Are Café Businesses Good Investment Opportunities?

How many people have you met who start their days with a cup of coffee (or five)? The answer to that has probably made you wonder whether starting your own café is a smart business move.

 Well, no business is guaranteed success, but the UK’s branded coffee shop market was worth £6.1 billion in recent years, showing just how much money is flowing through Britain’s coffee-coloured veins.

 Before you press “play” on your dreams of running a café, performing your due diligence is critical to avoid making a terrible mistake. Let’s discuss what you must know about the café business to help you decide whether it’s the right move for you.

How profitable is owning a café? 

The profitability of owning a café largely depends on where you are, the angle you take, the competition in your area, and so many other factors. Although the World Coffee Portal only pegged a 12-month growth rate of 2.2%, that’s still a larger growth rate than the UK economy as a whole. 

But what about profit margins? 

Well-run coffee shops are capable of immense profit margins. At the low end, a coffee shop might only garner a 2.5% profit margin, but on the higher end of the average, many cafes are enjoying margins of 7.5%. 

None of these numbers are ground-breaking, but these are only averages. Plenty of cafes do even better, with double-digit margins. In short, this is an industry with tremendous growth potential. 

The future of a café business in the UK 

Cafes are so profitable because of the relatively inexpensive stock. At wholesale prices, how much is a bag of coffee beans compared to the prices that cafes can charge for a single cup? Add in extra services, such as baked goods, hot meals and cold meals, and you have a menu with enormous margins on every item. 

The UK’s café market has grown consistently over the past decade, with established chains and independent brands experiencing positive trajectories. The reason why is simple. Here’s what the margins of coffee looks like: 

• Wholesale prices of arabica beans range from £10-£18 per kilo.
• Each bag consists of 120-140 servings.
• Wholesale price per cup is 10p.
• Add milk for 6p per serving.
• The average coffee price is £3.14.

Put all these numbers together, and you’re earning £2.98 profit for every cup sold, a gross profit margin of nearly 95%. Few industries or products see such enormous profit margins. 

Also, with coffee being such a staple of daily life, there’s little chance that the café business will collapse inward due to a slow or receding economy.

Why do some café businesses fail? 

Café businesses may offer strong margins, but you can’t just open one and expect it to succeed. All businesses require the right approach to avoid throwing your money into a black hole. 

Some of the most common reasons why café businesses fail include: 

• Strong Competition – The average UK high street is jammed full of cafes. If the market is too strong, you’ll flounder as you get jostled by established brands.
• Unprepared for Business – Having a dream and a passion for running a café doesn’t mean you’ll run a successful business. Owners must have the proper knowledge and preparation to make their ambitions a reality.
• Poor Location – Don’t have sufficient footfall? Can’t attract the right demographic? Simply put, you won’t bring in the necessary number of customers to cover your costs.
• No Working Capital – Sufficient financing and cash reserves are crucial for opening your café, sustaining its growth and covering those down periods. If you don’t have the pounds, it doesn’t matter how great your café is.
• Lack of Brand Image – You live and die on your brand because that’s what sticks in people’s minds. If your café doesn’t inspire and encourage people to try you out, you’ll struggle to attract a reliable customer base. 

Poor business management and planning will always lead to the same destination. Being passionate about your business idea is essential, but that’s no substitute for a proper business plan and carrying out your due diligence.

Is a café a good business to buy? 

Cafes can be a good business to buy for some and a poor move for others. It’s a personal decision, so asking the right questions is vital rather than dashing in and hoping for the best. 

So, why is a café a good business to buy? 

• Customer Base – Some areas are already filled with coffee lovers, giving you an established customer base to take advantage of. If you’re already looking at existing cafes to buy, you can start making money from day one.
• Lifestyle Appeal – Running a café isn’t a job. It’s a lifestyle. The social aspects of running one of these businesses are what has encouraged so many to launch their own cafes. Additionally, many cafes become community hubs, bringing people together for a particular vibe.
• Scalability – Cafes are infinitely scalable. Whether you want to move into the catering business, host events, or create a brand that expands to other locations, the possibilities really are endless because there’s no true glass ceiling.

The fact that the UK is a nation of coffee lovers also can’t be ignored. This makes it highly resilient against economic downturns, which is why it’s consistently outpaced the broader economy’s growth for some years now. 

Of course, cafes aren’t the businesses for everyone. Add in rent, labour and ingredients, and those large margins on the coffee can quickly receive an unwanted haircut. Moreover, cafes are highly demanding on your time. Expect to take a hands-on approach to your business, especially during busier periods. 

Additionally, it’s worth mentioning that an independent café is always vulnerable to larger chain stores moving in on your territory. Whether it’s Costa Coffee, Starbucks, or Greggs, a sudden influx of chains could undercut an otherwise flourishing business, especially as you get established during those early years.

 If you believe a café is the right way forward for you, you may wonder whether your best move is to buy an existing café or start a new one. At Cogogo, we have a database filled with current café listings across the UK, helping you to pinpoint your next big opportunity. Start your search for a café, or contact us for more guidance now.