If you own a coffee shop, you know that the key to profitability is keeping sales up and costs down. But coffee shop profitability is a very tricky equation. The factors driving sales and costs are wide-reaching and often daunting for a small business owner. Consider the complexities of juggling things like rent and utility costs, menu and product mix, pricing, staffing, customer taste preferences, store marketing and more.
As former coffee business owners, managers and marketers, the team at Stockton Graham & Co. has simplified the profitability equation. We call it our F.A.T. Philosophy; F.A.T stands for FREQUENCY, AVERAGE and TRIAL.
F.A.T. is a decidedly customer-oriented approach. At the heart of the philosophy is the realization that the only way to sustainably make money is to focus on the top-line while making sure everything else in your P&L is reasonable. If you do this, the bottom line will take care of itself.
Businesses that align to the F.A.T. Philosophy get more customers in the door, get them coming back more often and get them spending more during each transaction.
To help our coffee business customers understand coffee shop profitability, it often helps to see how frequency, average and trial or F.A.T. work in a real coffee business situation.
Our Director of Sales Thom Swain had the opportunity to chew the F.A.T. on coffee shop profitability with Darryl Parker, owner of Schoodacs Coffee & Tea in Warner, NH, which opened in September 2015.
Schoodacs Coffee is a Stockton Graham & Co. customer whose successful and well-respected coffee shop was voted “Best Cup of Coffee in Concord, NH” by the readers of the Hippo Press and “#2 Coffee Shop in Concord, NH” by the readers of the Concord Monitor. Darryl also owns website maintenance company Parker Web and is a business advisor with the Goldman Sachs 10,000 Small Businesses Program at Babson College.”
Here’s how the conversation went.
Darryl: We will always be a low volume store, averaging 100 or less tickets per day. Not only does our data indicate this performance, traffic data for the area supports this conclusion. According to NH DOT, we get about 3000 cars per day in front of the store. At 1% engagement, that’s 30 checks. We obviously do much better than that, but the idea seems clear: it’s low volume. Thoughts?
Thom: The average café serving coffee and limited food should be writing somewhere between 100-150 tickets per day. So, Darryl, your business instincts are right: you are positioned at the mid- to lower end of the traffic spectrum. We expected this, though. I recall our discussions about Warner—it is a town with less than 3000 residents and a very active tourist economy—which is what drives the traffic.
The F in F.A.T. stands for frequency. I believe that your key to success is to be loved by the locals and discoverable by the tourists. You seem to be doing this, as your customer reviews indicate. Another goal would be to maximize the high traffic periods of the year, maybe to the extent that you recover an entire year’s operating costs during a few high-traffic months.
A truly loyal coffee shop customer visits between 15 to 20 times per month. To monetize that, 15 visits x $6 average x 12 months = $1080 per customer. In your case, if only 1% of your town’s population frequents Schoodacs throughout the year, your top line will be consistent and you can focus on increasing traffic during the tourist seasons.
Getting more people at your door is the hardest one of all. It involves marketing, social media, pushing for word of mouth and overall visibility. Recognizing new faces and delivering exemplary customer service is paramount; each one of those new faces could be worth over $1000 to your business.
Darryl: Our average ticket is the place where we must focus in order to improve the business income. Looking at the data since November 1, we are averaging well above $6 per ticket. This includes a mix of retail, food and drinks. I believe the only way we can grow revenue is to NOT focus on traffic, but to focus on average ticket?
Thom: The A in F.A.T stands for ticket AVERAGE. Pushing for a higher average is not only vital to coffee shop profitability, but it’s vital to good customer service. All too often staff are willing to let a customer come in, buy a beverage and leave. Asking a customer if they would like a pastry or a sandwich to go may actually remind them that they really would like more than just a drink. Also, mentioning that you have take-home coffee available is a great, gentle way to nudge a customer towards a higher purchase. You’ve already demonstrated that you know just how important average ticket is for coffee shop profitability.
Darryl: I’d like to see our average ticket at $10, or about $3 more per ticket than we are seeing right now. It appears our best opportunity to improve average ticket is to add food beyond just pastries and snack items. This would be deli type food with a limited menu. I’m very intimidated by this direction and nervous about it. My staff and my shop are not equipped for it. Do you agree this appears to be the best route? Other ideas?
