Why Do Coffee Shops Fail?
Why Do Coffee Shops Fail?
Coffee Shop Startups
Why Do Coffee Shops Fail?
Like any other business, coffee shops face challenges that may lead to failure. Several factors contribute to the failure of coffee shops, and understanding these challenges can help aspiring entrepreneurs navigate the competitive industry more effectively.
It turns out that even well-funded and well-funded coffee shops can still fail. According to 2020 statistics, about 22% of small businesses fail after the first year.
Only half of the retail businesses surveyed make it to the 5th year. Specifically, nearly one-fifth, or about 17%, of restaurants fail in the first year alone! We can assume the same general numbers apply to coffee shops.
While the risk of failure is always constant, we think you can take some essential steps to minimize failure.
When coffee shops fail, it's not because of their coffee.
Other significant areas left unchecked can devour potential profits, burn money, lower morale, reduce customer service, and starve creativity. These are all recipes for disaster and all reasons for coffee shops to fail.
Reasons Why Coffee Shops Fail:
1. Failure to prepare
Failure to conduct thorough market research can lead to a mismatch between the coffee shop's offerings and the local community's preferences. Understanding the market, identifying competitors, and gauging demand is crucial for success.
It's been proven that the more you prepare, the less likely you will fail at starting a coffee business. Yet, many new coffee shop owners seem to skip out on the research to position them for better success.
Some overestimate their ability to start a coffee shop without doing the hard work of researching and planning for their coffee business.
“Hey, after all, it's just coffee, right? Just how hard can it be?” some may think.
Opening and running a coffee business can be much more complicated than first imagined.
Many people jump into a coffee business without learning what they need to succeed.
Your coffee shop startup research should include the following:
- Reading books & other resources about the retail coffee business
- Talking with current and former coffee business owners and managers
- Researching cost factors
- Learning about coffee (barista training, coffee origin, and roasting profiles)
The truth is that there are dozens of steps you can take to start your coffee business planning – much of it without any money.
Covering some critical tips, consider reading our post, How to Start a Coffee Shop in 30 Steps.
Reasons Why Coffee Shops Fail:
2. Location issues
A poor choice of location is a significant factor in the failure of coffee shops. Inadequate foot traffic, accessibility, lack of visibility, or choosing a location without considering the target market can impact a coffee shop's success. If your customers can't see you, they can't reach you. A well-lit, easily accessible location that offers customers safety, ease of access, and plenty of parking is essential for coffee shops.
For a deeper look at the importance of choosing the right location, please read our post, How to Choose the Best Location for Your Coffee Shop.
Reasons Why Coffee Shops Fail:
3. Failing to have coffee shop business plan
Writing a comprehensive coffee shop business plan is one of the best ways to avoid failure. While many coffee shop business owners skip right over this step, we believe that it's just got to be done.
A good business plan will save your coffee shop business before it even starts.
Effective planning saves money, time, and headaches. A coffee shop business plan ensures that you think about every business element, including your exit strategy.
The good news is that we've written a coffee shop business plan for you. Our coffee shop business plan guide and the template are available in our Complete Coffee Shop Startup Kit. All you have to do is fill it out.
For a more in-depth discussion, read our article, How to Start and Write a Coffee Shop Business Plan.
Reasons Why Coffee Shops Fail:
4. Lack of Capital (Cash)
Sometimes, businesses can run out of cash. When they run out of cash – for any number of reasons – their business struggles; think of cash like gas in your car. You might have a great, beautiful car, but it won't run without any gas or fuel, it won't run.
Likewise, independent coffee shop owners can get into trouble quickly – unable to pay their bills, inventory, employees, and taxes – and can quickly shut them down. Having a plan to avoid being cash-strapped is essential.
Reasons Why Coffee Shops Fail:
5. Unable to adapt and grow
A common misconception is that starting a coffee shop is easy. It's a very alluring perception.
The truth is that starting and developing a coffee business takes time and investment in research and planning.
When starting a coffee shop, you will find many elements to juggle. This is especially true in the face of fierce coffee shop competition. Taking a proactive attitude to learn and master these elements will be essential for your journey.
Having a good attitude towards learning will be the keystone to your success.
I want to encourage you to continue learning about coffee as a beverage and the retail aspect of the business. This would include pricing strategies, budgeting, marketing, promotion, and adapting on several fronts.
Failing to stay current with industry trends and customer preferences can make a coffee shop outdated. Regularly updating the menu, incorporating seasonal offerings, and staying innovative is vital for long-term success.
