Our unrequited love-affair with all things caffeine has seen a 300% increase in the number of cafes in less than a decade; cafes are everywhere, and the great Australian dream once focused on owning our own home, seems to have shifted to owning our own café!
But, before rushing off to a barista course, or spending hours researching the next artisanal coffee trend, or where the best origin is for your single-origin coffee blend, here are 8 things to consider when taking the ‘plunge’.
It’s not them, It’s you.
The success or otherwise of a café is strongly linked to the Owner; even the meaning of success itself. Many business owners define success in terms of self-determination; simply working for themselves. Others don’t see beyond the romance of being their own boss, and some look through the lens of Return On Investment (ROI).
1. What do you want to achieve through owning your own Café?
- What does success mean to you, specifically?
- Is it an investment decision?
- Are you investing money into a Café with an expectation of a financial return? And if so, how much return?
- Do you have an exit strategy?
A Hospitality business requires time and focus, and an important perspective to consider is what the reality looks like; you are no longer working for a paycheck and a café is not a Monday to Friday, 9-5 job, regardless of the opening hours.
A key predictor of success for any hospitality business is the hands-on nature of ownership; if, as an owner, you work in the business you are more likely to succeed than if you do not, and the pressure to meet family and other external obligations can be a reason why a business fails to begin, or an owner has an unplanned exit.
2. How much time are you prepared to invest in your business?
- What lifestyle do you want to live?
- Do you have time commitments outside of running a business that might prevent you from being successful?
Deciding what you want and how much time you have available can also impact the size of the business you want to own; a small Monday to Friday business may be cheaper to purchase or establish, but the revenue may be significantly less, and can’t support a Manager, where a larger business can, offering greater flexibility.
Family support can also be a reason for success; every person in a business can benefit from sound external support. In fact, having the right mentor can be a predictor for success in food and beverage businesses.
3. Do you have family and/ or other support? Do you have or will you have a mentor?
What financial resources do you have at your disposal? Both opening a café or purchasing one requires significant amounts of capital. Both through the purchase itself, and the need to prop-up cash flow for the first twelve months of trading.
Management new to a business will take time to understand the nuances of that business, and that ‘liability of newness’ will cost money as owners and managers begin to understand how to be efficient in meeting the demands of their business.
Also, highly leveraged businesses, businesses with significant amounts of debt, are much more likely to fail than businesses with lower levels of debt. Highly leveraged businesses and shortages of capital can lead to short-term decisions that are detrimental to the business in the long-term. It may be better to own a smaller business with less financial leverage, or to raise more funds, than stretching to a bigger business that you may struggle to afford.
A bar can also require a large upfront investment in stock, and new businesses rarely have favourable terms with their suppliers.
4. How much money do you have to invest? Not only in purchasing the business, but in operating the business for the first twelve months of ownership.
An owners Strengths and Weaknesses become those of the business they own; managerial inadequacy, incompetence, inefficiency, and inexperience are a consistent theme when explaining failures in business, and they all come back to the Owner.
Have you managed a business before? Experience in hospitality would be beneficial, but alone it is not enough. A café is a complex business, and an owner needs to be across obvious things like managing staff and delivering quality food and service, but this can be the tip of the iceberg of what you need to know.
Things like Food Safety and Workplace Health and Safety, GST, Pay As You Go (PAYG), BAS and Superannuation, Fair Work legislation and Privacy legislation, Anti-bullying laws and more are crucial to the operation of your business.
A successful Owner can begin to upskill in these areas before even opening the doors.
5. What is your experience in running a business?
- What are the legal requirements of running your business, and how familiar are you with them?
- What can you learn before purchasing or starting a business?
Choosing the Right Business
There are over 20,000 cafes in Australia, and with 50% of businesses either closing or going up for sale by their 4th birthday, there will always be businesses to buy.
Whether to or not becomes a key decision for a new owner; either buying an existing business with existing infrastructure or starting a business from scratch.
Both propositions have merit but are wildly different in their execution. An existing business may have a great location and have spent money on a quality fit-out and equipment, but have been poor in execution, or executed the wrong business model, or had too much debt. Acquiring an existing business may even be cheaper than starting a new one.
But, an existing business may have poor lease terms, and the demographics of an area may not suit the business or has changed over time when the business has not, or be encumbered with ‘goodwill’ or be expensive to buy.
Even the state of the broader economy has an impact on the decision, with Franchise businesses tending to do better than independently owned businesses when the economy is doing poorly. Franchise systems can provide support through the crucial first year of a businesses life but offer little choice in terms of technology or suppliers, and the value of the support they provide diminishes over time, but the franchise fees do not.
An independent business has greater flexibility in how it operates, where it buys its supplies from and how much it pays for example, and has the ability to change quickly and drastically if it needs to, but requires a higher level of management expertise to implement the processes and controls it requires to be successful, whereas a Franchise comes with the support to put them in place.
6. Do you start a Café from scratch, or buy an existing Café? Do you buy a Franchise or an Independent Business?
“By failing to prepare, you are preparing to fail” is as true today as it was over 200 years ago. A Business Plan is the heart of every business, and it is especially relevant to a café.
A Business Plan can be completed with information readily accessible on the internet, as can templates that disclose the types of information you need.
