You Shouldn’t Open a Cafe For Money Unless You Scale

Woodshed Cafe

12 Nov You Shouldn’t Open a Cafe For Money Unless You Scale

There seems to be a wave of cafe fever in Singapore. Just considering my neighbourhood, 4 cafes have sprouted within the past 2 years.

The curious me will always wonder what’s driving this cafe culture. First, I believe the standard of living has risen. Singaporeans are willing to fork out a price premium to sip coffee in a cool cafe as compared to a cheap fix at a kopitiam. We are buying an experience and not just coffee. Second, the younger generation are pretty westernised and the cafe culture is well embraced. Looking at teenagers spending their allowances at these cafes made my friends and me wondered why we hadn’t have the financial power to enjoy such coffee experience back in those days.

I love sitting at these cafes and just waste my afternoon away. The cafe owners probably couldn’t earn much from a cup of coffee and a slice of cake if I occupy a space for an hour or two.

Hence, is it profitable to open a cafe? Before you jump into this cafe rush,  you may want to read the rest of the article first.

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There are various approaches to evaluate the profitability of a cafe. Brian has done it on his blog. I am taking another approach, which is to look to the branded Starbucks to understand their profit margin per cup of coffee and use it as a proxy for a small scale artisan cafe.

The image below is an excerpt of Starbucks annual report and I picked the Asia Pacific region numbers since we are comparing costs in Singapore. It isn’t perfect but it is the closest.

Starbucks 2013 Asia Pac Operating Finances

Based on a revenue of $917m and operating costs of $748m, the profit margin work out to be 18% before tax. If a cup of coffee cost $5, Starbucks makes about $0.90.

We can further breakdown the costs into various segments, represented as a percentage of total costs (I merely reworded the line items of the financial report to make it more layman)

  • Rental and raw materials = 60%
  • Utilities bill = 23%
  • Salary = 7%
  • Advertising and misc expenses = 6%
  • Equipment and furniture replacement cost = 4%

Assuming your cafe is as efficient as Starbucks and make the same profit margin, pricing your coffee at $5 will make you $0.90. My experience at cafes says that we can expect about 5 patrons per hour during weekdays and full house in the weekends. For simplicity, let’s assume 20 patrons per hour in the weekends. We also assume the cafe is opened for 12 hours a day for 31 days.

Total profits for a month would be (5 patrons x 12 hours x 23 days + 20 patrons x 12 hours x 8 weekend days) x $0.90 profit margin= $2,970. It will be $2,465 after 17% corporate tax.

Do not take this value as is. There are many factors to consider whether a small cafe owner can maintain the profit margin. For example, an owner of an artisan cafe does not have the power of Starbucks who can control cost better and hedge against rising coffee bean prices by going into futures or forward contracts. There is also economies of scale for Starbucks to advertise vis-a-vis a small cafe. It makes sense to pay advertising for 100 stores compared to just 1 store. With many artisan cafes competing for this niche market space, cafe goers are unlikely to be loyal to one. And they may just visit a cafe once and never have gone back again. Constantly reaching out to new clients means costly marketing while cultivating loyalty suggests branding costs, which both are too cost inefficient for a small cafe. We have also excluded any loan servicing which could have been borrowed for renovation. This list of considerations are non-exhaustive and I am sure you can come up with more.

$2,500 is decent but most Singaporeans would not be satisfied with this amount to maintain the lifestyle they desire. One way is to scale the business and open more cafes. 10 cafes would make $25,000, assuming profit margin maintains. This is a very crucial point which most cafe owners never thought about. If you do not scale, the profits are not going to be significant. But some cafe owners felt that expanding as an act of commercialisation and a betrayal to their art.

Starbucks will keep scaling because they know the numbers. Profit margin is thin but all the stores will add up to significant profits. Sadly, most artisan cafes would not be extremely profitable to financially reward the owners meaningfully.

Hence, my view for opening an artisan cafe is not for money, but for art and passion.



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5 Comments
  • PIB
    Posted at 08:12h, 12 November Reply

    Hmm, what about those who do takeaways in the morning? But then its pretty rare for people to go all the way to the hipster cafes to do a takeaway because of its location to their work place… (This is actually not the case in Melbourne cos there are really A LOT of hipster cafes here in Melbourne CBD …)

    • Alvin Chow
      Posted at 09:19h, 12 November Reply

      Most hipster cafes don open until 10am! I guess Melbourne cafe culture is much more sophisticated and voluminous. Singapore is not there yet. Ang moh drinks atas coffee as a routine. Singaporeans drink atas coffee as a luxury!

  • Rolf
    Posted at 18:56h, 16 November Reply

    Hi Alvin,

    I really like this article and your analysis.

    Cafe owner indeed is not as glamorous as the looks of most modern Cafe. Margins are just too low let alone to recoup back the initial startups. Economies of Scale is extremely important especially in Sg where Labour rigidity is the main problem. Having more stores allow efficient allocation of labour and materials etc . Just look at the low margin of Breaktalk but their non-stop scaling.

    So maybe a better business is to start an investment class. Haha. Just joking. It is never as easy as it seems or as people thought! :-)

    Rolf

  • BigFatPurse in 2014
    Posted at 01:00h, 02 January Reply

    […] You Shouldn’t Open a Cafe For Money Unless You Scale […]

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