The UK’s coffee shop market is booming, outpacing most of the rest of the economy. But that doesn’t tell the whole story of profit margins and where most of these profits are actually being made.
According to the World Coffee Portal’s 2024 Project Café UK report, 2023 saw 9.2% sales growth for the coffee shop market. However, there are headwinds, and that’s why every café owner must get their numbers right regardless of what stage of their journey they’re in.
Let’s take a look at the profit margins of the average café business and see what that means for your venture.
Understanding UK café and coffee shop profit margins
Profit margin is easy enough to understand. It’s your revenue minus the cost of generating that revenue.
Esquire’s Coffee conducted an in-depth look into what this looks like in the UK today. According to their figures, the average cost of a cup of coffee in the UK is £2.45. With a wholesale bag of coffee beans costing about £10-£18 per kilo, giving you up to 140 coffees per bag, it costs just 10p to produce a cup.
In essence, you’re making £2.29 on an average cup of coffee, or a gross profit of 93.5%. Of course, this doesn’t take into account the other running costs of your café, so it’s a bit of a false picture. Typically, it’s your size, brand, and location that influence your profit margin the most.
Esquire’s found that the average profit margin is around 12%, so every cup of coffee sold actually generates just 12% of its costs. As you can see, that’s a far cry from the 93.5% when looking at the product in isolation.
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How to calculate a café’s profit margin
Calculating your own café’s profit margin means following this formula:
- Profit Margin = (Net Income/Revenue) x 100
Your net income is your total revenue minus your expenses. In other words, you’re taking all the money you brought in and subtracting it from your expenses, including rent, utilities, marketing, labour, and taxes.
Once you’ve got your net income, you can divide it by your total revenue for a particular period, and multiply it by 100 to get your profit margin in percentage terms.
Suppose you’ve got a net income of £14,000 and a revenue of £32,000. If we plug these numbers into the formula, you’d have a profit margin of 43.75%.
Profits in franchise vs. independent cafes
Should you join a franchise or start independently? It’s the age-old question for all prospective café owners.
The truth is that there’s a trade-off. Profit margins within franchises are usually lower because there are more costs involved, such as royalties, upfront fees, and giving up a percentage of your sales. Of course, being backed by an established name means you’ve got a higher chance of success.
Well-run independent cafes have a higher profit margin potential because you’re not burdened by paying extra for the brand itself. Of course, up to 64% of independent coffee shops fail within five years, so there’s always the risk of failure to consider.
That’s why your decision shouldn’t be made based on profit margins alone. Other factors come into play because the allure of higher profit margins with an independent shop is meaningless if you can’t deal with the steeper learning curve.
Generally, this is why less experienced entrepreneurs are advised to look into the more predictable, well-supported path of a franchise over the greater risk associated with building their own brand from the ground up.
Factors affecting your café’s profit
A multitude of factors impact how profitable your café is. Unsurprisingly, it all comes down to minimising costs and maximising your income.
Let’s split these into two sections:
Lowering your café’s running costs
Cost management is crucial to the success of any café because if you’re overspending, you’re forced to sell more to make a profit. Examples of how you could lower your costs include:
- Choosing a lower-rent location (but beware of lower footfall).
- Negotiating your utility costs down.
- Changing food and drink suppliers.
- Streamlining your workflows through technology.
- Not operating with a bloated workforce.
- Minimising waste through better inventory management.
The balance you have to strike is ensuring that you’re not cutting costs to the bone and hampering your café’s ability to perform. Reducing staff is one thing, but if you’re understaffed, service can slow down, and your team will start to burn out. Likewise, opting for a cheaper supplier might mean lowering the quality of your product, thus turning your customers away.
Increasing your café’s income
Growing your café’s income is the path to profitability. Here are some ideas for how an entrepreneur might go about growing their income:
- Choosing a prime location with more footfall.
- Increasing your prices enough to grow your income without becoming uncompetitive.
- Optimising your menu by taking unpopular items off sale.
- Training your staff to upsell and cross-sell to increase the average value of each customer.
- Invest in a marketing plan to define your brand identity.
- Improving the customer experience to build up loyalty.
- Establishing a dedicated loyalty program to increase your base of regulars.
Likewise, you have to consider how, as a coffee shop, you can leverage what makes you unique. That could mean investing in high-cost, high-quality coffee beans. It could also mean adapting your menu to special seasonal trends, such as summer, Halloween and Christmas.
Overcoming the competition
Your competition defines how you go about lowering your costs and increasing your income. If you’re surrounded by chains like Starbucks and Costa Coffee, you can’t hope to grow your income based on lowering your prices.
On the other hand, the presence of competition might open up opportunities to differentiate your brand by providing something others don’t have. For instance, if other cafes don’t serve food, deciding to sell food could be the key to improving loyalty and marketing yourself.
What matters is that you keep an eye on the competition after you’ve moved in, but a full competitive analysis is critical before you ever put pen to paper. At Cogogo, we boast a database of UK cafes and coffee shops for sale. Browse for the latest listings or get in touch with us now to get started.