Cafes fail more often in postcodes where cafes are concentrated, and Food Businesses can succeed or fail based upon the demographics of the local area.
Both of these crucial bits of information are readily available from the Australian Bureau of Statistics; it can tell you exactly how many businesses, of each type, are in each postcode, has a year on year comparison of opening and closings (which can tell you how an area is performing), and holds comprehensive demographic data; the composition of households (how many people are married, or single, or have children), the professional and educational makeup of the area, even the average weekly earnings per household, and homeownership. Plus much more. Looking for demographic data?
Looking for demographic data? The ABS QuickStats is a good place to start
It is also relatively simple to compile a competitive analysis for your chosen area; who are your competitors, (what do they do well?, why do customers go to them?) and what opportunities exist within the marketplace (who are your customers? where will they come from?)
Having a clear and focused ‘Concept’ is a key ingredient for success in food and beverage businesses. The Concept is distinct from the Strategy, which is a plan of action. A Café’s Concept informs every decision and encapsulates the positioning of the food and beverage, the service standard and style (whether it is table-service, or order at the counter, or order via tablet or smartphone), even the fit-out and marketing.
The Concept tells you whether food it is bought-in, made in-house, or a combination of both, it informs your staffing needs, and the layout of the café.
There is a huge variety of business models within the ‘café’ segment; cafes can either be “Quick-service Restaurant-like”, where customers come and go frequently, and the business is orientated to speed and efficiency, or the cafe can be “Restaurant-like” where the average spend is maximised, food is a crucial ingredient of the product mix, and opening hours may include weekends and evenings.
The concept tells you what should be on the menu, how the food will be prepared, by whom and informs the pricing strategy.
Information pertaining to your potential customers and competitors are the basis of Market Research; a core component of your Business Plan, which informs the choice of ‘Concept’, or ‘theme’ of the business.
A differentiated Concept, one that is sufficiently different from the competition, and oriented towards the customers wants and needs, succeeds much more often than one that is not.
7. What is your Café Concept or Theme?
- Do you have a Business Plan?
- Have you completed Market Research?
What are your key numbers?
A Cafes success or otherwise are often strongly influenced by the decisions that are taken before the doors even open; the lease especially can be a predictor of success or failure. If your lease is too high the business can be encumbered to a point that profitability is difficult.
But how do you know what is too much?
To be successful in a Café, the monthly revenue should exceed the annual lease. When assessing a lease, you can work backwards;
Patrice has been working on her business plan for 18 months. She knows her concept and has a good idea of the menu price and types of dishes and drinks she wants to serve. Patrice is considering a lease at a new development in an area she has identified as her preferred location.
The proposed lease is $120,000 per year.
To be successful, Patrice calculates her café needs to earn $120,000 per month, or $27,713.63 per week (dividing $120,000 by 4.33 weeks).
Patrice’s Business Plan outlines operating hours from 6:00 am to 4:00 pm, Monday to Sunday. Her café is positioned like a traditional Café; more QSR than restaurant. A lot of smaller transactions, with customers taking their purchases away, or sitting for only a short duration at the tables. Food is expected to be a significant portion of the revenue, but it is grab-and-go and designed to be prepared by Front of House staff rotated into the kitchen, without a qualified chef present.
Traditional Cafes, like QSR, tend to have revenue more evenly spread across the week, than a dominant Friday and Saturday that can account for 50% of weekly revenue, with the majority of revenue occurring between 11.00 am and 2.00 pm. The exception being Sunday; Patrice plans on her Sunday Breakfast and Brunch being the centre-piece of her week.
Patrice forecasts that her average check will be less than $12.50 per person after GST.
Based upon the revenue her café needs to earn, she would need to complete over 2,200 transactions per week, the majority happening in just three hours a day, to meet her required ROI.
Patrice decides not to proceed with the lease and instead looks to purchase a Café with a more reasonable lease in place, which she will seek to renegotiate through her leasing specialist lawyer if she can arrive at the right purchase price.
Patrice knows that the average expenses for a Café or Restaurant in Australia, including the lease, are 28% of total revenue, and the average profit is just two per cent. Her business model details an ROI of eight per cent or more, and every decision she makes is in line with this plan.
8. Does your Business Plan provide enough detail to define the key numbers that improve your chances for success?
- How much money does your Café need to earn each week to be profitable?
- What are your lease terms?
Owning a Café is a dream for many Australians; it is an energetic, high-intensity and enjoyable environment that can be fun and addictive. It is also a business environment that is more complex than most; it is highly competitive, half of the businesses fail every Four years, and 40% of businesses don’t make any profit in a given year.
Whilst there can be no guarantee of success in business, many Cafes fail because of decisions that were or were not made prior to opening the doors; poor planning, incomplete concepts, poor locations or too high rent, amongst others.
Often owners become unwilling to meet the extraordinary time commitment that their businesses require or their passion for their business eventually wains, or they don’t possess the range of skills required and their first years’ operation becomes too large a hole to crawl out from.
But by answering the ‘How to Open a Café in 8 key questions’ a potential business owner can choose to proceed, purposely designing a high ROI business, or not, potentially saving hundreds of thousands of dollars.
What will you do?