Business Analysis on the Fly

Every single business that you walk into, you should be able to analyze how it is going, if it is profitable, if you would invest, and how you would execute better were you to open a competitor next door.

I was sitting in a coffeeshop one morning, and I was the only customer for the first hour I was there. I paid them $4.33 for a coffee (with tip) and sat down to watch and work. For that coffee, there is obviously the cost of beans, water, and cup to sell it to me. I assume the breakdown on this is something like the following:

Cup and paper sleeve: $0.15
Coffee beans: $0.25
Lid: $0.07

So, the cost is around 50 cents to serve me this cup of coffee. It wasn’t a fancy Espresso drink, so the cost is lower - No milk or depreciation of the $30,000 LaMarzzocco they have here.

While I sat there, there were at least two employees working - one barista and one making various pastries. If we argue that each makes around $15/hr (absolute best case scenario for the business, as it is minimum wage here): that means that they spent $30 for an hour of labour while I sat there on my laptop. So at least for the snapshot of when I was present, the simple math on the one coffee they served me follows:

Income: $4.33
Expenses: $30 + $0.15 + $0.25 + $ 0.07

Profit = - $26.14

Note that this does not take into consideration rent on the space they are in, the spoilage of food that is sitting out in their case, the cost to operate the heat/wifi etc. on a one hour basis out of the month, etc. etc.

Now, obviously, 7am - 8am on a Friday is an atypical hour to analyze a coffeeshop, but the fact remains that if this pattern were to continue, they would be out of business. I do believe that they will go out of business, unfortunately, if they have to continue the way they are running. You can extrapolate based on max seating in the cafe (~36 seats), foot traffic in the area (3-4,000 people per hour on a summer day, likely a couple hundred on a good day in the winter), and what other businesses are in the complex. Customer turnover, and much more in-depth analysis.

There used to be a Starbucks in this location - and they ceased operation. Starbucks has tens of thousands of data points if a location is profitable or not. And, if they fold up shop, you would probably be best to not try to pick up where they left off. There are various businesses in this complex that have come and gone, the issue is a couple things that are glaring: parking isn’t great, visibility isn’t stellar, rents are notoriously higher than market, and a few other considerations.

This is a simple analysis of one business out of dozens I frequent on a weekly basis. Coffeeshops are good business if they are done correctly, in high traffic areas, and not in the midst of a pandemic (which we appear to be on the way out of). If I had to out compete this business, I would do about 15 things differently off the bat. I do this with restaurants, I do this with big box stores, and rental buildings. It doesn’t matter, it’s the mentality about it all that helps you to build something, see opportunity, and pounce.

Start doing this with every business that you walk into.

Where is their income coming from? What are their expenses? Is it a viable business? How would you compete better than them if you were to open up a similar business?

The mentality that comes from this exercise will pay massive dividends down the road.