What Is the Profit Margin on a Cup of Coffee?
Coffee is a high-demand product, and it's also a product that relies heavily on profit margins. The coffee space is competitive, with coffee shops, coffee stands and home-brew products found in abundance. According to Market Watch, Americans drink more coffee than any other packaged beverage product, with an incredible 88.8 gallon-per-capita consumption rate in 2016. That's more than soda, tea and juice combined.
Pricing strategy ultimately determines margin and profitability in the coffee business. Several strategies exist and are reflective of the overall business model. A coffee only shop can price similar to their competitors or focus on delivering specialty drinks and high quality coffee at a higher price. Shops with food and other products may offer a lower price to encourage foot traffic, while pushing the upsell on these offerings. The margin will shift, based on your approach to pricing.
Sourcing and buying in bulk have major effects on margins. Buying in bulk reduces the overall costs. Buying direct or close to the source also reduces a lot of costs, but the logistics of traveling to the major coffee-producing companies and negotiating contracts with growers is beyond the scope of many small business owners. Brokers are a good resource for securing bulk pricing from the growers. Your margins decrease when buying small batches from resellers. Ultimately, more buying power leads to better margins.
According to Coffee Makers USA, the actual coffee in a grande Starbucks Cappuccino costs roughly 31 cents. The drink itself sells for around $3.65, in 2014. Subtract the cost from the revenue and divide the difference by the original cost to get the margin. The margin in this scenario is 91.5 percent on the coffee alone. The average coffee shop will have slightly lower margins as their bulk pricing is not likely comparable to Starbucks. That said, even at 50 to 75 cents per cup, the margins remain excellent.
Overhead is a major factor for coffee shops. The actual cup, lids and straws can cost more than the coffee. This must factor into your pricing strategy and the cost. Free refills will decrease margins but buyers with personal cups will increase margins. There will be some play in your margins, based on these fluctuating overhead factors. The business itself also will have overhead for the location, employees and other common expenses. Take your total overhead figure and use it to determine the number of coffee sales you need to be profitable.
According to Crimson Cup, startup costs range from about $60,000 for a simple kiosk up to six figures for a full shop with seating and a drive-thru. Mobile food trucks and similar kinds of shops have startup costs similar to the kiosk model. The location itself accounts for a significant portion of startup costs, at 15 percent of the total sales projections. The coffee, cups, and additions such as milk and pastries, will account for a majority of the costs, at roughly 40 percent of the projected sales.