There is always something to learn and review and always something to master and re-master. This pursuit of ever-evolving people makes us better coffee business owners!
Further Reading: How to Start a Coffee Shop Successfully
Reasons Why Coffee Shops Fail:
6. Failure to Develop a USP
Not having a predetermined idea or coffee shop business concept right from the start can set your coffee business adrift on an open ocean without a rudder to steer with.
There are many things to focus on when starting a coffee shop. But when you set out to execute your business without a business concept, you can be sure you'll spend more time and money than you would otherwise.
Additionally, a coffee shop needs a compelling Unique Selling Proposition (USP) to stand out in a saturated market. A coffee shop may struggle to attract and retain customers without a unique offering, whether it's a specialty brew, a unique ambiance, or outstanding customer service.
Determine what kind of coffee business you want to set up and then base your decisions around it, including the items listed in the diagram above.
Depending on your coffee shop budget, business location, or competition, you may have to adjust your actions as you move forward. Nevertheless, having a central theme or concept will help you stay on track. “Staying on track” and moving forward will help you avoid spending more money than you have to, losing time, etc.
Reasons Why Coffee Shops Fail:
7. Failure to prepare for a property lease
Signing a property lease can be one of the scariest things for a new business owner. You probably already know that your multi-year lease can make or break your retail coffee business.
Signing a property lease for your coffee shop means you're pretty much locked into that physical space for years under specific terms you are now obligated to. Sometimes, these terms are not always reasonable. Terms can be a considerable burden around your neck.
Your monthly payment to other elements such as utilities, security fees, trash service, pest control, insurance, and menu options depend on your lease terms.
The only way you will get the best possible leasing terms for your coffee business is by:
- Getting lucky (It's not a good idea to base your business on!)
- Preparing for your lease negotiations (An excellent idea)
- Getting Professional Help – is costly but may be worth it.
Basing your money and future success on “being lucky” is not a good strategy for anything. You need to understand the landscape to maximize your lease negotiations. These are the general elements that must be considered before signing a lease for your coffee shop location.
Learning About Coffee Shop Property Leases
In our Complete Coffee Shop Startup Kit, you can listen to two-hour essential interviews focusing on your coffee shop business lease.
- How to approach a property manager
- What to look for in a property lease
- What to ask for in your lease negotiation
- How to save money (there's more saving than you can imagine!)
- When should you start paying your lease?
If you have never signed a lease before, you do not want to proceed without preparing for it. Even if you decide to use a real estate broker to help you sign your lease, you may want to understand the coffee shop leasing landscape better.
Reasons Why Coffee Shops Fail:
8. Poor quality coffee and menu items
The heart of any successful coffee shop is its coffee quality and menu items. Customers will likely choose other options if the coffee doesn't meet their expectations. Consistency and excellence in brewing are essential for customer satisfaction. Repeat business, word-of-mouth recommendations, and developing a loyal customer base with satisfied customers are essential.
Reasons Why Coffee Shops Fail:
9. Fail to anticipate the costs fully
Often driven by passion and a vision for creating a welcoming space, some entrepreneurs fail to fully anticipate the expenses involved in the build-out process and operational costs.
Renovations, interior design, and compliance with health and safety regulations can add up quickly, leading to financial strain. In some cases, unforeseen complications or the need for specialized equipment further contribute to cost overruns. Successful coffee shop owners recognize the importance of meticulous planning and thorough research to accurately assess build-out expenses accurately, ensuring a more realistic and sustainable financial foundation for their ventures.
Reasons Why Coffee Shops Fail:
10. Underestimating your coffee shop cash flow
Having cash flow is essential to meet the obligations of your coffee shop business. In addition, having cash on hand is vital for inventory (wholesale coffee beans, milk, cups), labor (barista wages), and utilities.
Estimating your cash flow will forever be critical, especially when starting up. Meeting your cash flow needs comes together with good accounting. From projecting your daily sales to maintaining your inventory to developing your profit and loss statements, your accounting and coffee shop budgeting matters right from the beginning.
Figuring out your accounting methods early on will help you better plan your budget. We recommend you start focusing on your cash flow, budget, and accounting immediately.
This will be especially important to incorporate while writing your coffee shop business plan. You already know that your budget, estimated cash flow, and accounting are essential to your business – where do you start?
Fortunately, our Complete Coffee Shop Startup Kit has an editable template and a Coffee Shop Business Plan. The template explains your financial estimates, overall budget, and general coffee business concept.
