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7.19.2021 NAICS CODES: 722515

SIC CODES: 5812

INDUSTRY PROFILE

Coffee Shops

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Companies in this industry sell coffee drinks and other food and beverages for consumption on the premises or for takeout. Major companies include Peet’s Coffee, Starbucks, and The Coffee Bean & Tea Leaf (all based in the US), as well as Caffè Nero and Costa Coffee (both based in the UK).

The biggest US coffee chains operate stores abroad, primarily through licensing agreements. Starbucks owns and licenses about 30,000 locations in about 78 global markets. The world's largest coffee consumers include the US, Brazil, Germany, and Japan.

The US coffee shop industry includes more than 60,000 stores with combined annual sales of about $38 billion. Coffee shops are part of the specialty eatery industry, which also includes outlets specializing in products such as bagels, donuts, frozen yogurt, and ice cream.

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 superior customer service.

Coffee shops compete with businesses such as convenience stores, gas stations, quick-service and fast-food restaurants, gourmet food shops, and donut shops. The US industry is concentrated: the eight largest companies account for about 70% of revenue.

Beverages typically sold by coffee shops 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 (unroasted coffee beans) to produce unique flavors, though some coffee shops use pre-roasted coffee. 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 (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.

Large companies may expand through franchise or license agreements, which 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, such as 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. Between 1,200 and 1,600 square feet is typical. Some chains offer a kiosk format, without seating, for spaces like airport concourses and grocery stores. A drive-thru window offers customers convenience and increases off- premise consumption. Since many customers consume beverages on the premises, a comfortable environment is important to provide a positive customer experience and increase store traffic.

Companies may use contracts to buy green 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

Industry Overview

Competitive Landscape

Products, Operations & Technology

monitor supplies of dairy products due to limited shelf life. Chains often vary their product mix, depending on store size and location.

Technology

Computer systems manage point-of-sale (POS) transactions; online sales; 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. Companies also use third-party providers for management of information systems and support functions.

Companies may use smartphone apps and social media, including Facebook, Twitter, and Instagram, to provide product information to educate and engage customers. The Starbucks mobile app enables customers to place an order, pay ahead of time, and skip the line when picking up their coffee in stores, as well as earn points and other perks through its loyalty program for future orders.

The typical customer for a coffee shop is 25 to 40 years old, affluent, and educated. Specialty coffee appeals to a diverse adult demographic, including college students and young adults. Larger companies may also sell coffee beans wholesale to commercial customers, such as grocery stores and restaurants.

Marketing and promotional vehicles include online, print, radio, outdoor, and TV advertising; direct mail or email; point-of-purchase displays; and customer purchase cards. Brand names, like Starbucks and Gloria Jean's, are extremely important. Community programs, like fundraisers for local charities and schools, help independent coffee shops establish local relationships. Special products available for a limited time, like Starbucks' Pumpkin Spice Latte or Caribou's Amy’s Blend (supporting a charitable cause in honor of the original roastmaster), increase consumer interest.

Outstanding service and an inviting store environment are extremely important. Coffee shops depend on friendly, knowledgeable employees to develop customer loyalty. Some companies use "mystery shoppers" to evaluate customer service. In addition, companies in shopping malls must offer fast service, since many customers are in a hurry. Comfortable seating and children's play areas encourage longer store visits. Coffee shops may provide wireless internet access or entertainment to drive store traffic. Positive word-of-mouth is especially important for independent coffee shops with small marketing budgets.

Through the internet, some companies offer products for retail sale to customers living outside local markets. Information on out-of-market sales can help companies spot areas of strong demand and identify new locations. Companies may also partner with prominent internet retailers to sell products. Websites may allow consumers to buy and reload customer purchase cards or offer automatic coffee reordering. The internet allows independent coffee shops with highly specialized blends to reach a broader audience.

Retail prices for coffee shop beverages vary. The retail price for an espresso-based drink can exceed $4. Due to the cost volatility of green coffee and dairy, retail prices often fluctuate. A pound of roasted coffee beans may retail for between $10 and $20. A pound of high-end or "reserve" coffee, like some Peet's coffees, can retail for between $50 and $80 per pound.

Sales are seasonal, with a peak during the fourth quarter, driven by cooler temperatures and the winter holiday season. For specialty eatery companies overall, including coffee shops, inventory typically represents between 20 and 30 days' sales. Account receivables are low, at about 10 days' sales. Most consumers pay at the register, but some companies maintain accounts for commercial customers. Companies may use contracts to buy green coffee and dairy products. Specialty eateries, including coffee shops, are labor-intensive: average annual revenue per worker in the US is about $59,000.

