5 ways to improve cafe profit (without selling your soul)

People often imagine that owning a cafe is a licence to print money.

“The margins on coffee are huge” they say, “$20 for avocado on toast...I can buy a whole tray for that”.

As anyone who has owned a small business knows, that’s not how it works.

Yes, the product margins in a cafe do look healthy - 65-70% Gross Profit is common (Gross profit is the amount you have left after deducting the cost of ingredients & GST).

However Net Profit (the amount of profit left after paying all the other bills) is often quite modest.

How modest? According to the most recent ATO industry benchmarks, the average Net Profit for a Cafe in Australia is around 10% of sales, with many cafes making even less.

It works out like this:

For a middle of the road cafe turning over $500k / year, that leaves the owners with $50k to pay off loans, taxes and then finally take home something themselves.

Not particularly compelling if you’ve just worked a 70 hour week.

So to make it worth the effort, we really need to beat the benchmarks. Here are some principles I’ve learned from successful, long-term cafe owners and in my own business.

Note: Every business is different, and this information is general in nature. It is based on my personal experience and opinion and should not be considered financial advice.

1. Know your numbers

Sorry, we’re starting with some tough love.

If you want to improve profit, then you need to start by measuring the key financial metrics in your business.

No, it’s not good enough to have “cash in the bank” and it’s not good enough to get a report from your accountant once a year.

You need to track the key numbers at least monthly and set goals based on these. This is the only way you can identify specific the issues holding you back and make the changes needed to get profit back on track.

First, you’ll need to get familiar with a Profit & Loss report (also known as a P&L or Income Statement).

This is a simplified example from a café that is beating the industry averages (...hello 21% Net Profit).

How are they doing it? They’re controlling the three highlighted items: Cost of Goods, Rent & Wages.

These are the 3 biggest expenses in every cafe. By measuring these monthly, we know where the opportunities are, and can start to make changes.

The good news - If you use a proper accounting system like Xero or MYOB, this report is waiting for you. Make sure you’ve setup the “bank feed” to allocate income and expenses to the right categories (or check with your bookkeeper) and run the ‘profit and loss’ report.

Now that we know where we stand, we can compare our numbers to the best practice in the industry:

2. Start by growing sales

Many people start by focussing on costs - they reduce labour hours, hire younger staff, buy cheaper ingredients.

It improves margins for a time, but then sales start to fall as service gets slower and products aren’t as good as they once were. With less sales, you’ve then got to keep cutting - and so it goes until there’s nothing left to cut.

There is really no way around it: to have a successful, sustainable business you need to find ways to grow sales over time.

The most obvious, and often overlooked part of growing sales is to increase prices.

I get it, price increases are scary. Customers never love paying more, and the longer we put off making a change the harder it gets.

So, my advice, because costs creep up every year, it makes sense to review prices once a year to minimise the amount you need to increase and maintain your gross profit over time.

So, apart from price, what else can we do to grow sales?

At this point, most people will jump right into to marketing ideas - social media, discounts, loyalty programs. While those things can help, I have found that there is simply no substitute for getting the fundamentals right: consistently good coffee, food & service - and a great atmosphere.

These are easy things to say, but they are really hard to objectively measure when you work inside a business all day, every day. It’s a really valuable thing to get some honest, and sometimes painful feedback from other business owners & industry professionals that are outside your business.

3. Improve Efficiency

No one enjoys inefficient service; it’s bad for customers, staff hate it and it costs you money you didn’t even know you were spending.

Here’s the problem: Let’s say you normally roster two staff on a shift. If sales grow by 20%, then you can either:

1. add another person to the shift, which eats up the extra profit or
2. keep it at two people - service is poor and sales drop back to where they were in the first place.

Neither is a great outcome.

The smart way is to focus on efficiency - that is, make your team more productive without using extra time and effort. In doing this, you can control costs and grow sales at the same time.

Here are a few practical ways to do just that:

1. Simplify your menu
   The more items and ingredients you have, the more time is eaten up on service, with managing orders & product waste.
2. Improve your workflow
   Arrange equipment, benches and furniture to minimise the amount of running around by staff.
3. Automate repetitive processes
   Automatic grinders, tamping robots, milk steamers and contactless card systems are just a few examples.
4. Self-Ordering
   These include options such as QR ordering at the table or one of the new compact, self-ordering kiosks. Sure, it's not for everyone, but as more customers embrace self ordering, this sort of technology is a big opportunity to make hospitality businesses more efficient and more profitable.

For more insights on how automated tech can boost your team's efficiency, click here.

4. Change the Product Mix

The ‘mix’ of products that you sell are not all equal. Some menu items have high sales & high margins, others have low sales and low margins.

The first step is to know which is which.

If you’ve discovered the reports section of your cash register, take a look at the product mix report (could be called ‘sales by product’, ‘product sales analysis’ or something similar).

Think of your menu like a football team. If a product is letting the team down by not delivering profit, then maybe it’s time to put it on the bench and bring on some fresh legs.

Those low-selling, low-margin products are dragging down your overall cafe profit and are also making your overall operation less efficient.

Tasty: yes...Profitable: maybe

5. Increase Capacity

Once sales are growing and we’ve improved efficiency, there’s a good chance you’ve got the opportunity to increase capacity of your business.

That is, you can increase sales by removing barriers (e.g. they can’t get a table) or by tapping into a new segment (e.g. opening earlier for commuters).

Some specific ways you can do that:

• Speed up service times. Quicker service means people are more likely to come back more often. It’s incredibly simple, but so many cafes are just too slow to grow.
• If your seating fills up during peak times, increase capacity by adding tables or reconfiguring the floor layout to allow more usable seating.
• Review your trading hours - adding to your opening hours can be slow at first, but can pay off in the long run.
• Offer incentives for customers to visit during quiet periods
• Mobile ordering & delivery platforms can open up new customer occasions, just make sure you crunch the numbers on the fees and price your menu accordingly.