Your shop's location is the biggest decision you’re going to make when opening a cafe. A great location can keep a mediocre shop running for years and a bad one can sink the very best in less than 12 months. A key part of knowing if a shop is going to work in the short-term and the long-term is making sure you have the right Rent to SOM Ratio.
SOM is a term meaning serviceable obtainable market. It comes from this super corporate concept that will definitely help you. The idea is to help you separate out the different layers of the market you have. TAM, meaning total addressable market is the whole market you're in; for example in 2019 the UK coffee shop market was worth £10.1 billion. The SAM, meaning serviceable addressable market is the amount of the total market your kind of business can reach; for specialty coffee shops in 2019 SAM is £2.3 billion.
The number that really matters to you is your SOM, the value of the amount of the market you can realistically sell to. In the coffee shop world SOM is dictated by location. In cities not many people travel more than 5 or 10 minutes for a cup of coffee. In a rural area you might get half an hour. This post is focused on urban sites that aren’t tourist areas.
Rent to SOM ratio is a way for you to get a sense if the location you’re looking at is any good. As a guide your rent should only be 10% of your turnover and definitely no more than 15%. This means you just multiply your SOM by 10% and if that number is higher than the monthly rent it could be a great spot.
At this point you’re probably wondering how the hell you find out SOM, the thing is you don’t need one, but two SOMs. You’re going to need the SOM that will take you to breakeven and the one that takes you a healthy level or profitability.
Getting your shop to breakeven is the first major hurdle after opening and will usually take 6 to 18 months. This is when you stop using any cash reserves and the revenue coming in pays for the revenue going out. In urban environments this is largely dictated by the foot traffic in front that goes by the shop.
You need a count on how many people walk by the shop at various times. The easiest way to see what times is to look at a nearby similar business on Google and it shows the busyness of the shop. You need a large enough sample size so the more counts the better. A good basic sample size is from 3 different days of the week across a couple weeks for at least 3 hours per-day at the different levels of busyness. Make sure to include a split of busy times and less busy times. Try to make these different hours so you have a full 9 hour picture.
Once you have these numbers add them up and multiply them by 30 calling this foot traffic for a month. Using this stat we know for every 100 people there will be 419 visits to a cafe per-month. With that it’s time to do math to find out how many transactions you will have per-month.
Transactions = (Foot Traffic / 100) x 419
The value of each transaction will depend on your model but for a rough idea if you are opening a specialty coffee shop with pastries and a few sandwiches it will be about £3.75 and with sit down brunch it will be £10.19. You also need to account for the competition. For every shop offering with any sort of coffee shop type model you will need to divide the SOM. More math time:
SOM = (Transactions x Estimate Value of Transaction) / Amount of Competitors
And there you have it. If this number is greater than the rent when multiplied by 10% your road to breakeven shouldn’t be too hard at all. If your rent is more than when multiplied by 15% you’re going to need a killer concept to succeed.
Use this calculator to easily find the rent that the location you are looking at is worth.
This is the market you will be enjoying into your second year and beyond. To find these numbers it is a bit tricky. You want to primarily focus on how many people work, not just live in about a 10 minute walk around the location.
In the U.K. you can find data about who lives in an area using the Office of National Statistics Numbers but the last census was in 2011 so this may be out of date for you if the area you’re looking at has changed a lot. For more up to date stats ask your local government.
The other way is a bit of canvassing. Most small retail shops will only employ between 3 to 5 people and large shops can have upwards to 20. If there’s office buildings it’s worth calling and asking for a rough figure. Most people are happy about a new cafe opening up so will be eager to share.
Once you have the number follow the same formula as before but instead of foot traffic you have density. If this number is greater than your rent it could be a really great spot.
More Indicators of a Great Spot
There are some more things that will tell you if a location is a good spot. If a Starbucks is close that's a good sign, they have way more data to play with, same goes for other big companies what share the same audience as you.
Looking for spots that have nearby businesses that target the same people as you. As a community of businesses you will be able to attract more people to the area. Instead of your business being the only pull, you share the marketing burden indirectly and you help amplify each others ability to attract your target market.
Picking the right spot starts with a good location but it doesn’t end there, you need to find the right spot for your concept. Subscribe to learn about making a killer coffee shop concept in an upcoming post.