I recently watched a food related programme on TV which had a focus on the coffee scene in the U.K. As part of the programme, the cost of producing a cup of coffee was calculated along with the amount of profit for the business. I often have discussions with local coffee shop owners with regards to the price of their coffee and in many instances I feel they could charge a little more. As such the figures quoted on the show caught my attention and I set about a number crunching exercise of my own.
Much of the information available with regards to the cost of producing a cup of coffee relates to high street chains so I’ve merged this data with my own knowledge of costs. The following is based upon an 8oz latte selling at £2.40, which is a price I typically see locally.
First and foremost let’s get rid of the 20% which is going to make its way to the Government through VAT. I often feel business owners underestimate this amount as it accounts for 40p in this instance.
Then there’s the cost of the ingredients, which is coffee, milk and possibly sugar. The coffee will be around 10% (24p) of the cost. The cost of the milk is going to very much depend on the type of milk used and the skill of the barista. A well trained barista will minimise milk wastage, so based upon the price of a typical 4 pint bottle of milk, we’re looking at around 3 to 4% (7 to 10p) of the cost.
In a well managed catering business staff costs should account for no more than a quarter of the income generated. Research by Allegra Strategies1 suggests staff account for 24% of the cost; in the case of our cup of coffee that’s around 58p.
So far our cup of coffee has cost us £1.46 to produce and we’re still not finished with the costs. The same study by Allegra concluded that 15% of the cost will be needed to cover rent and rates, and a further 15% for administration, which is 36p for each. The total cost by now is £2.04, leaving just 36p as profit for the business.
Granted, the aforementioned study was centred around high street chains where rent and rate costs can be high but in my experience many small coffee shop owners struggle to keep their staff costs below 25%. Even allowing for local variations, the overall profit per cup is relatively low. My rough figures suggest a figure of around 15%.
If we now factor in takeaway provision, we need the cost of the cup and lid, as well as maybe a stirrer and sugar. Many local businesses utilise compostable packaging and these work out at around 11p for a cup and nearly 5p for the lid. As the study by Allegra discovered, the cost of the packaging can be almost as much as the ingredients used in the beverage. In this example that’s 7% of the cost for packaging, leaving us with a profit of 8% or around 20p2.
So what can we read into this? I think the consumer is getting a good deal at £2.40 for a latte, particularly if they are being served a good quality coffee. Factor in the ability to relax over that cup of coffee, perhaps with a newspaper, book or free wifi, and the cost really is very low. I think prices need to increase from where they are now and I don’t think it will be too long before we see a 20p increase on the cost of a cup of coffee.
In terms of the coffee shop owner there are a few things to be aware of. An obvious approach, and very common in this part of the country, is to reduce costs to increase the end profit of a coffee. Buy a cheaper coffee and spend less on milk are two obvious approaches but this could easily have the opposite effect. Consumers are more discerning and have access to an increasing array of coffee producing gadgets at home. As such they are becoming more demanding of the coffee they enjoy when out and about. By all means manage costs but increasing spend per transaction is equally important. Similarly getting on top of milk wastage3 can save some extra pennies without impacting on the quality of the coffee. Finally being more aware of costs is vitally important. I still see the occasional establishment who charge less for take away drinks while the numbers clearly show that the margins are already very slim on these beverages.
- This research dates back to 2013 and was initially reported the Daily Mail online in September 2013 ↩
- The aforementioned Allegra Strategy research suggested the profit was around 13%, which echoes the findings of a Speciality Coffee Association of America study in 2011 ↩
- By managing wastage I do not mean reusing milk, as this is a practice which irritates me. With a little practice, a barista should be able to accurately judge the right amount of milk needed for each of the coffees they are making. ↩