Most companies lease store locations for a fixed term. Rent for coffee shops in malls may include a fee for shared area maintenance. Companies compete for prime locations, sometimes with other retailers, and negotiating power may be limited. Chains periodically close underperforming stores, and set aside a reserve for remaining lease payments.

Franchise and license agreements typically include an upfront fee, payments or royalties based on a percentage of sales, and renewal options. Master license agreements may allow licensees to grant sublicenses to third parties within a territory.

Working Capital Turnover by Company Size

Sales & Marketing

Finance & Regulation

Regulation

Change in Dollar Value of US Trade - US International Trade Commission

The working capital turnover ratio, also known as working capital to sales, is a measure of how efficiently a company uses its capital to generate sales. Companies should be compared to others in their industry.

Federal, state, and local governments regulate building codes, seating requirements, cleanliness, food preparation, safety, and accessibility for the disabled. State and local governments establish air quality and emissions regulations for roasting facilities. The Fair Labor Standards Act (FLSA) regulates working conditions, overtime, and minimum wage requirements. The FTC and state laws govern franchise agreements.

The International Coffee Organization (ICO) represents most coffee-growing countries, and can influence the price and supply of coffee. The National Organic Standards Board (NOSB) regulates organic food products. Fair Trade USA certifies products that have been grown on farms that guarantee fair pay and safe labor conditions for their workers.

The biggest US coffee chains operate stores abroad, primarily through licensing agreements. Starbucks, which operates in 78 markets worldwide, plans to continue its international expansion strategy, with a focus on the Asia/Pacific region. The Seattle-based company owns and licenses about 15,000 locations outside the US. It is opening more than 500 stores per year in China.

Other major international companies include Costa Coffee and Caffè Nero (both based in the UK); as well as Doutor Coffee (Japan), Second Cup (Canada), and Coffeeshop Company (part of Austria's Schärf Group).

The world's largest importers of green coffee beans are the US, Germany, Italy, and Japan. The US is also the top coffee consumer, followed by Brazil, Germany, and Japan. With the exception of Hawaii and Puerto Rico, the US climate can't support coffee trees. The top green coffee producing countries are Brazil, Vietnam, Indonesia, and Colombia. Many grower countries are small, poor developing nations that depend on coffee to sustain local economies.

Imports of coffee and tea to the US come primarily from Canada, Germany, Switzerland, Brazil, and Mexico. Major export markets for US snack foods include Canada, Mexico, Japan, Australia, and Philippines.

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). More data available at www.microbilt.com.

International Insights

31192 COFFEE AND TEA

In the US as elsewhere, coffee shops typically thrive in areas with large metropolitan populations and ample foot traffic. Berkley, California; Vancouver, Washington; San Francisco; Seattle; and Portland, Oregon have the highest per-capita concentrations of coffee shops, according to a recent study by Apartment Guide.

Coffee shops depend highly on part-time employees, and few skills are required for most jobs. Average wages for US snack and nonalcoholic beverage bars, including coffee shops, are significantly below the national average. Some Starbucks employees have formed unions to negotiate better wages, hours, and benefits. Turnover at food service establishments is significantly higher than the national average. The injury rate at snack and nonalcoholic beverage bars is about 50% higher than the US average. Employment for beverage servers is projected to grow nearly 15% from 2016 to 2026, faster than the average for all occupations.

New employees may go through training courses and receive in-store training to ensure superior customer service and product consistency. Master roasters oversee coffee roasting to develop trademark blends and flavors. Baristas receive training to operate commercial grade espresso machines used to make specialty drinks.

Regional Highlights

Human Resources

Demand: Tied to consumer income and tastes Need good location, store traffic, and high-quality product Risk: Economic health impacts spending on non-essentials

Industry Growth Rating

Quarterly Industry Update

7.19.2021

Challenge: Colombian Coffee Stocks Disrupted - US coffee processors are struggling to secure Colombian coffee stocks as protests in the country have disrupted US deliveries. Reuters reports US coffee importers are rushing to secure Colombian coffee stocks to supply groceries and coffee shops. The anti-government protests in Colombia have blocked roads to ports, resulting in a limited supply of Colombian coffee entering the US. Furthermore, Reuters reports that prices for Colombian coffee rose to 75 cents per pound, from 55 to 58 cents premium before the protests. Despite protests pausing, the supply route has yet to return to normal; a partner at the US coffee importer Wolthers Douque estimates normal flows to take 60 to 90 days as demonstrators continue to attack transport trucks on the way to the ports.?

