How to Open a Coffee Shop
– Have you ever dreamed about
starting your own coffee shop?
Maybe you just don’t know where to start?
Maybe you’ve already opened
up your own independent shop
and are just looking for ways to better
and more effectively manage it
and scale it to multiple locations?
(upbeat music)
In this two-part series episode,
we’re talking to Wes Herman.
Since opening up their
first location in 2002,
Wes has been able to build
a successful business
of 19 coffee shops throughout
the Pacific Northwest.
– So the initial budget was $23,000
is what we needed to
pull this business off.
– [Narrator] Wes Herman is
a lifelong entrepreneur,
he bought his first business
when he was just 21 years of age,
and a year to date he’s either started
or acquired seven more.
– I always like to think
that a business plan can be
put on one sheet of paper.
It’s the difference between
driving aimlessly without a map
versus having a map and understanding
where you’re gonna go.
– In this video, we’re gonna
share practical nuggets,
yeah we’re gonna share
some nuggets all right.
I’m just trying to figure out
which nuggets we’re gonna share,
but in this video we’re gonna
share some practical nuggets
of advice for people looking
to start a coffee shop business.
We’re also gonna hear from
Wes Herman’s genius strategies
of running a business successfully,
scaling it, growing it.
Things that you can apply
not only to coffee shops
but any other business.
– The really fun that part is
that we got this bag lifter
that allows one person to
just lift it effortlessly,
and then put it over a bin then we cut it,
and the beans fall right into the bin.
In terms of marketing,
social media is big for us.
All the standard stuff
that you really have to do
in a big corporation,
even in our business,
those are requirements and
that’s how we attract the best.
We didn’t start with this
big facility like this.
And this is expensive,
I mean, there’s no doubt
that point of entry here is
probably half a million dollars
to get something like this rolling
the way you want it to be.
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Stay tuned we’ve got an
awesome episode coming up.
Wes, it’s good to have you with us.
– My pleasure.
– Thank you for you
and your investment of time,
we appreciate that greatly.
In a nutshell, in a couple minutes,
give us an insight of how you started
the coffee shop business and the events
that led this business
to be where it is today.
– Hmm, wow in only a couple minutes?
That’s gonna be tight.
– It’s gonna be tough.
– I’ll make it happen.
So we were homeschooling
four children, my wife and I,
and I was selling a product
into the coffee industry,
traveling the United States
and seeing all the
coffee shops everywhere.
My kids were all drinking a ton of coffee
and we decided to teach them
how to write a business plan
around a coffee shop startup.
And figuring if we could do this together
that maybe we’d end up
with a long-term plan
of having a business that
would be family-oriented
and last for a long time, so we did that
and three of the four kids
are still in the business.
One of the married-ins is in the business
and we’ve just had a great time growing
from those early days of one location,
with the plan actually
in place that we wrote,
that would be multiple
locations over a period of time
to create generational wealth.
(upbeat music)
– Wes how much working capital
does a coffee shop
owner need to set aside?
– Most entrepreneurs forget
about working capital
and the need for a reserve
to get you through the beginning stages
of when you start your business,
which I assume that’s kind
of what you’re asking about.
– Right.
– In most people’s case
they have to probably reserve enough money
to get them through the
first year to pay themselves,
and then once that is done,
the next year is probably,
really, equally as complicated.
But here’s what I did, I
worked for a good five years
in another job so that I
wasn’t a drag on the company,
and I was able to keep the
money flowing into the company
and able to make the company successful
before I started drawing salary.
So we actually got to store number six
before I ever started earning
money out of the company.
And I worked another job during the day
and then at night I’d make all the deals
and put these things together
and before you know it,
we have six stores and
then I can quit my job
and go do this.
– So this is–
– This is the roastery, yeah, come on in,
and let’s take a look around.
It’s pretty fun to see.
This services all of our locations
but we’re roasting coffee every day,
so it allows us to keep the freshest.
We don’t want to necessarily
create lots of coffee
and let it sit so we
want to be very fresh,
so that’s the key to this roastery.
And you can see right here,
these are the bags of coffee
that we get deliveries,
sometimes twice a week, and
they come out of Seattle,
and these then are taken into bins
and we take these bins right here
and we put coffee in there,
and we make a blend that is specific
to whatever we’re roasting.
