identifying these factors, you can develop a marketing strategy that will allow you to arouse and fulfill their needs.
Identify your customers by their age, gender, income/educational level, and residence. At first, target only those customers who are most likely to visit your shop. As your customer base expands, you may need to consider modifying the marketing plan to include other customers.
Develop a marketing plan for your business by answering these questions (potential franchise owners will have to use the marketing strategy the franchiser has developed). Your marketing plan should answer the questions outlined below:
• Who are your customers? Define your target market(s).
• Are your markets growing? Steady? Declining?
• Is your market share growing? Steady? Declining?
• If a franchise, how is your market segmented?
• Are your markets large enough to expand?
• What pricing strategy have you devised?
• How will you attract, hold, and increase your market share? If a franchise, will the franchiser provide assistance in this area? Based on the franchiser’s strategy, how will you promote your sales?
The Competition
Competition in the specialty coffee and tea segment of the beverage service industry is fierce. Because of the volatility and competitiveness in this area of the beverage market, it is vital that you know and understand your competitors. Questions like these can help you stay ahead of the competition:
• Who are your five nearest direct competitors?
• Who are your five nearest indirect competitors; for example, gourmet coffee, and tea retail stores?
• Are their businesses steady? Increasing? Decreasing?
• What have you learned from their operations? From their advertising?
• What are their strengths and weaknesses?
• How does their menu or service differ from yours?
Create a file on each of your competitors containing examples of their advertising, promotional materials, and pricing strategy techniques. Review these files periodically, determining when and how often they advertise, sponsor promotions, and offer sales. Study, for example. Is their copy is short, descriptive or catchy? Do they reduce prices for certain promotions?
Pricing and Sales
You can use your pricing strategy to improve your overall competitiveness. Get a feel for the pricing strategy your competitors are using. That way you can determine if your prices are in line with your competitors and if they are in line with specialty coffee and tea service industry averages. Pricing considerations should include:
• Beverage and food menu cost and pricing
• Competitive position
• Pricing below competition
• Pricing above competition
• Price lining
• Multiple pricing
• Service components
• Material costs
• Labor costs
• Overhead costs
The key to success is to have a well-planned strategy, to establish your policies, and monitor prices and operating costs constantly in order to ensure profits. Even in a franchise where the franchiser provides operational procedures and materials, it is a good policy to keep abreast of the changes in the marketplace, because these changes can affect your competitiveness and profit margins.
Advertising and Public Relations
Many owners of retail beverage outlets operate under the mistaken concept that the business, its products, and service will promote itself, and end up channeling money that should be used for advertising and promotions to other areas of the enterprise. Advertising and promotions, however, are the lifeline of a business and should be treated as such. We have devoted a whole chapter to marketing and promoting your coffee, espresso, and tea shop (see Chapter 16: Internal Marketing: How to Keep Customers Coming Back to Your Establishment).
Develop a plan that uses advertising and networking as a means to promote your specialty beverage business. Create short, descriptive copy (text material) that clearly identifies your beverages, services, prices, and your shop’s location. Use catchy phrases to arouse the interest of your readers, listeners, or viewers. In the case of a franchise, the franchiser will provide advertising and promotional materials as part of the franchise package; you may need approval to use any materials that you and your staff develop. Even if this is not the case, as a courtesy, allow the franchiser the opportunity to review, comment on, and, if required, approve these materials before using them. Make sure the advertisements you create are consistent with the image the franchiser is trying to project. Remember, the more care and attention you devote to your marketing program, the more successful your coffee, espresso, and tea shop will be.
Business Plan: Section 3 The Management Plan
Managing a business requires dedication, persistence, the ability to make decisions, and the ability to manage both employees and finances. Your overall management plan, along with your marketing and financial management plans, sets the foundation for the success of your business.
Your employees are your most important resources and will play an important role in the total operation of your business. Consequently, it is imperative that you know what skills you do and do not possess since you will have to hire personnel to supply the skills that you lack. Additionally, it is important that you know how to manage and treat your employees. Make them part of the team. Keep them informed of any changes and ask for their feedback. Employees oftentimes have excellent ideas that can lead to new market areas or improvements of existing products or services that can improve your overall competitiveness.
Your management plan should answer questions such as:
• How does your background/business experience help you in this business?
• What are your weaknesses, and how can you compensate for them?
• Who will be on the management team?