Industry Impacts - US companies may struggle to secure stocks of Colombian coffee as Colombian anti- government protests have disrupted imports.?

US consumer spending on nondurable goods, an indicator of coffee shop sales, rose 2.7% in March 2021 compared to the same month in 2020.

US personal income, which drives how much consumers might spend on luxury items like coffee, rose 0.5% in April 2021 compared to the same month in 2020.

US retail sales for food services and drinking places, a potential measure of coffee shop demand, increased 15.8% in the first four months of 2021 compared to the same period in 2020.

Industry Indicators

Revenue (in current dollars) for US limited service eating places, which include coffee shops, is forecast to grow at an annual compounded rate of 10% between 2020 and 2025. Data Published: December 2020

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links between industries and the aggregate economy. Forecast FAQs

Industry Forecast

Changes in the economic environment that may positively or negatively affect industry growth.

Data provided by First Research analysts and reviewed annually

Industry Drivers

Consumer Spending Change in overall level of consumer spending on goods and services

Impact of COVID-19 - The operations of coffee shops around the world have been disrupted in many markets ever since the COVID-19 was reported by the World Health Organization (WHO) in March 2020. Business as well as federal, state, and local governments in the US have implemented significant public health actions to mitigate the spread of the virus. Coffee shops like Starbucks has been negatively impacted by the pandemic and may materially affect their future operations.

Competition from Other Outlets - Coffee shops face stiff competition from a growing number of fast-food and quick- service restaurants that have added premium coffee drinks at lower prices. Bakery cafés, a rapidly growing segment of the restaurant industry, specialize in breakfast items, coffee drinks, and baked goods. Additionally, coffee shops face competition from gas stations and convenience stores (c-stores), some of which offer gourmet coffee.

Critical Issues

Dependence on Healthy Economy - Specialty coffee sales depend on personal income and a strong economy. Consumers consider specialty coffee and espresso drinks affordable luxuries due to premium pricing. Personal finance experts often recommend cutting back on expensive coffee to save money during tough economic times.

Health Concerns - Negative publicity about caffeine and the high caloric content of some specialty drinks can reduce demand for coffee products. Coffee contains significant amounts of caffeine, and some studies linking caffeine to medical conditions can lead some consumers to decrease consumption. On the other hand, some studies also show medical benefits of caffeine. In addition, concerns over obesity have focused attention on certain specialty coffee drinks that exceed 500 calories. Even a temporary drop in demand based on health concerns can adversely affect sales.

Business Challenges

International Expansion - As market growth slows from record highs, some companies look to expand overseas. Certain US markets appear to be saturated, with coffee shops seemingly on every corner. According to Restaurant Dive, Starbucks has invested heavily in international markets to expand outside the US, primarily through licensing agreements. Emerging coffee cultures and growing middle classes in China and Southeast Asia may create opportunities for coffee shop operators to pursue growth in those markets.

Strong Demand for Specialty Coffee - More than 60% of US adults drink coffee daily, according to the National Coffee Association. Coffee shops, particularly Starbucks, have helped consumers develop an appreciation for specialty coffee. Higher-grade coffee beans, improved roasting methods, and better brewing equipment have improved product quality and increased customer expectations. Specialty coffee-based drinks, like cappuccinos, attract younger consumers who prefer sweeter beverages.

Home-Brew Alternatives - A majority of coffee drinkers make their own coffee at home, and consumers are investing in new ways to brew their own high-quality coffee and espresso drinks. According to Statista, 40% of American consumers owned a single-cup brewer. High-end espresso machines are also becoming more popular. People 65 years and older are the most likely to drink coffee exclusively at home, while those under age 35 are most likely to visit coffee shops.

Rising Tea Sales - US supermarket sales of tea, a beverage that can compete with coffee drinks served at coffee shops, are growing consistently from year to year. Ready-to-drink tea accounts for almost 50% of the US market share sales in mass market and convenience outlets with more than $10 billion earnings, according to World Tea News. Specialty, artisanal, and health-oriented teas are driving consumer interest. Coffee shops that offer tea products could benefit from the rising popularity of tea.

