How do you evaluate a potential coffee shop location?

Location Location Location
July 7, 2010
How do you negotiate for a Coffee shop location?
July 10, 2010

The following is the way we evaluate locations at Urban Coffee:

1- complete a footfall survey
So you get a clipboard and you stand outside the potential location on the day you think will have the least people about, you stand from the time you are planning to open until the time you plan to close (eg. 7am – 5pm). You note how many people walk by the location, you note how many people have a takeaway coffee in their hands. You make these notes in 1hr chunks so you can analyse when the busy times are likely to be. You note general things like the type of people, where they are going for coffee now and where they are going for food. We work on a 10% rule for footfall, that is to say we think you will attract about 10% of the footfall into your shop on a daily basis. So if you noted down 1000 people throughout the day you would see 100 people in the shop. Now of course hopefully you have surveyed on the worst day so this should be worst case scenario figures.

2- Calculate the potential revenue for this outlet
Take the average number of people entering your store based on your footfall survey, lets say for example its 100 people per day times this by the average spend per person. Now we use £3 per person as our measure which is around industry average. So thats £3 x 100 people = £300 per day revenue. Now times this daily revenue by the number of days you will be open per year, for argument sake lets say we are on the high street and therefore open most days (360), £300 x 360 = £108,000 per year.

3- Calculate your rent to revenue ratio
Find out the per annum rent for the shop, lets say its £20,000 per annum. Divide £20,000 by the predicted revenue of £108,000, £20,000/108,000 = 0.1851 x 100 = 18.5%.
We have a simple rule of thumb that says the percentage should not be more than 10% for it to work as a location.

So for this example location to work you would need to pay £11,000 in rent rather than £20,000. If you think its the right location then try to negotiate with the landlord or agent to get it closer, if you got it close to £15,000 you may be able to make it work. But you break the 10% rule at your peril.

4- Calculate the fixed cost to revenue ratio
So you have a number of other fixed costs associated with your location and they are rates (paid to the Council), service charge (not the case for all), building insurance (often paid to the landlord). Add these costs all together to get a total fixed cost for the location. For example lets say rates are £8,000, service charge is £2,000 and insurance is £600, giving us a total of £10,600. Divide the fixed cost by your predicted revenue, £10,600 / £108,000 x 100 = 9.8%. The golden figure here is 15%, these costs must not be more than 15% of your revenue. If you add your rent cost to your fixed cost total £20,000 + £10,600 = £30,600, you can then divide this by the revenue £30,600 / £108,000 x 100 = 28.3%. This figure should be under 25%, thats 10% + 15%.

5- Competition
Look at what competition is around you, draw a map or use google maps to create a competitor map. With each competitor look at the distance they are from your potential location. If you have multiple competitors inside 100 metres of you then you are in a highly competitive area. Competition is not necessarily a bad thing but if its high you are going to have a longer ramp up and less margin for errors. For our first outlet we wanted a medium competitive location, so we have 3 coffee shops inside 150m but greater than 100 metres away. This has allowed us to ramp up over 6-months and make mistakes without being punished to hard. For new locations we would be happy in higher competitive areas because we have the model pretty much sorted.

If you have no competitors for quite some distance then either you have found a golden nugget or a coffee shop will not work there, check to see if there have been any in the past.

6- Local intelligence and gut
If you live or work near the area and understand the type of people and the competition then this is best information you could ask for. If not find some people who do and ask them if they think a coffee shop would work. The other day we were looking at a location and we popped into the hairdressers next door and told them we were looking at it for a coffee shop and asked their opinion, its amazing what you can pick up from a simple conversation. Spend some time in the area, visit at different times to see how it changes. Above all you will have a gut feeling about the location so if the figures add up and you have a good gut feeling then its a winner.