In this third section (of three) we will go into the final
source of expense when starting a coffeehouse - operational expenses.
When you first start a coffeehouse, it is not immediately
profitable. Far from it. It can take up to a year to flip into profitability! (by the way, if your coffeehouse is not
profitable after a year, you need to pull the plug on it). So, for the first six to ten months, you are
in the unenviable position of working your backside off, while not only NOT
making money, but actually losing money every month. While
this is the normal state of affairs for a new coffeehouse, there are many
things you can do to reduce your operational expenses in the first year, so you
can stretch out your savings for as long as possible, and shorten the time to
when your coffeehouse flips to profitability.
The basic rule: KEEP EVERYTHING AS CHEAP AS POSSIBLE, WHILE
NOT IMPACTING THE PRODUCT QUALITY AND SERVICE.
Product quality and service are sacrosanct. Everything else is up for the chopping
block. Spend money on quality ingredients
- make absolutely certain that all your raw materials are fresh and delicious,
and are prepared in quality manner. If
you screw this up, your customers won't come back.
YOUR two largest sources of expense will be labor and cost
of goods (materials), followed by overhead.
I will broach each of these in turn.
1) When you first start out, OVER hire - in other words, hire
too many people. When you hire them,
make sure they understand that you are unsure exactly how many people you will eventually need for your operation, so it is likely that the final number of staff members
will not be what you start with.
Over the next MONTH, carefully watch the employees. I've noticed that employees can put on a
performance for about two weeks - then after that, their *true* colors start
showing through. Take note of the employees that start showing
up late, not completing their tasks, are not 100% on when serving customers,
leave their station dirty... likewise, identify those that really seem to be
having fun and are energized by the work.
Also, I like to use this time to assess the honesty of the
employees. Most people have either a
rigid sense of what is right and wrong,
or they have a *flexible* sense of morals. Look for signs of the latter, and find a
reason to let them go. People who have a flexible sense of moral
values can easily find ways of justifying stealing from you, treating customers
badly etc etc.
(by the way, you can only do this if you are living in a
"At Will" state, or you have had your employee sign an 'at will'
contract. Most states are At Will
states, except Delaware, Florida, Georgia, Indiana, Louisana, Mass, Missouri,
Montana, North Carolina, Pennsylvania, RI, Texas and Virginia. At Will employment is one in which the
implied contract between an employer and employee is that the employee is there
at their own will, and the employer is under no contractual obligation to
continue employing that employee. IN
short, it means if you are not living in an At Will State, you can fire someone
for any reason.. or no reason. If you
are living in an AT WIll state, then you need your employee to sign a statement
when they first start indicating they are an At Will employee - look up the
paragraph on line).
AFter the first month, choose your top 2-3 employees to keep
(depending on your production needs), and get rid of the rest.
The benefit to this is twofold: first, while you are trying to figure out the
operations of your new business, you will have a surplus of labor to ensure
that every person who walks through your door has amazing service (remember -
product quality and service are the two primary aspects of your place you focus on). After about a month, when things settle down,
and you are figuring out how everything works, setting up systems etc - you just
wont need as many people. Second, you
will end up with the best employees, and you will have instilled a meritocratic
culture in your coffeehouse (in other words, the best employees get the best jobs
etc.) You employees will now understand
that you value performance, attitude, diligence and reliability.
Dont forget - you can pay employees below minimum wage, so
long as their tips plus wages surpass the minimum wage (double check this is
the case in your state - it is the law in my state). I always start people off at around 50 cents
below minimum wage. This is because for
the first month or so, I have to spend a lot of time, energy and money training
a new employee. Last year, I sat down
and figured out that every new employee costs me $500 to bring up to speed.
(most states have labor laws that allow businesses to pay new 'trainee'
employees below-minimum while they are in their training period). Virtually every new employees is useless for 2-4
weeks. After a month, I'll assess how
they are doing. If they are starting to
really *get* the job, and dont need constant supervision, I'll boost their
wages 50 cents to $1.00 per hour. In
about 3-4 months, when they are promoted to Shift Leader, I'll give them
another wage boost of 50 cents to $1.00.
Another helpful tip - you have 90 days to determine if you
want to keep an employee. If you get rid
of an employee before the 90 day trial period is up, then you are not liable
for unemployment taxes on that individual.
After 90 days, you are now liable for unemployement. Whenever I hire a new person, I add a note to
my calendar 80 days in the future - something to the effect of "Do you
want to keep Mary? If not, you have 10 days to remove her from the
rolls".
2) Plan to work alot.
You personally need to work all the time. Plan to work in your shop 12 hours a day, six
days a week for at least six months.
