Brews, Beans, and WiFi: How Coffee Shops Really Make Money

Coffee shops are the original startups, and they continue to boom. But how do they make a profit when a cup sells for just a few bucks and real estate, raw materials, and labor costs are sky-high? Denver's most popular caffeine sellers tell us their secrets to success.

Coffee shops are unique among brick-and-mortar retailers: part venders, part social centers. The average customer, by one Denver coffee shop owner’s estimation, spends only $4 to $6, and may take up space for hours. Not that shop owners are complaining. But it does make for a challenging business.

“There are consumers who sit and ‘poach’ WiFi, but if it wasn’t for those folks we wouldn’t be in business,” says Tim Thwaites, who launched Coda Coffee Co. in 2005 with his brother, Tommy Thwaites. They opened a Coda retail shop in Edgewater in January 2016, largely as a place to showcase Coda’s roasting prowess and product varieties.

Mark Overly, majority owner of Kaladi Coffee Roasters on East Evans Avenue since 2000 and a coffee trailblazer for more than 30 years, points out that even customers who spend little but stay long serve as a sort of window dressing, attracting other customers. “People don’t like going to a place that’s empty,” he says in what sounds like an inversion of that lovable Yogi Berra line, “Nobody goes there anymore; it’s too crowded.”
Coffee shops are unique among brick-and-mortar retailers: part venders, part social centers.
Starting in the mid-1980s when he was in his early 20s, Overly built a Kaladi Coffee empire in Anchorage, Alaska, before moving to Denver in 1999. He also foresaw the influence Starbucks would have on the nation’s coffee culture a few years before the retail giant went public in 1992, as he would fly to Seattle to learn how to service espresso machines in sessions attended by Starbucks personnel. Starbucks, the internet, and WiFi all came of age in the 1990s, and coffee shops would never be the same.
“It certainly came to define in many ways the coffee shop experience,” Overly says of the internet and WiFi. “We were the first of the internet cafes up in Alaska where we literally had computers in the shop. Of course, as technology came along, that went away. People had their own laptops and devices. Nowadays there’s just an expectation that you have not only internet, but free internet, and free, fast internet.”

Overly shares the story of a coffee company’s blog he follows that pokes fun at itself and the coffee culture. “They’re going on about how coffee shops bring people together, but all the images are showing people either on their phone or buried in their laptops.” At one point, Overly says, the moderator in the parody becomes preoccupied with his phone and loses his train of thought in mid-sentence. “The joke is that on the one hand coffee shops like to present themselves as these kind of community centers, but it’s the kind of a place where you can all come to be alone together.”

If that’s the case, a lot of people come to Kaladi Coffee Roasters to be alone together – about 1,000 a day at the East Evans shop, Overly estimates. And fortunately for business, they buy coffee to drink while they sit, and beans to take home – in roughly equal measures.  
The Thwaites brothers too have been immersed in all aspects of the coffee business since their college days in the 1990s in Seattle. Coda Coffee Roasters has gained increasingly wide distribution since they founded it in Denver in 2005. Meanwhile, the brothers’ shop in Edgewater, plus kiosks at Denver-area Kaiser Permanente facilities, keeps them attuned to coffee-shop business dynamics.  

“One busy coffee shop can generate maybe $50,000 annually of take-home for an owner,” Tim Thwaites says. “This is where economies of scale come in. The more shops you open, the cheaper COG (cost of goods) becomes, and the more effective you can grow your business.”

Another way shops increase gross margins without adding to labor costs is by boosting average sales per customer.  Thwaites gives the example of strategically placing items at the cash register based on seasonality, “special sale,” or to appeal to impulse buys.

By doing this, “labor remains almost the same while that ticket (sale per customer) is brought up significantly by the impulse purchase, and you have just increased your gross margin,” Thwaites says, adding, “You may also offer premium specialty beverages such as a pour-over, or aeropress to increase price while keeping cost-of-goods minus labor relatively the same.”

Phil Goodlaxson, 34, opened Corvus Coffee Roasters on South Broadway in 2010 and has since opened a second shop in the Denver Tech Center. He figures the average customer ticket at his shop is $4 to $6. Baristas at Corvus make $18 to $19 an hour with tips. While Goodlaxson is primarily a wholesale roaster, his net profit on shop sales is 18 percent to 20 percent, with most of the costs going to materials and labor.Baristas at Corvus make $18 to $19 an hour with tips.

And what about the corporate giant in the room? Starbucks is responsible for creating the nation’s coffee culture, and its presence only helps, Overly says. In fact, he sought out a location near Starbucks after he sold his 88 percent share of Kaladi Brothers to his partners in Alaska while retaining rights to the name in Denver. Not long ago when a third Starbucks opened near Kaladi on East Evans, Overly says he held a staff meeting to prepare employees for a 10 percent increase in sales. He was wrong. Sales rose 15 percent; he had forgotten to factor in bean sales.

He says Starbucks remains a market driver, benefiting all. “For a lot of people that’s kind of their introduction to coffee,” Overly says. “And for those who get into it, they begin seeking out the higher end.” That higher end is what he envisioned for Kaladi Coffee.

“I wanted to become known as a coffee seller rather than just a drink provider, so we work really hard at that at the Evans store,” he says. “I think 45 percent of our revenue is beverage sales, 45 percent bean sales, 10 percent everything else.”
That’s in contrast to what he says is the typical shop breakdown -- Starbucks or his own former business in Alaska -- for which beans would only make up 10 percent to 15 percent of counter sales.
In addition to the East Evans store near the University of Denver campus, Kaladi Coffee operates a roasting facility and another retail shop in one building on South Broadway.

“We’re more of a wholesaler than we are a retailer,” he says. “All our customers are independent coffee shops. We’re not interested in opening a bunch of coffee shops. We see ourselves more as a roaster-supplier.”

Overly also sees the Kaladi Coffee Roasters shops as a place coffee enthusiasts can go to talk about coffee. “Like if you get into wine, you go to a wine store,” he says.”You have somebody there who can talk to you about wines, about what your preferences are. That’s what we wanted to create with our place. Where we can find the right coffee for you, based on what you say about your preferences: ‘Yeah, that’s the coffee I’m talking about!’ That’s a lot of what drives our bean sales.”

And for those wondering whether Denver’s coffee market might be approaching saturation: It’s going to be a while.

“I came from Seattle, and if we think Denver is saturated, take a trip through Seattle for a day,” Thwaites says. “Denver has plenty of room to grow. Coffee is unique in that it not only is a daily product for consumers, but it is a part of life in our world. It’s a ritual in our routine, and almost has bit of spirituality to it.”

Read more articles by Mike Taylor.

Mike Taylor is a freelance writer in Denver. He is editor of ColoradoBiz magazine and previously wrote for The Fort Worth Star-Telegram and The Anchorage Times.
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