• What are their strengths/weaknesses?
• What are their duties?
• Are these duties clearly defined?
• If a franchise, what type of assistance can you expect from the franchiser?
• Will this assistance be ongoing?
• What are your current personnel needs?
• What are your plans for hiring and training personnel?
• What salaries, benefits, vacations and holidays will you offer? If a franchise, are these issues covered in the management package the franchiser will provide?
If your business is a franchise, the operating procedures, manuals, and materials devised by the franchiser should be included in this section of the business plan. The franchiser should assist you with managing your franchise. Take advantage of their expertise and develop a management plan that will ensure the success of your franchise and satisfy the needs and expectations of employees, as well as those of the franchiser.
Business Plan: Section 4 The Financial Management Plan
Each year thousands of potentially successful businesses fail because of poor financial management. In 2010, 6.6 percent of the specialty coffee shops closed according to the Specialty Coffee Association of America®. As a coffee, espresso, and tea shop owner, you will need to identify and implement policies that will lead to and ensure that you will meet your financial obligations.
To manage your finances effectively, plan a sound, realistic budget by determining the actual amount of money needed to open your shop (start-up costs) and the amount needed to keep it open (operating costs). The first step to building a sound financial plan is to devise a start-up budget. Your start-up budget will usually include such one-time-only costs such as major equipment, utility deposits, down payments, etc.
Start-Up Budget
• Personnel (costs before opening)
• Legal/Professional Fees
• Occupancy
• Licenses/Permits
• Equipment
• Insurance
• Supplies
• Salaries/Wages
• Accounting
• Income
• Utilities
• Payroll expenses
An operating budget is prepared when you are actually ready to open for business. The operating budget will reflect your priorities in terms of how you spend your money, the expenses you will incur and how you will meet those expenses (from income). Your operating budget should also include money to cover the first three to six months of operation. It should allow for the following expenses:
Operating Budget
• Personnel
• Insurance
• Rent
• Depreciation
• Loan payments
• Advertising/Promotions
• Legal/Accounting
• Miscellaneous expenses
• Supplies
• Payroll expenses
• Salaries/Wages
• Utilities
• Dues/Subscriptions/Fees
• Taxes
• Repairs/Maintenance
Additionally, the financial section of your business plan should include any loan applications you have filed, a capital equipment and supply list, balance sheet, break-even analysis, pro forma income projections (profit and loss statement), and pro forma cash flow. The income statement and cash flow projections should include a three-year summary, detailed by month for the first year and detailed by quarter for the second and third years.
The accounting system and the inventory-control system you will be using are also generally addressed in this section of the business plan. If a franchise, the franchiser may stipulate in the franchise contract the type of accounting and inventory systems you may use. If you develop the accounting and inventory systems yourself, seek the input of a financial adviser; he or she can assist you in developing this section of your business plan. The following questions should help you determine the amount of start-up capital you will need to purchase and open a franchise:
• How much money do you have?
• How much money will you need to purchase the franchise?
• How much money will you need for start-up?
• How much money will you need to stay in business?
Other questions that you will need to consider are:
• What type of accounting system will you use? Is it a single- or dual-entry system?
• What will your sales and profit goals be for the coming year? If a franchise, will the franchiser set your sales and profit goals? Or, are you expected to reach and retain a certain sales level and profit margin?
• What financial projections will you need to include in your business plan?
• What kind of inventory-control system will you use?
Your plan should include an explanation of all projections. Unless you are thoroughly familiar with financial statements, get help in preparing your cash flow and income statements and your balance sheet. Your accountant or financial advisor can help you accomplish this goal.
Legal Forms of Business
Types of Business Organizations
When organizing a new business, one of the most important decisions to be made is choosing the structure of the business. Factors influencing your decision about your business organization include:
• Legal restrictions Liabilities assumed
• Type of business operation
• Earnings distribution
• Capital needs
• Number of employees
• Tax advantages or disadvantages
• Length of business operation
The advantages and disadvantages of sole proprietorship, partnership, corporation, and the new hybrid limited liability company are listed below:
Sole Proprietorship
This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by simply finding a location and opening the door for business. There are likely to be fees to obtain business name registration, a fictitious name certificate, and other necessary licenses. Attorney’s fees for starting the business will be less than those of the other business forms because less preparation of documents is required and the owner has absolute authority over all business decisions.
Partnership
There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by making an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating.