Coffee Shops
Buy This Industry Report
Get more in-depth industry information with a First Research industry report containing business challenges, trends, executive insight, call prep questions, and so much more!
Get Information Now
Rest assured, your information will not be shared with anyone else (see our privacy policy for details).
Industry Overview
The coffee shop industry includes 20,000 stores with combined annual revenue of about $11 billion. Major companies include Starbucks, Caribou, Coffee Bean and Tea Leaf, and Diedrich (Gloria Jean’s). The industry is highly concentrated at the top and fragmented at the bottom: the top 50 companies have over 70 percent of industry sales.
Competitive Landscape
Consumer taste and personal income drive demand. The profitability of individual companies depends on the ability to secure prime locations, drive store traffic, and deliver high quality products. Large companies have advantages in purchasing, finance, and marketing. Small companies can compete effectively by offering specialized products, serving a local market, or providing a personal level of customer service. The industry is extremely labor-intensive: average annual revenue per worker is $40,000.
Starbucks dominates with over 10,000 stores worldwide. Caribou Coffee is a distant second with almost 400 locations. Besides other coffee shops, companies compete with convenience stores, gas stations, quick service and fast food restaurants, gourmet food shops, and donut shops.
Products, Operations & Technology
Major products include beverages and food. Beverages include brewed coffee and tea; espresso drinks (cappuccinos, café lattes); cold blended beverages; bottled water; soft drinks; and juices. Food includes pastries, bakery items, desserts, sandwiches, and candy. Many coffee shops sell whole or ground coffee beans for home consumption. Some coffee shops sell coffee or espresso-making equipment, grinders, mugs, and other accessories. Most coffee shops serve high-quality, premium coffee known as specialty coffee.
Companies may blend and roast green coffee to produce unique flavors, though some coffee shops use pre-roasted coffee. Grinders reduce roasted coffee beans to particles, and most coffee shops grind roasted beans immediately prior to brewing to ensure freshness. Grind level is matched to brewing time. Brewing equipment controls water temperature and brewing and mixing time. Companies may use water filtration systems to screen out minerals that affect taste. High-quality coffee filters are also important to extract the right amount of flavor from ground coffee. Baristas (or trained coffeemakers) operate espresso machines, which use pressurized hot water and specially ground coffee to produce espresso. Combining espresso with other beverages (like milk) produces specialty beverages like cappuccinos. Companies typically limit how long ground coffee can sit before being served.
Starbucks is the only national chain. Other companies include regional chains, franchises, licensed stores, and independent stores. Franchises allow third parties to leverage a recognizable store name and benefit from economies and efficiencies of the franchiser. Companies may issue licenses to other businesses to gain access to highly desirable retail locations with tenant restrictions, like airports. Some large companies are expanding internationally through licensing agreements.
Coffee shops depend greatly on customer traffic and are most often located in areas with convenient access for pedestrians or drivers. Typical locations include downtown or suburban retail centers, shopping malls, office buildings, and university campuses. Store format and size vary by site, as some locations offer more space than others. Caribou Coffeehouses range from 200 to 3,000 square feet, with an average store 1,200 to 1,600. Some chains offer a kiosk format, without seating, for small spaces like airports and grocery stores. A drive-thru window offers customers convenience and increases off-premise consumption. A comfortable environment is important to provide a positive customer experience and increase store traffic, since many customers consume beverages on premise.
Starbucks and Peet’s generate about $1 million annually per store, while other regional chain stores generate about $500,000. Independent coffee shops generate about $200,000 in coffee beverage and bean sales, according to the 2005 Specialty Coffee Association/Gourmet Retailer Specialty Coffee Survey. Companies may use contracts to buy green coffee (unroasted coffee) from brokers, farms, estates, exporters, or cooperative groups. Coffee shops may also purchase roasted coffee from independent roasters. The vast majority of green coffee is imported from countries with tropical climates. Most companies use high-grade arabica beans, which trade for a premium above commodity prices. Pricing and supply can be volatile due to changing weather conditions, the political and economic climate of grower countries, and the actions of trade organizations. Coffee shops also buy significant amounts of dairy products from regional suppliers. The price of dairy products is also volatile, and most companies use contracts to lock in pricing.
Companies tend to keep higher levels of inventory for green coffee, because roasted coffee is more perishable. Since coffee quality starts to deteriorate after roasting, shops may discard old beans. Coffee shops must also monitor supplies of dairy products due to limited shelf life. Chains often vary their product mix, depending on store size and location.
Computer systems manage point-of-sale (POS) transactions; credit card processing; and customer loyalty card purchases. Information systems also record employee hours and generate sales reports. Computerized warehouse management systems track inventory of coffee and other products. Some companies use Internet-based systems to link stores and warehouses to ensure rapid replenishment of roasted coffee.