Many avid investors are wary towards investing in tech stocks as the tech scene is changing too rapidly. In other words, it’s a common phenomenon that the market leader today might be lagging behind its competitors tomorrow.
Personally speaking, one thing I cannot live without, rain or shine, is coffee, as I rely heavily on it to stay awake after my 1.5-hour train ride to work in the morning. I’m sure many others might be equally if not more dependent on coffee to function.
So the question is: Investing in a café can’t go wrong, right? After all, we are reminded every once in awhile that millennials, the masters of the future, have a thing for cafes.
Bearing that curious question in mind, I attended the recently concluded Singapore Coffee Festival, where Straits Times Business Editor Lee Su Shyan interviewed DBS Managing Director and Regional Head for DBS Group Research Timothy Wong on personal finance tips, budgeting for millennials, and the things to take note when financing a startup café.
At the end of the session, my takeaway is that regardless whether you are an aspiring café owner or an investor who is considering about owning shares of a café, you might first want to know that—
Most café startups fail
About 80% of the F&B startups in Singapore suffer a complete loss, said Timothy, who shared his experience of having invested in a café that ran for 70 months but made money for only six of those months.
He also reminded the audience that although F&B businesses have potentially high returns, even successful café businesses may have a low profit margin of around 10%. As for the costs, he said that the rental, staff labour costs, and food should take up about 30% each.
Let’s not forget other costs, which can include delivery, marketing and utilities among many more. One should be clearly aware that a café business, no matter how hip, cannot be powered by merely the owner’s passion.
According to a Straits Times article published in early 2015, data from the Accounting and Corporate Regulatory Authority had shown that almost half of the 369 cafes, coffee houses, and snack bars that registered in 2011 had since closed down.
With all that being said, if the idea of owning a café or investing in one still sounds sexy to you, here are three pieces of advice from Timothy that might help you cope better should you devote yourself to the business.
1. Be prepared to lose money
Be prepared to lose money, even if you are sure that you can attract a steady flow of customers with an ideal/convenient location or a unique selling point that is highly sought after.
For instance, suppose your café sells really good coffee (which also happens to have great profit margins), it’s unlikely that you will generate enough gross profit dollars to pay for all the costs (rental, staffing, etc.) by selling just coffee.
To secure sufficient turnover to be sustainable, you’ll need to have a “coffee plus” strategy. For example, coffee plus bakery item or food item that customers can conveniently order.
On the other hand, you might shoot yourself in the foot by offering too many food choices, as wide assortment offers are difficult to manage and result in increased costs and decreased quality, which would lead to decreased sales.
Also, in the first few months, when the marketing efforts have yet to fully take effect and words about your café have not yet spread far and wide, think about whether you have enough funds to continue running your café business despite early losses.
2. Don’t borrow (aggressively) for your start-up café
Credit companies will be more than happy to offer you a business loan to start up your café. But if you aren’t comfortable with borrowing money to purchase more tech stocks, you might not want to own an overleveraged café business either, especially since there is a high chance that it might fail.
3. Work at a café first
This is a test to see if your passion lasts. It is also one of the quickest ways to know every nook and cranny of how a café is run. Learn from the strengths and shortcomings of the café that you work at.
If you are not happy with the work processes or the management there, ask yourself how you are going to make sure that your future staff don’t feel the same.
If you find yourself lacking in product and business knowledge, you’ll probably have a lot more to learn before you are ready to start your own business.
It’s not as simple as hiring people to man your business so that you can sit back and collect money. You’ll need to lead, train and manage a team, and you cannot effectively manage what you don’t understand.
In my opinion, a café business is something artsy and sophisticated, and its highly subjective nature makes it even harder to predict than technology trends. Now, the important question is: Where shall I get my next cup of morning coffee?