Business Trends

Product Innovation - Nontraditional drinks can generate customer excitement and seasonal offerings can help boost sales. Pumpkin spice, gingerbread, and eggnog lattes are all espresso-based drinks with flavors that may attract new customers. According to BeverageDaily, chilled, frozen, and over-ice coffee drinks make up one of the fastest-growing beverage segments and help generate sales during warm weather. Tea-based drinks, like chai tea (tea, spices, milk, and sugar) and tea lattes, broaden appeal and offer customers something new.

Anti-Starbucks Movement - Independent coffee shops can benefit from the growing group of consumers who resent Starbucks' domination of the industry. In some areas, a Starbucks on every corner has led to market saturation and resentment from consumers looking for variety. Some younger consumers, more interested in unique retail experiences and products, are turned off by Starbucks' mass appeal. Anti-Starbucks customers look for independent shops that roast small batches of coffee, and more closely reflect the style and attitude of the local community.

Social Responsibility - Many companies like Starbucks maintain its positive impact on the communities they serve through their committed efforts in being involved in the local communities, ethically and responsibly growing their traded coffee to help build a better future for farmers, and finding ways to tackle climate change and minimize environmental footprints. As a result of increased publicity on the plight of coffee farmers in developing countries, more consumers care about the countries of origin and growers' living conditions. In addition, companies can be environmentally sensitive by using recyclable materials and encouraging the use of travel mugs rather than disposable cups.

Industry Opportunities

Competing with Starbucks Starbucks dominates the industry. In some areas, Starbucks has virtually saturated the market with so many locations that consumers perceive a shop on every corner. Small companies can target consumers turned off by Starbucks' mass appeal and looking for a more unique retail experience. By roasting coffee in small batches, a shop can attract true coffee aficionados looking for highly specialized roasts.

Creating Positive Customer Experience To develop a loyal customer base, companies need to find ways to become a regular habit for consumers. Superior customer service through personalized service, a comfortable store environment, and consistent, high-quality products help generate consistent repeat business. Starbucks' employees remember regular customers' first names and drink orders. Caribou Coffee has a mountain lodge design that provides both comfort and a signature look for company locations.

Managing Volatile Raw Ingredient Costs Unstable pricing for green coffee and dairy products can affect profits. Trade organizations and the weather, political, and economic conditions of grower countries can cause huge swings in green coffee prices. Most companies have contracts with suppliers to control costs, and many coffee shops raise retail prices to compensate for significant raw ingredient cost increases.

Securing Prime Retail Locations Because of the relatively low average transaction, coffee shops depend especially on high-traffic locations. Competition for prime real estate can reduce bargaining power with landlords, resulting in higher rents. Many chains rely on local brokers to negotiate favorable terms. Companies may also alter store design or format to better fit a site with a nontraditional space.

Executive Insight

Chief Executive Officer - CEO

Chief Financial Officer - CFO

Chief Information Officer - CIO

Improving Transaction Speed Long lines can hurt business, as many customers aren't willing to wait long for a cup of coffee. Computerized POS systems rapidly record purchases and process credit card orders. And some systems allow the use of customer purchase cards (similar to debit cards), eliminating the need for a signature.

Leveraging the Internet As competition grows, many companies are looking for ways to grow sales beyond local markets. Coffee shops that roast their own beans can use the internet as a way to reach out-of-market customers. Companies may operate a retail website or partner with larger related-product internet retailers. Information gathered through websites can also help chains spot areas of strong demand and identify new locations.

Training Baristas Baristas require special training to operate espresso machines and make specialty drinks. Even with some degree of equipment automation, high-quality espresso depends on the baristas' abilities. The Barista Guild of America and Specialty Coffee Association have created training to help baristas develop necessary skills. Many commercial espresso equipment manufacturers also offer training.

Training Customer Service Workers Even a few bad customer experiences can tarnish a company's reputation and affect repeat business. Friendly employees and personalized service help companies generate customer loyalty and differentiate from other retailers. Most chains require new employees to attend classes and receive in-store training. Some companies use "mystery shoppers" to evaluate customer service and identify the need for additional training.

Developing New Products Most coffee shops offer the same types of beverages. Unique products provide a competitive advantage and generate customer excitement. Flavored espresso and tea-based drinks and chilled and blended beverages appeal to different consumer segments and can drive incremental sales. In addition, products available for a limited time, like special lot coffees, can also increase business.

