Room to Grow
Coffee shops have been marked as a growth market and excellent investment opportunity since the nineties. In the early two-thousands, SCA estimated there would be 15,000 coffee shops by 2006, followed by an estimate of 50,000 coffee shops by 2010.
Last year Allegra put out a report stating that the US coffee shop market was at 38,000 shops, so we’re not quite there yet. The fact remains that this is a growing market, and there is much space left to grow. So much focus was put on the larger populated cities like New York and Los Angeles over the last decade that a fair amount of the country was still being overlooked. Now that we are in a post-pandemic world and the nation’s populations have shifted to various markets, the opportunity for building coffee shops in alternative cities has spiked tremendously. There has been a concerted effort to put a flag in the ground in Texas, where two of the country’s top ten most populated cities reside.
Let’s look at some stats to illustrate the seismic shift in population. According to the US Census, the fastest-growing cities and towns in the US include Georgetown, Texas, with a population increase of 10.5%, followed by Leander, Texas, with a growth of 10.1%. The most significant impact of this migration has been people leaving large cities like New York (which lost 305,465 people between 2020 and 2022), Los Angles (down 40,537) and Chicago (down 45,175) and migrating to the south and southwest. Places like Fort Lauderdale, Florida (up 7,568), Phoenix, Arizona (up 13,244) and Fort Worth, Texas (up 12,916 since 2020). These stats represent a tremendous redistribution of people around the country.
We have witnessed a geographical shift in our population and a career shift in the aftermath of the pandemic. The “great resignation” has also created a new set of players in the game. So many individuals that once worked in tech, law or medical fields are finding themselves dissatisfied and pursuing their daydreams of opening a cafe or coffee shop. As I visited the country last year and spoke at multiple trade shows for Coffee Fest and New York Coffee Festival, I witnessed a new phenomenon. More and more entrepreneurs are eager to enter the coffee industry through the brick-and-mortar retail gate. At first, I found this surprising directly after the pandemic, given that brick-and-mortar was the hardest hit, and everyone expected a pure shift to online and automation. Instead, people are doubling down on the human experience, and coffee shops are on the rise in every part of the country with various concepts and approaches to businesses.
In a time of financial uncertainty where large stable companies are buckling, it is hard to put your faith in these institutions, and it has caused people to rethink their approach to life and regain control. Being your own boss has long been a romantic vision that has allured droves to the restaurant and coffee business. This fact that many of these newcomers have yet to gain experience in coffee or food and beverage, combined with this employment shift, creates a clear opportunity for franchisors.
One of the critical advantages of franchising a business is that they provide the operational structure of the business, the systems to run the business and the products and distribution pipelines to supply the company. So many of these franchises are turn-key operations that provide so many solutions and education to be successful that it can be highly enticing to someone looking to learn as they build.
Ziggi’s Coffee in Colorado has been around since 2004 and started franchising in 2017. They currently have 65 locations nationwide and just signed their 200-franchise agreement. The last two years have been a boom for Ziggi’s.
“We just took off. We sold 70 franchise agreements in 2021, and our sales were up 80%” – Brandon Knudsen. CEO Ziggi’s Coffee.
“The past year underscores the extraordinary opportunities that the franchise industry presents for entrepreneurs of all levels,” says Entrepreneur editor-in-chief Jason Feifer
Another stunning example comes from Hawaii with the charming Bad Ass Coffee. In August of 2022, QSR Magazine reported that Bad Ass saw Franchise sales growth of 79% from 2019 which was a 66% increase from 2021. Bad Ass is a minor franchise that did not have a significant presence on the mainland until recently. However, in 2022 they opened 14 locations and sold 79 additional units. This is an unprecedented time for franchise growth.
Bigby’s in Lansing, Michigan, has been franchising since 1994 and had 243 locations in 2020. It took twenty-five years to get to 243. In November of 2022, Bigby reported to 1851 Franchise that they have 316 open locations with 153 in development. That means they have almost doubled their business in two years from what took twenty-five years to build. This clearly illustrates the setting that the pandemic created for this accelerated growth to occur in the franchise world.
So far, we have only been looking at what is happening on the franchise side of coffee shop growth in the US. There is still a slew of entrepreneurs looking to open shops and bring their individual voices to their spaces.
The advantage of the franchise is the built-in systems and the existing marketing engine. They take away a lot of the guesswork and make that side easier. However, you still need to come up with the money. Franchising can be expensive with upfront buy-in fees (ranging between $25,000-65,000), royalties and ongoing licensing fees (expect between 5%-10%) that will eat into your profits. In addition, there are often additional marketing fees depending on where you are opening. Other requirements include having $200,000 in liquid capital and usually a net worth of at least $350,000.
It is investing heavily, and having the support of a successful franchise company does not guarantee success. The survival rate of a franchise in the US has been long disputed, so it is difficult to get accurate data; however, a report by NBC shared several statistics that pointed to franchises having a 63% success rate at the five-year mark, making the failure rate 37%. This statistic may not be completely accurate; however, it is more favorable than the average ‘ground-up’ coffee shop with a 50% failure rate.
The population redistribution and employment evolution have created a unique and tremendous opportunity for entrepreneurs to start new coffee shops across the country. The question is, how will this impact the landscape of America? How will this historical moment shape the food and beverage and unique character of the individual towns and states? Will they all look alike and offer the same cookie-cutter menu with the ubiquitous avocado toast, flat white and cold brew? There may be another option. The country may be littered with individual owner-operators that saturate the landscape with idiosyncratic spaces and unique menus that give you a sense of place and add rich texture and character to the towns and cities where they reside. There is an opportunity to create something new, different, wonky, and wonderful for those willing to take the chance to strike out on their own.