This is one of the best things you can do for your nascent
business. First, it means you are there
doing the work, so your payroll expenses are lower. Second, as you are there doing the work, you
gain a detailed insight into what needs to be done, how long things take to do,
what 'done' looks like... in short, you quickly learn every detail of the
business inside out, upside down and backwards.
Third, you learn how to keep your
expenses to a minimum - by being there and seeing what is going on, you can see
where the waste is, what is being thrown away, and you can figure out ways to
reduce those expense. Fourth, you learn
what sells and what is not selling... and why.
Your one-on-one time with each customer allows you to ask customers what
they like about the experience, what they dont like, and what sorts of things
they would like more of. After speaking
with a number of customers, you begin to see patterns of answers - which will
help guide your business forward.
3) Purchasing Raw Materials: Clearly, you are going to need raw materials
for your business. Coffee beans,
filters, cups, produce, dairy, cleaning products etc etc. There are many places you can get these items - most often,
restaurants (and cafes) rely on vendors
that they order from (over the phone) that then deliver the materials to you. These
include the likes of Sysco, Perkins, Thurston Foods, Gordon's... the list goes
on and on. While it is very convenient
to order from these places (just a call, and they deliver the stuff the next
day), it is also EXPENSIVE. When you
are first starting out - do not use these distributors. It is MUCH MUCH cheaper to go to places like
the Restaurant Depot (that specializes in supplying restaurants - they have
locations in 27 states - check em out www.restaurantdepot.com), Sams club,
BJ's, Costco etc. Sams
club has this amazing program for small business customers - you can order all
your materials you want from them online, and they will send someone around the
store to get everything you want. The
next morning, you just drive up and pick up your stuff. They even help you load up the car. My average cost of materials dropped 15-20%
when I started using bulk warehouse stores.
It can even help improve the quality of the products you are using -
when you are selecting produce, you can pick out the freshest, nicest
stuff. (as opposed to a vendor that
picks the stuff out for you).
An example of the savings:
most small independent coffeehouses reach their break-even point
somewhere around $250,000 - $300,000 in sales per year. Cost of goods (raw material costs) usually
ranges around 28-31% of sales, so that means you are spending in the range of
$100,000 per year in cost of goods. If
you save 15% on $100,000, that translates to an extra $15,000 per year in your
pocket. I'd say that is worth while!
4) Overhead: Your
overhead costs include such things as electricity, rent, water, internet,
garbage collection, alarm monitoring, telephone, music, gas, heat, a/c etc
etc. These are all the products and services you
need to just keep the doors open, and unfortunately, most cannot easily be
adjusted, nor do they move the cost needle much. At the same time, they too are sources of
expense. If you have already focused
your attention on your labor costs, AND your cost of goods, this is another
area that you can look into to try and save money.
RENT - when negotiating a lease, see if you can get lower
rates for the first year. For example,
if the landlord wants $3000/month for the space, ask if you can go to $2000 per month for the
first year, then $3500 for year II and III etc.
This will help to better match up
your expenses with your anticipated income.
In Year I, you will have very little income, so lower rent will help you
make it through the first year.
Presumably, in Year II, you will have flipped to profitability, so you
can pay the higher rent much easier. At
the end of the day, it is in the landlord's best interest to do something like
this. He is looking for a tenant that
will be in his space for a long time, and pay the rent for a long time. Only a stupid landlord will look to maximize
his income for one year, and kill the business in the process.
HEAT - gas gas gas.
Avoid electric heat. It is
EXPENSIVE!! (especially up North where we are located). I had
one shop that used electric heat, and during the winter, my electricity bill went
from $900/month during the summer, to almost $2200 per month in the
winter. I had no idea it would get that
expensive when I took over the space. I spent one long weekend in the middle of
January weatherizing the space, insulating it, and generally figuring out ways
to reduce heat loss. I managed to get my
electric bill down to $1600 per month, but it was still a substantial expense!
GARBAGE - if your town has a commercial composting facility,
you may consider switching to a split-stream waste system. It is VERY cheap to have someone pick up your
recycling. Last year, we switched from a
regular garbage dumpster to single stream recycling (you'd be surprised as to
how much stuff can now be recycled), in conjunction with a separate compost
bin. In short, all food waste (and
napkins) went into the compost bin, and everything else went into the recycling
bin. There are only a handful of things
that cant go in the recycling - so they were pretty easy to eliminate from our
supply chain. Previously, we were paying
$270/month for garbage pick up. The same
sized dumpster - only for recycling - cost me $140/month.
