From The Australian, Entrepreneur
THE cafe business is highly lucrative and has a lot in common with the game of Monopoly.
There’s a vibrant trade in cafes — in Melbourne there are stories (perhaps exaggerated) of $50,000 a week businesses selling for $2 million.
If you know what you’re doing you can pick up an ailing business — or start your own — build it up, sell, then move on to something bigger and start again.
Nick Kutcher is one example. He sold his five-day, daytime-only cafe, Mamma’s Boy on Little Collins Street, Melbourne, in 2007 at the peak.
He made enough to take a stake in a former synagogue in a prime location in central Melbourne and fit out a swanky restaurant using the city’s top designers and builders.
Jonathan Kaplan, a lawyer specialising in hospitality at Meerkin & Apel in Melbourne, has owned five cafes in the past 14 years.
He says they can sell on a multiple of one to five times net profit, although he used to aim to sell his for three to three and a half times. He says a cafe turning over $900,000, less one-third food costs, could net $130,000 a year and sell for about $400,000.
All the owner needs to do is ensure that their books have been clean (no syphoning off cash) for at least three years. And that there is at least five years on the property’s lease with a 10-year option.
The only problem is that the number of cafes has quadrupled in the past 15 years and the days of five times net profit multiples may be over, Kaplan says.
The economics are based on the fact that coffee costs very little to buy but can be sold for much higher prices. A cafe latte, for example, can be sold for six times the cost of its ingredients.
This means the number of kilos of coffee beans turned over each week is a better indicator of value than the net profit of the overall business.
Many cafes don’t pay too much attention to precisely adjusting the grind of the coffee, ensuring the group head is the correct temperature or monitoring the quality of the coffee produced.
They can probably squeeze more than 100 coffees from a single kilo. Other operators that aim for quality may have more wastage and only squeeze 60 to 80 single espressos from a kilo.
For those getting 100 coffees per kilo, it’s an attractive equation. With each kilo costing less than $30, they earn $300 or more with input costs of around $60 (60c a cup).
Popular cafes may get through 30 kilos or more in a week — that’s about $9000, mostly in cash.
Business partners Adele Arkell and Jackie Bega won’t say how much they and their two other partners got from selling Las Chicas in Melbourne’s Balaclava last year. But it has given them enough to buy into St Kilda’s ailing Jackie O bar, revamping it as the St Kilda Branch, and plan another cafe in Northcote.
And then there’s Mark Dundon. He had no plan to sell St Ali, his cafe and coffee roasting operation in a South Melbourne warehouse, but was offered so much he would have been silly not to sell (although he retains Brother Baba Budan on Little Bourke Street).
The Monopoly game is the formula Bega and her partners have unwittingly followed.
Their first cafe in Melbourne was Leroy, in a prime location at the tram terminus in St Kilda. The design was awkward but they were able to open a coffee hatch where waiting commuters could buy takeaway, boosting the kilos of coffee turned over.
Two years later she and her partners sold and opened Las Chicas next to Balaclava railway station.
Meanwhile, Arkell, who was employed at Leroy but was also a partner in Las Chicas, bought into the ailing Expresso cafe next door. The price wasn’t huge because its lease only had 18 months to run.
She then bought into another cafe, the well-known Galleon in St Kilda, which was ailing because of inexperienced operators.
But Arkell says the glory days of cafes could be over due to rising food and staff costs. “Coffee has the highest margin,” she says. “But a cafe also needs to run its food at a profit.
The biggest change is that food costs are spiralling out of control at the moment.”