So it’s got a certain percentage
of this bean and that bean.
And then the really
efficient thing we’ve done,
which is kind of fun, and
sorry for all the noise
because we’re roasting coffee,
the really fun bit part is
that we’ve got this bag lifter.
And a lot of times what happens
is these bags are so heavy
that it takes two men to lift.
My son actually designed
and built this system
that allows one person to
just lift it effortlessly
and then put it over a bin,
then we cut it and the beans
fall right into the bin.
– What was your initial budget
and how did you finance the startup costs?
– In those early days, which
is almost 18 years ago now
or 18 years ago, we were on
a very, very tight budget.
We didn’t have the money and
so we need to find the money
and we need to be creative
on how we launched this first store.
So the initial budget was $23,000
is what we needed to
pull this business off.
We didn’t have the dough so we went out
and asked somebody to partner
with us that had the money
and they weren’t coffee
drinkers but they decided
that this would be a good
investment and it was.
– Did it seem like a lot, 18
years ago to start with 23,000?
– It probably was, it
didn’t seem like a lot,
as I looked at other budgets
and what other people were doing,
they were spending a
lot more money as well,
but not like infinitely.
But you can see that from 18 years,
just over the years,
how much that has grown
in terms of the costs to start a business,
and it’s not only the cost
of the infrastructure,
the permitting, and everything else.
It’s the leases are more expensive,
equipment’s more expensive,
everything just costs
a lot more money, yeah.
– So Wes, including all the costs
in starting a coffee shop similar to this,
what would someone need today
with where we are in
economy to get it started?
– Oh you’d probably need close
to half a million dollars or more.
– Half a million dollars?
– Yeah.
– You started with 23–
– 23,000, yeah.
23,000, 18 years ago and
to do the same today,
you’re thinking half a million dollars?
– Oh yeah, half a million is
kind of your point of entry.
You can do some things
that are a lot less money.
If somebody wanted to put up
a little drive-through shack,
they can do that with a lot less money
but to do a full-blown store like we do
with all the stuff that
goes into technology
of the point sale, the
drive-thru experience,
headsets, and then the amazing equipment
that we use to really give you
that perfect cup of coffee.
– How did you go about
developing your menu
and how important is it?
Walk us through the process
’cause that’s important.
– It is super important.
The look of your menu,
what’s on your menu,
those are all items that
are completely subjective
and as a coffee shop owner,
you wanna create something
that maybe you like but
will the masses like?
And so in our case, it
was developing something
that had mass appeal
and that people really were interested in.
So we worked hard from day one
to develop not only the
standards of what people liked
but we were pulling from my experience
of traveling the country prior
to opening the coffee shop,
I was traveling country selling a product
into the coffee industry,
so I got to see every coffee shop
and look at all the various menus.
And so I was bringing the
best of what we had seen
because you’ve got your baseline drinks
that everybody enjoys
and we can get creative
on what a latte or an
espresso drink will look like.
But it’s how can you make
something creatively different
in this space that attracts people
and maybe attracts a
different market segment
than you’re normally pulling.
So that’s what we did.
– I’m just thinking about our interview
with Tim and Grace
Lukens, Grace Harbor Farms
and you touched on that a little bit,
is where he went out
looked at his competitors
in the supermarkets, the local creameries,
and yogurts and et cetera.
He took the highest-priced
one and priced those higher.
I mean it touches on another point
but it goes back to what you’re saying,
is we’re not recreating the wheel,
we’re just taking what
everybody else is doing
and taking the best from
it and making it better.
You guys, if you haven’t
seen Grace Harbor Farms,
and since I touched on that a little bit,
I highly recommend check out our episodes.
There’s two series for
that as well, great story,
Grace Harbor Farms, Tim and Grace Lukens.
Wes as far as expenses percentage-wise,
can you walk us through
what are the percentages of each location?
You got payroll, you got supplies,
just a good way to see
how it’s all broken down?
– Sure, one of the things we
talked about was the aspects
that are so important to every business
and that is how do you
control your cost of goods,
how do you control your occupancy,
and how do you control your labor.
And so in our world,
it’s making sure that the
occupancy costs are under 10%
and that the labor is under 30%
and your cost of goods are
probably somewhere 35 to 40%.