Creating Customer Loyalty Programs Companies depend heavily on repeat business and developing a loyal customer base. In some areas, market saturation gives customers numerous options for good coffee. To encourage regular visits, companies may offer discounts, free drinks, or rebates to reward frequent customers.

Human Resources - HR

VP Sales/Marketing - Sales

How does the company compete with Starbucks? While Starbucks dominates, small companies can target consumers looking for a more unique retail experience.

What kind of customer experience does the company aim to provide? Companies provide personal service, a comfortable store environment, and consistent, high-quality products to generate consistent repeat business.

How does the company compensate for changes in the cost of raw ingredients? Trade organizations and the weather, political, and economic conditions of grower countries can cause huge swings in green coffee prices. Dairy prices can also be unstable.

How does the company handle lease negotiations?

Executive Conversation Starters

Chief Executive Officer - CEO

Chief Financial Officer - CFO

Competition for prime real estate can reduce bargaining power with landlords, resulting in higher rents.

How does customer wait-time affect the company's business? Long lines can hurt business, as many customers aren't willing to wait long for a cup of coffee. Computerized POS can help speed transaction time.

What role does the internet play in the company's marketing strategy? Companies can use the internet to reach out-of-market customers.

How does the company train baristas? Baristas require special training to operate espresso machines. Even with some degree of equipment automation, high-quality espresso depends on the barista's abilities.

What type of customer service training do employees receive? Friendly employees and personal service help companies generate customer loyalty. Many chains provide classroom and in-store training.

What types of new products have been most successful? New, unique products, like flavored espresso drinks, chilled and blended beverages, and tea-based drinks can provide a competitive advantage and drive incremental sales.

What types of customer loyalty programs does the company offer? Companies depend heavily on repeat business and may offer discounts, free drinks, or rebates to reward frequent customers.

Chief Information Officer - CIO

Human Resources - HR

VP Sales/Marketing - Sales

How is the company affected by the pandemic? The operations of coffee shops around the world have been disrupted in many markets ever since the COVID-19 was reported by the World Health Organization (WHO) in March 2020.

How does the company market itself as an alternative to other places to buy coffee? Coffee shops face stiff competition from a growing number of fast-food and quick-service restaurants that have added premium coffee drinks at lower prices.

How do economic conditions and personal spending affect the company? Specialty coffee sales depend on personal income and a strong economy.

What unique drinks or products does the company offer? Nontraditional drinks can generate customer excitement and seasonal offerings can help boost sales.

How important are sales of products other than coffee? Independent coffee shops can benefit from the growing group of consumers who resent Starbucks' domination of the industry.

What role does mobile technology play in the company's business strategy? Many companies like Starbucks maintain its positive impact on the communities they serve through their committed efforts in being involved in the local communities, ethically and responsibly growing their traded coffee to help build a better future for farmers, and finding ways to tackle climate change and minimize environmental footprints.

Call Prep Questions

Conversation Starters

How is the company affected by the Colombian anti-government protests? ?US coffee processors are struggling to secure Colombian coffee stocks as protests in the country have disrupted US deliveries.

How does the company buy coffee? Companies buy green coffee (unroasted coffee) from brokers, farms, estates, exporters, or cooperative groups; some buy pre-roasted.

What supply issues has the company had? Coffee supply can be volatile due to weather conditions, the political and economic climate of grower countries, and the actions of trade organizations.

How does equipment quality affect the end product? Companies use high-quality brewing equipment, grinders, and filters to deliver a consistent end product. Water filtration systems also screen out minerals that affect taste.

How have drive-thru windows affected the company's operations? Drive-thru windows offer customers convenience and increase off-premise consumption.

What are the fastest-growing product segments? Beverages include brewed coffee and tea, espresso drinks, cold blended beverages, and bottled water. Food includes pastries, bakery items, desserts, and sandwiches. Many stores also sell whole or ground coffee beans for home consumption.

How would the company describe its store environment? A comfortable environment is important in providing a positive customer experience and driving store traffic, since many customers consume beverages on premise.

What is the average size of a store? Store format and size varies by site, as some locations offer more space than others. Kiosks are stores without seating, for small spaces like airports and grocery stores.

What types of new products have been the most successful? New, unique products, like flavored espresso drinks, chilled and blended beverages, and tea-based drinks can provide a competitive advantage and drive incremental sales.