Reasons Why Coffee Shops Fail:
11. Hiring the wrong people
Your customers will demand excellent service every time they enter your business. Therefore, you should hire for it.
Retail coffee can be a very competitive environment, especially in some urban or touristy areas. Therefore, having great baristas that provide your customers with excellent service – every single time – will be critical for your long-term success.
Happy customers are repeat customers. Unfortunately, I've personally seen once-great coffee shops wither painfully away because of their poor customer service.
I strongly recommend hiring and training baristas for personality, reliability, and trainability. When hiring staff, giving greater weight to personality and reliability than experience is essential for your success.
Reasons Why Coffee Shops Fail:
12. Poor coffee shop management
A successful coffee shop or coffee business never just appears out of nowhere. A profitable business requires good management right from the start. It takes time to develop and execute well. It requires quick adapting, changing plans, filling gaps, and sometimes making hard decisions.
The day-to-day management of your business is challenging. It takes energy, grit, patience, and finesse.
Poor management can quickly deteriorate your business on a variety of fronts. Good management skills are needed to execute in the following areas:
- Inventory management
- Managing employees
- Payroll and HR-related issues
- Vendor relations
- Training
- Budget management
Finding your management footing can take time. An excellent way to boost your coffee shop management skills is by learning as much as you can about running a coffee business. Brush up on specific aspects of your business, such as accounting, inventory management, leadership, marketing, etc., through books and seminars.
Reasons Why Coffee Shops Fail:
13. Poor marketing and engagement
Insufficient or ineffective marketing can contribute to a coffee shop's failure. Establishing a solid brand, engaging in local marketing efforts, and maintaining an active online presence are crucial for attracting and retaining customers.
Building a loyal customer base is essential for long-term success. Failing to engage with customers, respond to feedback, or create a sense of community can result in a lack of customer loyalty and repeat business.
Reasons Why Coffee Shops Fail:
14. Having too much debt
Poor financial planning and management can lead to financial instability and, ultimately, failure. This includes underestimating startup costs, improper budgeting, or failing to monitor and control ongoing expenses.
Debt can crush a new or fledgling coffee business. Unfortunately, taking on too much debt can be challenging to overcome.
In addition to spending your own money and savings, taking on bank loans, increasing personal credit card debt, and borrowing from friends and family are all common ways to get the money to launch your coffee business. But taking on too much – and spending unwisely – can cause a world of hurt.
You'll want to determine how much and where you will get the money to start your coffee business.
When it comes to avoiding too much debt:
- Determine how much money you will need
- Where will you get the money?
- How will you spend the money?
- When will you pay the money back?
Avoiding debt, avoiding costly mistakes, and learning from other coffee shop owners will keep your coffee business afloat long enough for you to sustain yourself through your revenue.
Reasons Why Coffee Shops Fail:
15. Overestimating coffee sales
Coffee shops live and die by the number of daily sales they bring in every day.
When you are just starting, you will need to determine your sales estimates for various audiences – including your investors. But the most critical audience is you! Having accurate estimates can help you better budget and figure out your break-even point.
My recommendation is that you remain very conservative about your sales estimates. Basing your numbers on very conservative estimates will provide you with a better margin for error. But, on the other hand, being too optimistic about your sales can hurt your business too.
Overestimating can lead you to project your levels of profitability way before you actually have the money to sustain yourself. Quickly running out of cash or digging yourself into an even deeper debt trap can lead to the slow death of any business.
Reasons Why Coffee Shops Fail:
16. Coffee shop owner burnout
Being in love with the idea of having a coffee shop and not understanding the work involved can quickly turn your enthusiasm into burnout.
Burnout happens more frequently than you might imagine.
Sustained burnout can lead to massive problems relatively quickly. Burnout can destroy the energy needed to maintain a business – training, customer service, being proactive, honoring your paperwork, and staying competitive.
Many new coffee shop owners can experience burnout within the first two years of opening their coffee shop. Many reasons for this early burnout exist, but some of them are related to:
- The energy it takes to open the coffee shop.
- The unexpected growth.
- Not taking care of your personal life.
- Managing employees.
Burnout can lead to poor service, grumpy employees, laggard sales, and, ultimately, the end of a coffee business.
There are a lot of ways to avoid common burnout:
- Get help with your research and planning (know what to expect).
- Hire the right people.
- Develop an accurate coffee shop business plan.
- Learn to delegate.
- Rest and make time for yourself and your family.
- Budget appropriately.