And if you can do that
and do it effectively,
then you can probably make some money
but it’s hard work to do.
– So it leaves you with
about a 25 to 30% margin?
– Margin, yeah, gross profit
and then you’ve got overhead
and all the other stuff
that goes along with that,
and other business expenses.
You can operate a small business
very efficiently in coffee
and if you get a lot of customers,
then you can make some serious dough.
So let’s talk about a business
plan, how important is it,
how far into the future does one need
to consider writing a business plan?
Walk us through that a
little bit if you could.
– It’s probably the most
critical thing you can do
before you ever start
what you’re working on.
I always like to think
that a business plan
can be put on one sheet of paper
and so with our training
with our own children
in a homeschool setting, it was,
“Okay guys, we’re gonna get together,
“we’re gonna write this business plan
“of how we start a coffee shop.”
And the idea of putting down on paper
makes you think through the process.
And it should never be like
sentences and paragraphs,
it should be more bullet points
and then actually hitting the the idea.
Because you could write a
book, end up with 10 pages,
you don’t really need that.
You just need to know this is
what I’m going to try and achieve,
this is how we’re gonna do it,
this is where I’m gonna find the money,
and this is the net result.
And if you can do that
and put it on paper,
and make it simple enough
where you’ll actually
go back and revisit it,
then you can revisit it
every six months, every year,
and then it becomes a part of who you are.
– The issue, I think, just
speaking from my own experiences,
we overcomplicate things
and when we talk about a business plan
most people would think,
“You’re talking 20, 30
pages, it’s got XYZ.”
You’re talking about a
business plan on one page.
– One page, you can have all
kinds of backup information
that is spreadsheets and numbers
and to make it look like
if you’re gonna go sell it to somebody
and raise some money,
it’s probably not one
page it’s gonna do it.
You need to show some
graphs and things like that
but the one-page document
is really what is the plan.
It’s the difference between
just driving aimlessly
without a map versus having a map
and understanding where you’re gonna go.
You’ll get there faster,
you’ll get there more directly,
and you won’t be distracted
trying to figure out
where you’re supposed to be going.
– Wes, we’re standing in really,
the center of all the activity,
tell us a little bit about the process
and some equipment tips and tricks
where you learn to be
lean when you save money,
when you save time, let’s
do that a little bit.
– The key to lean is
avoiding any wasted motion.
In our case, it’s really important
to have all of our equipment
and the various processes
we do all in the same place.
So when a staff member goes
from one store to the next,
there is a seamless transition
where they can just pick up and go
and look at each piece of equipment,
know where it is, how to operate.
As you can see, there’s a barista working
right here in the background,
if she went to another store,
she could easily pick up
and just do the same process
at the same bar without having
to familiarize yourself.
So that’s a one of the tips that we,
or one of the things
we’ve done over the time–
– So this setup is replicated
throughout all your stores?
– Yeah, not exactly
because everything has
a different setting,
every store is different in
terms of where the windows are,
how the space is laid out,
but in terms of actual bar setup
where we are functioning
with an espresso machine,
a grinder, a knockbox, and
all the things that we do,
it just needs to be familiar
and so that you can just move and motion
and from one thing to the next,
and that’s the key going
from one store to the other.
– How much is salary and payroll?
– Yeah, labor?
– Yeah.
– Yeah, direct store
labor would be something
that we battle and every business battles.
I don’t care if you’re Starbucks
or some of the smaller
mom and pops like us,
we all battle the same thing,
and that is how do you control that labor
and how do you get it
to within a percentage
of 20 maybe 25%.
And some businesses are different, right?
Our business just happens to
be one that is labor intensive
and requires that percentage
to stay in that range.
Our optimum is if we can hire somebody
who works full-time and
has open availability,
that’s our prime candidate.
To attract those people, we
do a lot of different things.
We not only pay a certain wage
and that is based on abilities,
but most people do
start at a minimum wage.
The benefit in a coffee shop
is you’re making great tips
and so that kinda bridges a gap
between what a minimum wage is
and what people really want.
And then we add in
401(k), medical insurance,
sick leave, all the standard stuff
that you really have to
do in a big corporation.
Even in our business,
those are requirements
and that’s how we attract the best.
– Why do you roast your own beans?
