That first sip. Coffee lovers just know. There’s pure joy in those steaming introductory drops of smooth, aromatic brew. A hug-like warmth flows through your veins while your hands wrap around the familiar shape of that heated cup.
It’s a small comfort – the kind of momentary bright spot we craved during COVID, arguably more so than the caffeine itself. But while coffee love brewed strong during an era of social distancing, shuttered storefronts put an abrupt brake on foot traffic, changing where and how people grabbed their cup of joe.
The effects of dine-in closures continue to factor into what’s impacting coffee chains today as we emerge from the pandemic more than two years later, shares Dimitri Mazur, Senior Manager with CWB Franchise Finance.
“While some companies and brands are back to normal, the reality is that a good chunk aren’t there yet,” says Mazur, noting that coffee chains are part of the quick service restaurant segment – or QSRs –and while the QSR category was easily the strongest of the restaurant industry throughout the pandemic, coffee was the exception. “Coffee operators were highly impacted. That said, necessity is the mother of invention, and new opportunities and considerations are arising from pandemic-time pivots and as consumption habits continue to evolve.”
Here, Mazur gives us a pour-over of what’s percolating in today’s coffee franchise space – and how, while recovery is going to take time, today’s operators are leveraging their learnings to grind success from the current landscape and plan for tomorrow’s growth.
1. The daily grind: labour and goods
Like many industries these days, coffee chains are grappling with labour shortages and the rising cost of goods sold (COGS).
“With beans coming from all over the world, there are inherent challenges with COGS. For example, maybe the beans are stuck at a port in a container in South America. Those delays not only cause issues operationally, but also drive costs up,” says Mazur.
Where labour shortages are concerned, he says incentives like higher hourly wages and benefits are bumping up against the reality that many hospitality workers have decided to leave the industry. Adding to that, when new staff is recruited, high turnover rates are increasing the time and cost to onboard and train.
But while he believes these challenges aren’t dissipating any time soon, he says the industry is adjusting and finding the way through. “I think we’ll see improvements as operators get their footing in the post-pandemic world by zeroing in on what will drive their revenue today and fine tuning their expenses to support both the top line and bottom line. For example, there will be a strong focus on retail lines of revenue to offset where in person sales have not returned – and may in fact not return – to pre-pandemic levels. Operators are also looking to increase their footprints in large format stores such as Costco.”
2. Shifting sipping habits
The big driver for coffee chains prior to COVID was breakfast – that much-needed caffeine infusion on the morning commute, perhaps amplified by a breakfast sandwich or pastry. That routine quickly came to a halt as we were forced to spend most of our days at home. Likewise, there was a lengthy pause to those coffee shop work meetings and cozy, extended java-fuelled get-togethers with friends.
And so, as Mazur explains, consumers began developing new habits for enjoying their favourite brew.
“With kids doing their virtual schooling and parents working from home, the new routine became the coffee excursion,” he says. “Let me get my donut and coffee just to disconnect from being at home – or, very literally, to disconnect from being in front of my computer screen all day. That brief outing, hopping in the car and going through the drive-thru to grab your favourite drink, became a kind of comfort. It also meant operators had to re-think their offerings to rescue and protect their revenue.”
3. Pouring focus into diversified revenue
One avenue where operators have found success is retail stores. Large corporations have been doing this for a while now – pop into any major grocery store even five years ago and you’d find an array of coffee grounds, coffee beans, and pods – but Mazur says it’s now a revenue source most coffee chains have in their mix.
“I think if you’re a coffee chain and you’re not offering grounds or coffee beans in a retail environment, you could be missing out on a significant untapped market. We’ve seen several chains leverage this route and it’s opened another revenue stream to supplement where they were lagging with in-store sales during the pandemic,” he says.
Drive-thru is another area where Mazur sees opportunity. He anticipates operators who found they could run a leaner restaurant when forced to focus on drive-thru orders will continue to build on those efficiencies.
“All you really needed as an operator was someone at the order window, someone getting the order together, and someone on cash. Operators were able to cut many cost aspects like labour and COGS by focusing on drive-thru only. There were some good learnings that can be leveraged going forward,” he says, noting that an emphasis on drive-thru is common in South America with two- and even three-laned drive-thru’s guiding customers throughout the entire flow of order, payment, and pick-up. “While something like that might be farther off in the future in Canada, those operators there have harnessed the opportunity to pump out a high volume of orders with less backlogs.”
What about those who prefer their order brought to them? Mazur says another product that’s grown thanks to the pandemic is digital offerings – the majority of coffee chains now have either their own app or use a food-delivery service. “You have to do it. It goes back to the rethinking all your offerings, what people are now used to, and what they want and expect,” he says.
Finally, when it comes to how much the loss of foot traffic impacted coffee operators’ revenue, Mazur explains this was closely tied to location. And it’s one of the reasons he thinks operators will think differently about where to place their future restaurants.
“Coffee shops that were in a mall, a university campus, or an office building, saw sales disappear almost in its entirety during the pandemic. Whereas if you were in a suburban market, your sales were maybe down 15, 20, 30 per cent,” he says. “So if you’re an operator with five coffee shops and are looking to open a sixth, you might now be more closely considering a suburban neighbourhood or a downtown urban area.”
4. Re-aligning to today’s revenue drivers
In general, many businesses are in a transition period right now – not just adapting to a post-pandemic climate, but also to the wind-down of government programs that helped supplement labour and other costs. And so, the next step is to reassess the way forward if revenue hasn’t yet returned to pre-COVID levels.
What does that look like for coffee chains? With hybrid and work-from-home arrangements, a lingering leeriness toward in-person dining, and a continuing demand for convenience, Mazur says operators are re-aligning their cost metrics and expenses to today’s revenue drivers.
“They’re lining up their expenses and revenue expectations with what can actually drive the growth of their business now. That could be retail, that could be in-store, that could be drive-thru, that could be through aggregators like Skip the Dishes, and that could even be changes in product preferences like the rising popularity of cold beverages that is anticipated to only keep growing with the younger generations, who are now driving sales. This likely looks a lot different from pre-pandemic, but there’s also good opportunity there,” he says.
That’s also why it’s critical, particularly during times like these, that coffee chain operators have a banker that’s a partner, explains Mazur – one that understands the business, the industry, and what it’s gone through.
“This is so important to being able to gauge the outlook of a given business. You generally wouldn’t want a lender or a banker that also handles your visa application, personal lines of credit, auto loans, and mortgages, while also being the same banker that says, I might as well handle your business banking too. Coming out of COVID, operators need help and guidance supporting their business, in some cases recovering their business, and then eventually growing, or re-growing their business. Those three things – support, recovery, and growth – need to happen in succession. And that happens with a lending partner that has a whole team of business banking experts working for you.”
Mazur says the emphasis at CWB Franchise Finance is on creating a structured offering that’s designed to fit each specific business segment. Careful attention should be given to ensure a client isn’t underfunded, but also isn’t over leveraged – because they need to be able afford their loan payments, especially in a rising interest rate environment. Those payments might need to go toward refinancing debt, renovating, building a new location, and more.
“A coffee chain won’t have the same lending package as a fried chicken concept chain – the metrics, the sales and revenue drivers, all that differs. You can’t recommend the same products for two very separate businesses, it just doesn’t work. Add to that the fact that different coffee chains will have different levels of operational performance, and you can start to see why business owners need a partner that really gets them. Successful businesses receive guidance based on the specific space they're operating in, both in good times and challenging ones.”