Compost (food waste) can be either processed
by a commercial compost facility, some
locals often like to pick it up for their gardens, or close by pig farmers
might be interested in taking your food waste to feed their pigs. Right now, my compost is being processed by
a compost facility , but I'm talking with a couple local farms that have pigs
to see if they'd be interested in grabbing my compost. We'll see how that works out.
TELEPHONE - do NOT get a phone line through your local
AT&T / sprint etc. Those phone lines
are INSANELY expensive. Before I dropped
my AT&T line, they were charging me $80 / month for a single business phone
line that I barely used!! I mentioned
this in an earlier posting, but you can get an Obitalk box (www.obitalk.com) - it costs $60 on Amazon. Then set up a Google Voice account, and
funnel that google voice account through obitalk (they have all the detailed
instructions on how to do this).
Voila! Free phone service!!
ALARM MONITORING - go with the little guys. There are many many small alarm companies out
there. Use them instead of the big alarm
companies (like ADT). ADT will charge
$50-60 per month to monitor your place.
You can bargain the smaller guys into monitoring contracts of $25/month
(including fire monitoring, break in monitoring etc).
ELECTRICITY - The two biggest electricity suckers are
refrigeration, and any kind of equipment that generates heat.
There are four ways to keep your refrigeration costs
low: First, use fewer, larger
coolers. Ideally, a walk in cooler with
a couple smaller units. You see, larger
coolers use less electricity per space cooled than smaller units. They are just generally more efficient. Second, keep the condenser cool. The way refrigeration works, is a liquid is
pumped into a compressor... which compresses the liquid. The act of compression forces the liquid to
give off heat... which is then bled off in the condenser coil. The now room-temperature (yet high pressure)
liquid is now pumped into the evaporator (inside the refrigerator) and is
allowed to expand out to its normal pressure.
In the process, it *absorbs* heat from inside the refrigerator, causing
the inside to get cold. The place
where the compressor is working hardest (and uses alot of electricity) is in
the part of the cycle where the liquid is compressed. If the condenser coil is in a hot environment
(say in a hot kitchen), it will not bleed off the heat efficiently, forcing the
compressor to work harder and use more electricity. It works better if the condenser coil is cool
(or in a cool environment - say outside).
When we had high electricity
bills , I added a couple cooling vents to the outside with powerful fans to the
bakery to better circulate the air - this made the entire environment cooler
and reduced our electricity costs. The third
way to keep your refrigeration costs lower, is to keep the condenser unit
clean. They have a tendency to clog up with all kinds
of junk - and the more junk there is on them, the less efficient they are in
shedding heat (the junk acts like mini sweaters!). So, clean them at least once a week! The final way to keep your refrigeration
costs low is to put them on timers. You
are not opening or closing your coolers from 10pm - 5am are you? Well, then they should not be on during that
time. Set them on electric timers so they
go on for 10 minutes every hour during the night. That keeps them cool, but also keeps your
electric usage to a minimum.
Heat - generating equipment:
There are a number of types of restaurant equipment that use electricity
to heat - but in a very wasteful manner.
First, ovens. You can get
electric convection ovens - while they are convenient because you dont need a
draft exhaust for an electric oven (since there is no combustion, there is no
Carbon Dioxide being produced, you dont need an exhaust vent), they use HUGE
amounts of electricity. I have two full-sized
electric convection ovens for my bakery, and they cost me about $400/month in
electricity alone (needless to say, it is on my list of things to do - to
replace them!). Second, conveyor
toasters. When you go shopping for a commercial
toaster, you can get a conveyor toaster (that is on all the time) or a pop-up
toaster (that is just on when toasting).
DO NOT use the conveyor toaster.
It is better to get three pop-up toasters if you need the volume. When that conveyor toaster is on, not only
does it use huge amounts of electricity for 18 hours a day while it is on, but
during the summer, your A/C bills are higher, because the A/C has to work
harder to get rid of all that excess heat the toaster is throwing off.
Well, I think that is enough for now. Thanks for reading the posting. Let me know if you have any requests for issues
you'd like me to address!!
Best
Duncan
Coffeehouse Guy
On a final note: as you may know, I'm in the process of writing a series of guides to show people how to move from a corporate job to owning a coffeehouse. Unfortunately, they are not going to be ready for a little while. However, If you are REALLY serious about starting your own coffeehouse, and you cant wait for my guides to come out, I also offer a 2-day, one-on-one intensive boot camp on starting a coffeehouse. You come up to New Haven for these two days, and we spend two intensive days going through all the intricacies of starting, owning and operating a successful coffeehouse. If you are interested, send me an email and we'll get it set up: coffeehouseguy1@gmail.com
