Specialty coffee business owners can’t afford to improvise anymore

laptop and coffee
  • For a long time, third wave coffee businesses were able to compensate for a lack of financial savvy with passion for the job, a great network and strategic marketing
  • Today’s challenging economy has made the business of specialty tougher – 2019 research shows that 50-64% of independent coffee shops fail within their first five years
  • Roasters and business owners must step up to the challenge by working on their business acumen and learning the ropes of finance and investment to stay afloat and grow in a time of crisis

THE BUSINESS of specialty coffee has changed. Once an industry of carefree, passionate actors, business owners are now dependent on financial aid, and challenged by countless rivals vying for market share. 

In its early days, much of the sector was hallmarked by young, enthusiastic entrepreneurs, who were “winging it” – writing business plans on napkins and building coffee enterprises from the ground up. Today, intense competition and a fickle economy mean coffee knowledge and passion alone no longer cut it. 

If specialty coffee business owners are to survive and grow, they now require financial literacy and business acumen. This marks a maturation of the industry, or simply the changing nature of these businesses and how they should be run.  

For a long time, many coffee businesses were able to compensate for a lack of financial savvy with successful, public-facing campaigns, such as flashy collaborations, high social media followings, strategic networking and a visible presence at coffee festivals and community events. 

However, changing circumstances mean this no longer puts food on the table. 

“In the early days, there was this big excitement at the idea of exploring new grounds and following a passion for innovation, which was almost enough” says Konstantinos Vallianos, a green coffee buyer.

“However, the last decade brought in many changes. Many new players (small and big) joined the wave. Suddenly, the specialty market segment – still relatively small in terms of demand and market share – became overpopulated and saturated.” 

A saturated market and the increasing appropriation of specialty-styled businesses by larger companies feed into a landscape of competition that is hard to keep up with. On top of this, supply chain disruptions, razor thin margins and inflationary pressure are forcing specialty businesses to get more financially organised and business-savvy.

Shifting from passion to pragmatism

In previous decades, many specialty coffee businesses leveraged the growth of the specialty industry as a new market segment to attract investment and stay afloat. Now, the bottom line is that the long term viability of the passion project, startup model of specialty coffee businesses is floundering. 

Although specialty coffee continues to rise in global popularity, businesses can’t afford to rest on the laurels of that expectation.To compete successfully in an oversaturated market, a pragmatic approach and gaining a better understanding of business management, finance and investment are becoming prerequisites.  

In 2019, an independent survey of coffee shop owners in the USA, UK and Canada reported that 50 – 64% of independent coffee shops fail within their first five years. In contrast, in the previous decade, most major markets saw a growth in the number of coffee shops opening and surviving past this five-year mark. 

The current specialty coffee market environment requires entrepreneurs to invest time and resources into mastering the finer points of financial management – from budgeting and cash flow analysis to strategic pricing and inventory management.

“In an environment of high competition and increasing wholesale demand expectations, specialty coffee roasters have to balance costs and revenues with realistically applied solutions,” says Konstantinos.

“Cafes and wholesale customers aren’t so much interested in higher end coffees with limited availability anymore. They require coffee stock, coffee machines, other equipment and credit lines that will keep their businesses afloat. Cash flow has to be planned and controlled pretty tightly.”

Learning how to navigate risk and financial management, and negotiating loans are tools that will be crucial to survival and turning a decent profit. But the world of finance and investment can be daunting to many, and a landscape that is trickier to navigate than most.

business planning coffee shop

Millennials are testing new investment models 

Traditionally, many startup and small coffee businesses relied on bank loans or personal savings to fund their ventures. But increasing overhead costs, inflation, and finance and green coffee trading sectors in crisis are changing this.

A growing number of millennial entrepreneurs are eschewing traditional financing models in favour of revenue share equity investment schemes. US coffee business Cxffee Black, for example, raised nearly $190,000 through crowdfunding platform WeFunder, a tool that allows investors to purchase equity in start up businesses. 

Other and more established businesses like multinational roaster Blank Street have raised funds through venture capital investment in favour of loans through traditional banking institutions. 

“Certainly the cost of money has increased significantly over the last couple of years. With increased interest rates, borrowing from banks became less attractive,” says Konstantinos.

“On top of that, with higher set up and running costs, even the most modest startup business plan comes with a larger price tag. External investment and private equity, with the right circumstances, could be a more convenient solution for a new startup business.” 

For business owners who lack the collateral assets required for bank loans, this may seem like an attractive solution. However, revenue share agreements often come with onerous terms and conditions that include high interest rates, profit-sharing clauses, and restrictions on future financing options. 

Despite these risks, for many cash-strapped startups that are desperate for capital, the allure of quick cash may prevail. But they should remain wary of other long-term implications like signing away a share of their future profits, and risking losing independence when it comes to day-to-day business operations and decision-making. 

“Investors usually request their investment to pay off in the mid term, and therefore have a say in the company’s decisions, strategy, and margins,” says Konstantinos.

“This kind of mindset is sometimes in contradiction with the approach and beliefs of the company founders, and can cause friction in the long run. In a way, it limits their decision-making power. Choosing private investors shouldn’t be a light-hearted decision, it requires careful thought and discussion.” 

Navigating the landscape of business ownership is difficult at any time. Juggling the risks and costs of running a specialty coffee business today requires sound financial literacy and forward planning. 

While finance, investment, and business management are separate skill sets, it could be well worth it for smaller roasters and business owners to step out of their comfort zone to adapt to changing times.

Coffee Intelligence

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