What are some disadvantages
and advantages of doing that?
– Sure, you can certainly hire somebody
to roast a coffee for you and in our case,
we wanted ultimate
control over the process,
the quality and consistency.
And we can do that with
our own coffee beans
coming from specific countries
and then how we control
the roasting process
is really important because we wanna know
that the process is done correctly,
that it’s fresh, and that it’s done
in the way that we want it to be done.
So that’s why we roast our own coffee.
We didn’t originally, that was a process
that we had outsourced
in the beginning years
but eventually we were
able to bring it in-house
and roast all of our own coffee,
and that’s been a huge advantage for us.
– What’s the initial cost
of the setup for a roastery?
Let’s just focus on this one,
it’s on a bigger scale but–
– Well, I can give you a broad definition.
This is a very expensive setup.
You can start out probably
with less than $10,000
and have a roasting machine
and do very small batches.
Of course, you can even get down
to some really, really small numbers
and do air-pop-type roasters
and things like that.
But yeah, when you’re getting
into these type of things,
you’re talking about a
quarter million dollars
to set something like this up,
make it work efficiently.
You can see the way that we’ve done this,
this is a very lean process
so you can take one person
who is actually loading in all the coffee
and then roasting it,
and then it goes into a weigh/fill machine
but then it’s bagged and
then set on the shelf,
so it’s extremely efficient.
– [Narrator] Two to three
steps, it looks like.
– Yeah.
– Not much going on.
– [Wes] Yep.
– A lot of businesses when they start out,
they have a difficult time
turning a profit, right?
Tell us a little bit
about how long it took you
to turn a profit,
whether that includes you
starting to pay yourself.
– Sure, in our case, it took till year one
until we actually went from red to black.
And we’d planned for that
but what you also have to understand is
that we took a little
diversion in the first year
and that was we opened store number one
and six months later we
opened store number two.
So it wasn’t like it was just routine,
we’re gonna run one
store, see how it goes.
We threw another bump in the road
because we’ve decided, you know what,
we’re gonna put in another
store in the same town,
a small town that was
only 6,000 people, Lindon,
and we we were going to, for
most people’s perspective,
just split the town in half.
And half would go this way
and half would go this way
versus all of them going one way.
– Was that part of your
original business plan?
– It was not, no.
It kind of fell in our laps.
Starbucks had a hold on a property
that we ended up taking a store number two
and when they released it then we said,
“Well, if they released it
then it must be gold for us.”
And it was great, I mean,
it was the right move at the right time
and it did exactly what we wanted to do
which was show people
that we were actually
doing something significant
and that they get excited
about what we’re doing.
And so both stores rose in at that time
and both got business.
♪ Yeah ♪
♪ Yeah, yeah ♪
– Talk to us a little bit
about your type of marketing,
how much percentage you spend
in marketing, what kind?
Walk us through that a little bit.
– Yeah, we actually don’t spend
a lot of money in marketing.
We do…
It’s changed over time, right?
So when we first started,
we were really looking at
what are other people doing,
how are they marketing themselves,
and we realized that we didn’t need
to do a lot of marketing,
we didn’t need to put
advertisements in newspaper,
that was a thing back then, 18 years ago.
And there was no social media
which is almost like a free vehicle,
but we didn’t have any of that.
There was no Facebook,
there was no website that you could put up
and people would understand
what you’re doing.
So we actually realized
that the best form of advertising for us
was putting multiple locations
within a certain geographic territory.
– [Narrator] Interesting.
– So that became our advertising
and our budget was putting in new stores.
So it was expensive, we put
a lot of money into that,
but true marketing budget,
we did not put a lot of money into that.
I think in the early days,
we were running somewhere
between 1 and 2%.
And in terms of marketing,
social media is big for us.
We’re pretty dominant in
our space in this area
on social media and
that’s been a lot of fun.
It’s a great vehicle for us
to show some of our creativity
and how people understand
who we are and what we offer.
Well there you go guys,
that is the end of our first episode
of interviewing Wes Herman,
owner of Woods Coffee.
We want you to come back and
watch episode number two.
We’re gonna talk about
scaling your business,
we’re gonna talk about
your growth strategy,
how to be competitive,
and setting the right goals to succeed.
Thank you for watching.
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Thank you for watching.