What types of customer loyalty programs does the company offer? Companies depend heavily on repeat business and may offer discounts, free drinks, or rebates to reward frequent customers.

Who is the company's typical customer? The typical customer for a coffee shop is age 25 to 40, affluent, and educated.

What are the company's primary marketing and promotional vehicles? Companies may use internet, print, radio, outdoor, and TV advertising; direct mail or email; mobile and social media promotions; point-of-purchase displays; and customer purchase cards.

What amenities does the company have to drive store traffic? Coffee shops may provide wireless internet access or entertainment to drive store traffic.

What is the company's pricing strategy? Due to the cost volatility of green coffee and dairy, retail prices can fluctuate.

What is the company's biggest competitive threat? Starbucks dominates the coffee shop industry; other chains may play leading roles in local markets. Companies also compete with convenience stores, gas stations, quick service and fast food restaurants, gourmet food shops, and donut shops.

Quarterly Industry Update

Operations, Products, and Facilities

Customers, Marketing, Pricing, Competition

Regulations, R&D, Imports and Exports

How difficult is complying with local government regulations and building codes? Federal, state, and local governments regulate building codes, seating requirements, cleanliness, food preparation, safety, and accessibility for the disabled.

How important are sales of organic products? The National Organic Standards Board regulates organic food products.

What trends does the company see in sales of Fair Trade products? With Fair Trade products, the grower receives a minimum price to maintain operations and profitability.

How do the actions of trade groups affect the company's operations? The International Coffee Organization represents most coffee-growing countries, and can influence the price and supply of coffee.

What type of customer service training do employees receive? Friendly employees and personal service help companies generate customer loyalty. Many chains provide classroom and in-store training.

How important are part-time employees? Coffee shops depend greatly on part-time employees.

What challenges does the company face recruiting and retaining employees? Wages are low, making recruiting new employees more difficult, but few skills are required for most jobs.

How does the company handle lease negotiations? Competition for prime real estate can reduce bargaining power with landlords, resulting in higher rents.

How significant are write-offs for store closures? Chains periodically close underperforming stores, and set aside a reserve for remaining lease payments.

What issues does the company have with inventory management? Coffee quality starts to deteriorate after roasting, and shops may discard old beans.

How do seasonal sales affect the company's business? Sales are seasonal, with a peak during the fourth quarter, driven by the winter holidays.

How does the company compete with Starbucks? While Starbucks dominates the industry, small companies can target consumers looking for a more unique retail experience.

How does customer wait-time affect the company's business? Long lines can hurt business, as many customers aren't willing to wait long for a cup of coffee. Computerized point- of-sale can help speed transaction time.

What role does the internet play in the company's marketing strategy? Companies can use the internet to reach out-of-market customers.

How will the growing market for high-end home brewing appliances affect the industry? Sales of high-end brewing appliances are increasing, providing consumers with more ways to brew quality coffee

Organization and Management

Financial Analysis

Business and Technology Strategies

and espresso drinks at home.

How important is social responsibility to the company's customers? The sale of Fair Trade coffee (coffee bought at a price above market value to ensure a sustainable business for growers) attracts socially responsible customers and can enhance a company's image.

Quick Ratio by Company Size The quick ratio, also known as the acid test ratio, measures a company's ability to meet short-term obligations with liquid assets. The higher the ratio, the better; a number below 1 signals financial distress. Use the quick ratio to determine if companies in an industry are typically able to pay off their current liabilities.

Current Liabilities to Net Worth by Company Size The ratio of current liabilities to net worth, also called current liabilities to equity, indicates the amount due creditors within a year as a percentage of stockholders' equity in a company. A high ratio (above 80 percent) can indicate trouble.