Why Do Coffee Shops Fail?
Coffee shops fail for reasons that vary from poor management, lack of sales to cover costs, bad employees and service, and having too much debt. While it's easy to look back on a failed coffee shop and proclaim that failure was evident for these reasons, it is often challenging when you are trying to make it through the day. So start your coffee shop with a real effort in research, planning, and training to avoid these mistakes.
Let's review why coffee shops fail below:
- Failure to prepare.
- Location issues.
- Not writing a coffee shop business plan.
- Lacking the willingness to learn, adapt, and grow.
- Not having a cohesive concept.
- Not preparing for your rental lease.
- Poor quality coffee and menu items
- Fail to fully anticipate the build-out cost
- Underestimating your coffee shop cash flow.
- Hiring the wrong people.
- Ineffective marketing and engagement
- Poor coffee shop management.
- Having too much debt.
- Overestimating sales.
- Coffee shop owner burnout.
Taking clear steps to address these common reasons for failure will maximize your chances of success, steady profitability, and lasting value.
Why Do Coffee Shops Fail?
Additional Questions:
Is it worth starting a coffee shop today?
Yes! Starting a coffee shop can be an incredible opportunity to build a profitable enterprise, impact your community, and ultimately change your lifestyle.
With an increased demand for high-quality espresso drinks, a well-located and well-run coffee shop can be very profitable. Current data suggest that starting a coffee business today is primed for success and growth.
According to the National Coffee Association, 64 percent of Americans drink coffee daily. This is up 2% since 2017. With these numbers, how could any coffee shop fail?
The good news doesn't end there. By all accounts, Americans, Canadians, Europeans, and people living in Asia, love gourmet coffee. For example, in the U.S. alone, 83% of Americans drink coffee, spending an average of $1,110 a year on coffee, according to Reuters.
Ultimately, this means that the strong demand and growing opportunity to start a profitable coffee business – regardless of coffee shop size – is available for those who take the time to invest in their business planning.
How much do coffee shop owners make?
Coffee shop owners can earn a good income. A small coffee shop can make $65,000 to $175,000 of income for the coffee shop owner. The revenue a coffee shop makes depends on several factors. These revenue factors include the number of sales over time, the average receipt price, and margins on your sales. High-margin or profit items will naturally boost your revenue and income. General fixed, and variable costs play a significant role in your coffee shop's net income.
For more information on how much a coffee shop makes, please read, How Much Do Coffee Shop Owners Make?
How do I be a fantastic coffee shop manager?
Your coffee shop management will ultimately impact the long-term success of your coffee shop. So even if you had the best coffee brand, choose the best coffee shop location, and serve the most delicious coffee in town, your management and operation of your coffee shop will impact your success.
So, how do you become an amazing coffee shop manager?
Excellent management skills take time to develop. While some people are natural leaders and managers, others can still be excellent managers with little awareness, training, and constant improvement.
There are some managerial points that you will want to consider. We break it all down for you in our article, How to Be an Amazing Coffee Shop Manager.
Avoid Coffee Shop Failure:
Research, Plan, and Limit Risk
No business is fail-safe, but every business can reduce its risk. All you have to do is drive around your town, and you will see signs that coffee businesses can be profitable and successful.
Understanding these potential pitfalls can help aspiring coffee shop owners make informed decisions and develop strategies to address these challenges. Successful coffee shops combine a passion for quality coffee with effective business management and a keen understanding of their target market.
How to Avoid Coffee Shop Failure:
- Research and Plan.
- Write a business plan.
- Develop a coffee shop concept.
- Prepare for your rental lease.
- Don't spend too much on coffee equipment.
- Don't overestimate your cash flow.
- Hire good people, invest in training.
- Develop good management skills.
- Be mindful of your debt.
- Be realistic with your sales numbers. Finally, find ways to make working fun.
If you are still thinking about starting a coffee business and haven't decided what your coffee shop concept would be, read our post, 50 Great Coffee Shop Ideas to Start a Coffee Shop.
Are You Ready To Get Started?
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Coffee Shop Startups
Based in Seattle, Washington, USA, Coffee Shop Startups is dedicated to providing you with the most relevant information on how to start a coffee shop business successfully. Over the last 11 years, we've helped thousands of aspiring coffee business owners worldwide. We harness the experience, wisdom, and knowledge of many successful coffee shop owners to help you increase your chances of success and profits. We support business owners who want to start a coffee business by providing them with valuable information on starting their coffee business successfully.
