Could rising energy bills kill off coffee shops?

The co-founder of Taylor St Baristas and director of Tolley Coffee & Tea, Andrew Tolley, discusses the ongoing European energy crisis and how coffee shops can navigate what is proving a challenging period.

The rising cost of energy is affecting people and businesses all around the world. In many places, rampant inflation is complicating the matter, creating a cost of living crisis that’s changing consumer habits and shifting the world’s focus to renewable energy solutions.

But what’s the source of this crisis? In part, it’s a hangover resulting from lockdown measures imposed during the Covid-19 pandemic. As businesses have re-opened, the increased demand for power has pushed prices up.

Furthermore, the issue has been exacerbated by the Russian invasion of Ukraine.

“The invasion is restricting energy coming into the markets, which has allowed energy providers to increase their prices,” says Andrew Tolley, co-founder of Taylor St Baristas and director of Tolley Coffee & Tea.

“Russia’s position within OPEC means that every country is either more or less exposed to Russian oil and gas.”

This is no less true within the coffee industry, with energy prices making the future seem especially dark for coffee shop owners. A recent UK Hospitality survey suggested that a third of the country’s hospitality businesses may close their doors permanently as a result of these “soaring costs”. 

In one case, a UK café owner reported that her energy bill jumped from £10,000 ($11,200) last year to £55,000 ($61,500) this year. In fact, the average energy prices quoted by the UK government this autumn are 96% higher than last winter’s 2021/22 price cap.

How is the energy crisis affecting coffee shops?

As a coffee professional, Andrew has weathered his share of financial obstacles. However, he feels that this time around, the severity of the price increase and its impact on profit and loss margins poses a dire threat to coffee businesses.

He explains that when looking at the breakdown of a business’ profits and losses, energy has – historically – never been a significant cost. In general, utility bills are considered “fixed costs”.

“While coffee is a high margin product – the cost of ingredients in a coffee can be anywhere from 15 to 20% of the net drink price,” Andrew says. “When it comes to the profitability of a café, the average is between 8 and 12%.”

For a small, independent café with net revenue of £200,000 ($224,000) a year, the owner can expect to earn around 10% of that as profit. 

“That amount is quite a small income, and [an increase in] utility costs has a big impact on the overall profitability of the business,” Andrew emphasises.

With added pressures like staff shortages and the increasing cost of coffee, things are becoming incredibly challenging very quickly.

Considering the array of related stories published in the UK press this autumn, as well as the conversations Andrew witnesses as a member of a WhatsApp group for London café owners, he’s adamant that this challenge is causing a great deal of stress. Sadly, he says, many owners are now questioning the viability of their businesses.

However, he maintains that there are ways to mitigate these challenges.

“The worst thing you can do in these situations is to get tunnel vision and not explore all possible avenues to find solutions,” he adds.

What can businesses do to survive?

While increasing prices is the quickest route to boosting revenue, it comes with significant risks, especially for coffee shops. An increase of a few cents per cup of coffee may seem minimal, but for the customer, Andrew says that it “might be the difference between them buying a coffee or not”.

First and foremost, any price increase needs to be communicated clearly and effectively.

“The team has to be fully behind it to start with, they need to understand the rationale, and they need to be able to explain it to customers in a natural way,” Andrew elaborates. “Authenticity is key in these kinds of communications.”

He’s confident that despite the risks, the net result is higher revenue overall. However, if inflation remains high and the cost of energy continues to rise, price increases alone might not be enough to save struggling coffee shops.

In one extreme example, a café owner reported that to cover a quoted energy bill, he would need to raise the cost of a latte to £14.30 (US $16.04), four times the current – and already exorbitant – cost.

“As a business, you always need to be looking at ways you can diversify your revenue stream,” Andrew says. 

For example, many cafés survived the challenges of the pandemic by shifting to online sales and delivery services. Andrew also advises that coffee shop owners should reassess their fixed costs. 

“Try a new energy supplier who’s going to give you a discount or lock in a fixed price so you don’t have to deal with spikes,” he suggests.

A simple conversation with the landlord about making the building more energy efficient could also lead to tangible savings. At the simplest level, this could involve installing LED light bulbs. Coffee shop owners can also adopt modern, energy efficient coffee machines that are specifically designed to cut costs.

Some business owners are anticipating government intervention. In the UK, for example, the government has outlined plans to reduce energy costs for businesses.

“Any work the government can do to reduce costs in a macro way is a good thing,” Andrew admits.

However, he counters that this may be a short-term solution that has negative implications in the long run.

“Money doesn’t come from nowhere, and eventually the tax-payer is going to have to pay this off,” he explains.

“I would argue that the more effective way to reduce the burden on cafés is to reduce VAT,” he concludes. “This would have a much bigger impact on the viability of a café than any short-term subsidisation of energy prices.”