Financial Information

COMPANY BENCHMARK TRENDS

Data Period: 2021 Last Update July 2021

Table Data Format Mean

Company Size All Large Medium Small

Size by Revenue Over $50M $5M - $50M Under $5M

Company Count 31492 41 495 30956

Income Statement

Net Sales 100% 100% 100% 100%

Gross Margin 85.4% 85.3% 84.9% 85.6%

Officer Compensation 3.5% 2.7% 2.9% 4.3%

Advertising & Sales 4.5% 4.4% 4.8% 4.5%

Other Operating Expenses 74.3% 75.2% 74.4% 73.8%

Operating Expenses 82.4% 82.3% 82.0% 82.6%

Operating Income 3.0% 3.1% 3.0% 3.0%

Net Income 0.6% 0.6% 0.6% 0.7%

Balance Sheet

Cash 4.7% 3.8% 4.4% 5.5%

Accounts Receivable 6.5% 6.6% 6.9% 6.3%

Inventory 2.6% 2.3% 2.6% 2.9%

COMPANY BENCHMARK INFORMATION

NAICS: 722515

Total Current Assets 16.4% 15.1% 16.5% 17.3%

Property, Plant & Equipment 65.3% 66.5% 65.5% 64.4%

Other Non-Current Assets 18.3% 18.4% 18.1% 18.3%

Total Assets 100.0% 100.0% 100.0% 100.0%

Accounts Payable 6.5% 5.8% 7.0% 6.7%

Total Current Liabilities 13.4% 12.4% 14.3% 13.6%

Total Long Term Liabilities 36.8% 26.8% 39.4% 41.9%

Net Worth 49.8% 60.8% 46.3% 44.5%

Financial Ratios

Quick Ratio 0.84 0.84 0.79 0.87

Current Ratio 1.22 1.21 1.15 1.27

Current Liabilities to Net Worth 27.0% 20.5% 30.9% 30.6%

Current Liabilities to Inventory x5.09 x5.46 x5.59 x4.66

Total Debt to Net Worth x1.01 x0.65 x1.16 x1.25

Fixed Assets to Net Worth x1.31 x1.09 x1.41 x1.45

Days Accounts Receivable 9 9 10 8

Inventory Turnover x14.61 x16.31 x15.04 x13.56

Total Assets to Sales 37.7% 39.1% 39.3% 36.1%

Working Capital to Sales 1.1% 1.0% 0.9% 1.3%

Accounts Payable to Sales 2.4% 2.2% 2.7% 2.4%

Pre-Tax Return on Sales 1.0% 1.0% 0.9% 1.1%

Pre-Tax Return on Assets 2.8% 2.6% 2.3% 3.2%

Pre-Tax Return on Net Worth 5.5% 4.2% 4.9% 7.2%

Interest Coverage x1.52 x1.24 x1.21 x2.04

EBITDA to Sales 6.1% 6.2% 6.4% 5.8%

Capital Expenditures to Sales 4.0% 4.0% 4.4% 3.7%

ECONOMIC STATISTICS AND INFORMATION

Index of Industrial Production - Federal Reserve Board

Coffee Shops

Acquisition multiples below are calculated medians using at least 3 US private industry transactions completed

between 1/2008 and 12/2020 and are based on middle-market transactions where the market value of invested

capital (the selling price) was less than $1B. Data updated annually. Last updated: December 2020.

Valuation Multiple MVIC/Net Sales MVIC/Gross Profit MVIC/EBIT MVIC/EBITDA

Median Value 0.5 0.8 3.3 3.1

MVIC (Market Value of Invested Capital) = Also known as the selling price, the MVIC is the total consideration paid to

the seller and includes any cash, notes and/or securities that were used as a form of payment plus any interest-

bearing liabilities assumed by the buyer.

Net Sales = Annual Gross Sales, net of returns and discounts allowed, if any.

Gross Profit = Net Sales - Cost of Goods Sold

EBIT = Operating Profit

EBITDA = Operating Profit + Noncash Charges

Change in Consumer Prices - Bureau of Labor Statistics

VALUATION MULTIPLES

SOURCE: DealStats (formerly Pratt's Stats), 2021 (Portland, OR: Business Valuation Resources, LLC). Used with permission. DealStats is available at https://www.bvresources.com/learn/dealstats

Coffee Association of Canada (CAC) News, events, and links.

Daily Coffee News by Roast Magazine Coffee trends, news, and analysis.

Fresh Cup Magazine Trade magazine for specialty coffee retailers.

Global Coffee Report International coffee industry news and analysis.

National Coffee Association (NCA) Blog Retail and food service coffee trends.

National Coffee Association USA (NCA) Trade association for coffee manufacturers.

Specialty Coffee Association (SCA) Trade association for specialty coffee companies and professionals.

Tea & Coffee Trade Journal Global coffee and tea news, listings, and host of Tea & Coffee World Cup.

Industry Websites

FLSA - Fair Labor Standards Act

ICO - International Coffee Organization

NCA - National Coffee Association USA

NOSB - National Organic Standards Board

POS - point-of-sale

SCA - Specialty Coffee Association

Glossary of Acronyms

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