Thom: I would look for a balance of foods that are quick serve and take away with some that can be enjoyed while sitting in the café. A good balance of sweet and savory is key as well. You will want to focus on any features of each option that would be a trigger word to your frequent customers and store concept like locally-baked muffins, gluten-free brownies, organic oatmeal, etc. Talk to your food reps and see about products that are top-tier quality, but aren’t highly perishable or labor intensive.
Darryl: I’ve recently done some pretty major shifting in what we offer and our food costs. We have seen food as a percentage of sales drop from averaging over 30% to now averaging only 20%. If food is currently 20% of that $7 ($1.40) and I want to get to the $10 using food (+$3.00), that means food would go to 44% of our overall revenue. That looks to me to be a fundamental shift that will impact the entire business.
Thom: You can get creative on the food, especially in your market, without implementing a true kitchen. Think about teaming up with a food truck to provide you a small menu of high-quality products at a great price for your store while allowing them to park on-site during lunch. Another idea that comes to mind is continental breakfast bar, something akin to what you would see in some hotels, which would be a real draw during the tourist season. Maybe you charge $7 or so for it, and you have options like pastries, eggs, fruit bowls, yogurt and fresh-squeezed juices. Or maybe just a DIY oatmeal bar with a variety of mix-ins for $5 or $6 including a cup of drip coffee.
Depending on the local regulations, your options are fairly wide without actually cooking or adding significantly to your labor costs.
Darryl: We have added significant retail options to the shop at a high cost of inventory investment. This has netted out some increased retail sales, and I do believe we can account for our higher-than-usual average ticket because of retail sales. I will continue to manage and add to this category, but there isn’t enough push there to get us to the higher revenues needed for sustainability.
Thom: I fully believe in retail for your type of business. The trick is maintaining turns and rotating product. When it comes to raising coffee shop profitability, having products that both trigger impulse buys and encourage browsing is key. You obviously want to arrange these items in appropriate areas: granola bars by the register and cookbooks on a shelf. For true retail, focus on specialty and local as much as possible. These can be things like a local maple syrup, your own branded items, non-electrical coffee apparatuses, literature, local jams/jellies, local soaps, etc. Essentially, any non-perishables that aren’t going to be found in every other shop around town.
Darryl: We have a bottled cold brew and tea that is adding business. I’ve faced as many rejections as acceptances, and I understand it is like launching an entirely new business to chase this revenue. I’m not opposed to it, but I don’t think it is going to do us much good in the short term.
Thom: We’ve gotten into the T of our F.A.T. philosophy: Trial. The Schoodac’s bottled Cold Brew and ready-to-drink Iced Tea allow you to get your name out through New Hampshire Made, Kearsarge Food and other local outlets. Potential customers who are out-and-about will see your name, try your Schoodac’s Ready to Drink (RTD) coffee or tea products and, because they like it, they will seek your shop out for more.
Retail coffee and tea are areas that need a special focus. Let’s look at coffee, and specifically packaged whole bean coffee, for your business. Recall, a loyal customer comes to you only about 1 out of 2 days. Coffee drinkers are habitual, however, and most have more than one cup. So, where does that coffee come from? Keeping a core of popular coffees, packaging them well, and making sure that each member of your team is capable of describing and suggesting coffees will push more movement.
Selling take-home coffee to just 5% of your customer base should add a minimum of $600/month to your bottom line. Just to give you a sense of the potential of packaged beans, we have a customer that sells more take-home coffee than any I’ve ever seen. I am certain he does far more business that way than in beverages and food; I’m guessing 80/20. He spends most of his time away from the service counter, talking to customers about what coffee they like and directing them to his line of packaged whole bean coffee. He sells a lot of 2lb. bags. And customers are always looking to explore new coffee regions, new roast levels and new producers, which can make a significantly positive impact on coffee shop profitability.
If you’re interested in learning more about our F.A.T. Philosophy on coffee shop profitability, feel free to contact Thom Swain at 800 835 5943.