How Can Coffee Shop Operators Reduce their Fixed Costs

In a recent article, we discussed how owners and manager in coffee shops can start to increase their revenue with 21 quick, actionable tips. If you missed that article, we recommend starting there to get a good idea of how to increase your top margin -> 21 Quick Strategies for Boosting Coffee Shops Sales and Revenue.

The next piece of the puzzle towards a more profitable coffee shop business, is knowing when and how to reduce the fixed running costs of the cafe. With greater revenues and a plan for reducing costs, your coffee shop can start to become profitable and maintain profitability into the future. In this article, we’re going to discuss a number of tips you can implement to start reducing the fixed costs in your cafe. But first, let’s answer a key question…

What Factors Go Into a Cafes Running Costs?

A few years ago, James Hoffmann published a fantastic video titled ‘Why is a cup of coffee so expensive?‘, in which, he detailed where the money goes when a customer spends £3.00 on a cup of coffee. Immediately, 20% of the cost of that coffee goes to government in the form of VAT, so the cafe has £2.50 remaining to cover the costs and potentially make some profit, too.

That remaining £2.50 is split into roughly 30% product costs, 35% staff and labour, 15% rent and other location costs, 10% will go towards overheads such as lighting and heating, with potentially 10% or 25 pence being held on to as profit. Once you are able to break down the price of a cup of coffee, you can see that any cafe with the ability to reduce their running costs will vastly increase their odds of bringing a larger percentage of the revenue, as profit.

Note that running costs, or fixed costs, are costs that the business will incurr no matter their performance on any given day. For example during a great month, the business will pay the same amount of money towards rent (fixed cost) as they would during a quiet month. Whereas the amount they spend on coffee (variable cost) can vary drastically month to month depending on the number of customers that walk through the door. The running costs for most cafes typically include the following factors:

1. Utilities

These are essential services such as electricity, water, gas, and internet required to operate a coffee shop. Examples include monthly electricity bills, water bills, and internet service fees.

2. Property

Fixed costs associated with the physical space where the coffee shop is located. This includes rent or mortgage payments, property taxes, and maintenance fees for the building.

3. Equipment

Costs related to purchasing and maintaining necessary equipment for running the coffee shop, such as coffee machines, grinders, refrigerators, and POS systems. This also encompasses the depreciation of these assets over time.

4. Insurance

Expenses for various types of insurance coverage, including property insurance to protect against damage or loss of assets, liability insurance to cover accidents or injuries on the premises, and workers’ compensation insurance for employees.

5. Licensing and Permits

Fees required to obtain and maintain legal permits and licenses necessary for operating a coffee shop, such as health permits, food service licenses, and liquor licenses if serving alcoholic beverages.

6. Taxes

Fixed costs related to various taxes, including property taxes on the coffee shop’s premises, sales taxes collected from customers on goods sold, and payroll taxes for employees’ wages.

7. Labour

The cost of employing staff to operate the coffee shop, including wages, salaries, benefits such as health insurance and retirement contributions, and payroll processing fees. This also includes any contracted labour for services like cleaning or security.

Why Might you Want to Reduce Running Costs?

We speak to a lot of food and beverage managers and directors, hospitality groups, leisure sites and education establishments about their coffee offering, and how it’s often not generating the expected returns they would be excited about. Of course, increasing revenue is the main lever that you can pull. There are a large number of efforts you can implement, and we have already outlined 21 strategies for boosting revenue in a previous blog post. The other main factor you can affect to get better returns from your coffee offering, is reducing your running costs and creating a more cost-efficient setup. If you’re looking to reduce the fixed costs in your coffee shop, it’s likely because you aren’t seeing the returns you expected. If that sounds like you, feel free to contact the coffee strategists at Bridge Coffee Roasters.

How Can you Reduce a Cafe’s Fixed Costs?

Let’s take this one factor at a time. First, how can coffee shop managers, owners and operators, reduce the cost of utilities?

Reducing Utilities through Efficiency

In recent years, the cost of gas and electricity has forced many established businesses to close. Whilst utilities are a large and growing cost to many coffee shops, they can certainly be proactive about using energy more efficiently. To reduce utilities costs, coffee shop owners can invest in energy-efficient equipment, use programmable thermostats, switch to LED lighting, ensure regular maintenance of equipment, improve insulation, and encourage energy-saving practices among staff. They could even incentivise and reward staff for finding more energy efficient practices during day-to-day operation, and potentially even reach out to suppliers to negotiate for better deals.

Can you Reduce Property Costs?

Property costs are difficult to reduce – there’s not going to be a huge amount that a coffee shop can do to negotiate a successful reduction in their rent. Yes, you can consider relocating to a more affordable area, but that pretty much equates to starting from scratch. Instead, consider making better use of the space that you have available and instead bring up your top line. For strategies to consider in order to increase revenue – click here.

Choose the Right Equipment

One thing we’re absolutely certain about at Bridge Coffee Roasters is that a coffee business can be made, or broken, by their choice of equipment. Get it right, and you’ll be set up for success now and in the future with gear perfectly suited to your needs, coffee volumes and service type. Get it wrong, and you could be faced with a complex machine that your staff aren’t trained to operate and that is eating into your budget. One potential method of reducing your fixed costs is to consider your coffee equipment and whether it is more than you need. For example, are you using a three group espresso machine when a two-group will suffice? Are you using a premium bean-to-cup machine that’s rated for 200 drinks a day, but you’re only serving 50 cups on a good day?

To streamline your costs and make your business more efficient, consider the equipment you’re using and whether your fixed costs could be reduced by properly matching your needs to the equipment. Looking to choose the right gear for your business? Learn more about our coffee machines or all equipment.

Consider your Finance Options

Also part of the decision when it comes to choosing your equipment, is deciding on the finance model and agreement you want to enter in with your wholesale coffee company. The most common finance options for coffee equipment, aside from upfront purchasing, include lease finance, lease purchase, rental, and free on loan. When it comes to your financing options, you can reduce your fixed costs by leasing 0r renting the equipment over a longer period of time. Paying for a coffee machine over the course of 5 years rather than 3 will bring your regular payments down significantly. You could also consider purchasing the gear up front or going with a free-on-loan agreement. However, we do not recommend free-on-loan as a good way of financing coffee equipment. Learn why in Here’s Why Free on Loan Coffee Equipment Isn’t Really “Free”.

Look For Better deals on Insurance and Tax Deductions

Now we aren’t insurance coverage experts or tax advisors, or anything remotely of the sort. But, if you’ve ever shopped around for car insurance, then you know that there is certainly money to be saved by doing a little bit of research. To reduce fixed costs from insurance, cafes can shop around for competitive rates, implement risk management practices, bundle policies for discounts, consider higher deductibles, and regularly review coverage to ensure alignment with business needs. The same can be true of taxes – do your research, and consider speaking with an accountant or tax professional to seek ways of reducing your ongoing costs and tax commitments.