Editor’s note: This article was first published in September 2018, and was written in 2018 for Spain. The prices it cites, such as a Coca-Cola costing the bar €0.32 and selling for €1.50, and the claim that electricity is currently the business’s number one enemy reflect that time.
We’ve often heard that opening a café or bar is a business where it’s all profit. It’s true that profit margins are very high, but we need to look at the factors that work against profitability.
Most cafés don’t make it to five years, even though it’s a highly profitable business. Let’s see why.
Is a café profitable?
To start with, following the basic rule that more customers means more profit, we’ll first focus on how to get customers to come back and on choosing your customers. This is a complex subject, because having a café on a busy street in a capital city is not the same as having one in a village. The rules change.
See also: 17 business ideas for small villages
Customers return to a café for three essential reasons
- Quality
- Service
- Cleanliness
These are the three main reasons. Price may matter, but it isn’t everything, since it’s part of quality. In fact, we can see how Starbucks has succeeded, and you could hardly say it’s cheap.
- If you serve with a smile, the customer comes back.
- If the place is clean, the customer comes back.
- If the coffee and everything else they had was good quality, the customer comes back.
- If your prices were lower than your competitors’ but you fail on any of the other three, the good customer won’t come back, but the problem customer who only wants to spend as little as possible will.
Coffee
Never forget that coffee is the product with the highest profit margin in a café. Because the margin is so high, don’t squeeze it further by using blends. Aim for excellent quality coffee without torrefacto (beans roasted with added sugar, common in Spain).
There are upmarket cafés that charge a high price for coffee, and it turns out the coffee is 60% natural roast and 40% torrefacto. A bomb for the stomach and for anyone who appreciates good coffee.
The difference between a kilo of natural roast coffee and a kilo of blended coffee can be 2 or 3 euros. It’s not worth serving a bad product for that amount of money. You may be wondering: if it isn’t worth it, why do some places do it?
They do it for a simple reason. If these places go through 2 kilos of coffee a day for the 30 days of the month, they reckon they save about €180 a month. A considerable saving, but they forget that they lose customers worth more than that €180. Let’s call it poor business management and a big mistake.
Mixed drinks (the cubalibre or cubata)
This is another product with a high profit margin, but it can also be the one that brings your place the most trouble, because people who drink badly make bad customers. So if you want a select clientele, price your rum and Cokes higher than your competitors do.
Some cafés don’t sell alcohol at all, which, depending on the style you want for your café, might not be a good idea. If you want to create an upmarket atmosphere, well-presented drinks at a high price can make your place a meeting point for the right kind of people and not just for those looking to get drunk cheaply, who are problem customers that don’t fit what we should be aiming for.
Innovation
All success depends on constant innovation. Offer new flavours of toast or pastries, and set yourself apart from your competitors. Create a welcoming atmosphere: comfortable chairs, pleasant lighting, decoration and so on.
Even if your country or city doesn’t have the custom they have in Andalusia (the tapa), it could be a big success. A tapa is a “free” snack you give your customer with a drink, usually a soft drink, a beer or a cubalibre.
On the subject of innovation, we gave some ideas in our article “Ideas for hospitality businesses”.
And if you’re the first to offer this kind of service, setting yourself apart from your competitors, you’ll have a head start.
Why cafés close
So far we’ve talked about highly profitable products, including coffee, with a 250% return. A simple Coca-Cola costs the bar about €0.32 and sells for €1.50.
You need to pay close attention, above all, to refrigeration. If you have a lot of fridges, electricity is currently the number one enemy of this business. Air conditioning for the premises, a drinks fridge, another for beer, ice cream, pastries, machines… electricity eats up a large part of your business’s profitability, because whether you have more customers or fewer, your monthly electricity bill is about the same.
Then there are taxes, occupational health and safety, basic safety measures for the premises and so on.
Even after covering all these expenses, the business is still profitable (as long as customers come in).
The biggest enemy of a bar or café is the work
Nobody wants to be a waiter for the rest of their life, so what makes you think that if you spend every day behind the bar, even if it’s your own business, you’ll last more than two or three years? It’s hard. This is where you need to draw up a plan and a clear strategy.
You need to find a way for your bar or café to run without you having to be there; otherwise, this business will end up wearing you out.
I once met a hospitality entrepreneur who said: “A bar or café is a business that enslaves you, but when you open two more bars, it stops enslaving you.”
What he meant is that with three venues he obviously can’t be in all three at once, so that’s when he looks for a way for at least two of them to run on their own, and once he’s achieved that, why not make the third one run on its own too?
That way of thinking is what separates a waiter who works in a bar from a hospitality entrepreneur. This doesn’t mean you shouldn’t put in more hours than anyone else when you first open.
Remember: achieving big profits in the long term takes big effort in the short term.
That said, a bar really is all profit and one of the most profitable businesses there is, but if it isn’t managed properly, it can also cause family problems and sometimes health problems.
See also: 22 creative business ideas
Featured image: Lisa Stevens from Sutton Coldfield, UK, CC BY-SA 2.0, via Wikimedia Commons.
