Flat white economics

One of my favourite moments of the day is the first coffee in the morning. Always a special moment, and certainly something I look forward to.

And whenever I walk into the coffee shop, I can't help but find myself contemplating whether the coffee shop owner enjoys what they do. Is the business doing well? Are their tables full? Where do they make their margins? How are the voibes?

This ongoing curiosity has led me to try to better understand the business side of coffee shops, specifically in Spain (and then Western Europe generally as they share similar dynamics). This article is written through research online, and then through the various conversations with coffee owners. To create a structure for this piece, there will be a scoring system out of 10 across several key business aspects - just to give an insight into what life may look like if you ever wanted to open a coffee shop.

So, with that in mind, let's explore. Are coffee shop owners, on average, running successful businesses?

UNIT ECONOMICS
score: 3/10

Coffee is often considered a good-margin product, but it is also a low-ticket item. A coffee sold for €3 might cost around €2 to produce and serve once you account for ingredients, equipment, labour, rent, utilities, and other operating expenses, leaving roughly €1 in gross contribution (around a 33% margin).

Because the profit per cup is relatively small in absolute terms, cafes typically rely on selling a high volume to generate meaningful overall profits. This is why factors such as customer throughput, repeat business, and operational efficiency are so important.

Can vary depending on size of cafe, but general breakdown

Cafes rely heavily on products beyond coffee. Food is often where the business model improves. A €5 pastry, for example, can generate a strong margin because the raw ingredients, flour, butter, and water, account for only a small percentage of the selling price. The labour involved in producing these items can also be concentrated in the early morning, allowing cafes to prepare large quantities before opening and maximise efficiency throughout the day.

One of the biggest challenges in the cafe sector is the labour. Hospitality is fundamentally a people-driven industry. You need someone making drinks, serving customers, preparing food, cleaning tables, managing stock, and creating the atmosphere that customers expect. Especially in Spain. It can become a challenge to constantly be balancing profitability, atmosphere, legal obligations, and survival.

Another factor that makes the unit economics score low is the volatility of the cost base. The cost of raw ingredients can fluctuate significantly due to unforeseen external factors + utility bills such as electricity and gas are also subject to price changes. This level of uncertainty can make internal cost control particularly challenging.

This is why scaled chains such as Syra Coffee have performed well, even attracting venture capital investment, something that is very uncommon in the cafe sector.

Syra Coffee in Spain

By operating at a fast growth pace, they can benefit from economies of scale to build a more sustainable business model. Their strategy typically focuses on small-format stores, high foot traffic locations, streamlined operations, and a strong brand identity.

By contrast, independent cafés can be highly popular within their local communities, but they still depend on consistently high sales volumes to generate sustainable profits.

MARKET / COMPETITION
score: 7/10

Spain has one of the highest densities of cafes, bars, and hospitality venues in Europe. Cafes are everywhere: main roads, alleyways, inside neighbourhoods, next to offices, and in tourist areas. The barrier to entry is relatively low, which creates a highly competitive market with many small independent operators.

Example of google maps of a few blocks in Madrid. 15 cafes within 5 min walking

The result is a market with strong demand but difficult profitability.

And unlike some markets where coffee is primarily a morning convenience, in Spain coffee can be consumed at all times of the day.

• A café con leche con un pincho de tortilla at breakfast

• A coffee break during work

• A coffee after lunch

• A coffee at night after dinner

This helps with the volume.

Another positive factor is the booming tourism industry. Many tourists enjoy going to cafes and brunch places, which helps drive demand for these businesses.

The challenge for competition is to convince customers to choose your cafe over the five others within walking distance.

The traditional competitor: the neighbourhood cafeteria

The established local cafe, 'cafeteria Juanito' often have advantages that are difficult for new entrants to replicate:

➟ Loyal daily customers

➟ Knowledge of customer preferences

➟ No marketing costs

➟ Experienced owners who understand their neighbourhood

A customer may not visit these cafes because they serve the best quality coffee in town - but rather because it is familiar. The owner knows their order, their kids names, the prices are reasonable, and it has become part of their routine.

This creates a difficult environment for new cafes. They are competing against people's habits and trust.

Chain competition

The Spaniards also love their chains. Coffee chains such as Vivari, Santagloria, Manolo Bakes, 365 and many others compete through different advantages:

➟ Cheaper prices (relative to specialty coffee and brunch places)

➟ Strong brand recognition

➟ Consistent customer experience

➟ Professional marketing

➟ Ability to secure prime locations

These two types of places make it quite difficult to enter. And for existing business owners, it creates a highly competitive environment where differentiation is difficult and margins are constantly under pressure.

But also to put it in perspective, it's no Apple versus Microsoft style competition.

GROWTH PROSPECTS 
score: 4/10

The traditional path to cafe ownership is pretty well established.

You spend a few years working, save (or borrow) around €50k for a fit-out, and open your own cafe. Or you're an office worker craving a sea change and decide to back yourself. Most specialty coffee owners in Madrid have the vibe of being ex-McKinsey.

And if you're good, you may be profitable within a year or two, earning yourself a salary while generating a little more in profit.

For most owners, though, that's where the journey ends.They become successful single-site operators, but they're trapped in the business. Every day they're on the floor, managing staff, solving problems, and keeping the wheels turning. Step away for too long, and the business starts to suffer.

The owners who break through (from a business point of view) make a mindset shift: they start thinking like big hospitality brands. Instead of relying on themselves, they build systems, develop leaders, and create repeatable operations that can run without them.

Profit fuels expansion rather than just income.

As they grow into multiple locations, they gain purchasing power, negotiate better supplier pricing, spread overheads, and improve margins across the group.

OTHER FACTORS
score: 5/10

The administrative burden of running a coffee shop is significant. Opening and operating a cafe involves navigating a range of regulations, permits, and licensing requirements. While the process is possible, as evidenced by the thousands of cafes in operation, it can still be time-consuming and complex.

Weather is another factor that can have a meaningful impact on sales. If temperatures are too high, customers may be less inclined to grab a coffee, particularly if outdoor seating is a key part of the business. Conversely, if the weather is cold and wet, fewer people are likely to spend time outside, reducing foot traffic and overall demand. And it's hard to plan for that.

Wider economic performance and consumer confidence also correlates to how much coffee people are willing to drink outside - another factor not in coffee shop owners control.

LIFESTYLE (SUBJECTIVE) 
score: 7/10

If you’re an owner-manager, you’re probably up at 7am every day, and on your feet for 8–10 hours, sometimes even earlier if you run a busy cafe.

You’re managing staff, chatting with customers, dealing with suppliers, and somewhere in between all that, you may also doing the accounting.

You don’t really get weekends. Saturdays are usually your busiest days. While your friends are relaxing, you’re out there making coffees and serving tortilla for hundreds of people. Holidays are a foreign concept.

But, it is important to note it’s also a very social job. You become part of the community. You create a place where people meet, connect, and feel at home. You're building a little piece of the neighbourhood. Which is very special, and I think the main draw card to be in this sector.

FINAL SCORE 
26/50

Of course, this is a subjective exercise, just based on high level research and conversations. So much of this also depends on context, momentum, and like with anything, a little good fortune.

The point of this piece is to highlight that cafe owners are entrepreneurs. They take risks, create jobs, create value, and build the community spaces that we love spending time in.

Is the business rich? Probably not. But they’re resillient and serve the community in massive ways we rarely appreciate enough.