# What is your mark up on a typical drink?



## Mr8ean

Hi there,

For those guys that are set up and "living the dream" of having their own coffee shop, what is your typical mark up for say a latte and/or an espresso drink?

Furthermore do you have any advice what is included and not included in a typical markup?

Thanks in advance.

Alex


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## MikeHag

Personally I don't price based upon markup. I price based upon what the local market will accept. The cost per shot comes down to who you choose as your roaster and the price you agree per kilo/order.

But without getting too accurate, I'd be looking at the GROSS profit margin (not markup) being at least 80% on coffee drinks. It needs to be that high to ensure that you still have profit left over after paying fixed costs (rent, rates, labour, utilities, insurance etc etc). When people say the profit on coffee is high, they are usually ignoring the fixed costs per drink. NET profit margin per drink is more like 10-20%, for coffeeshops who know how to make it work.

(As always, just my view)


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## Pjordan

It really varies I find. Think about Tea - around 1p per bag, hot water cost is marginal. charge 1.50. do the maths there! Coffee depends, think its about looking at the local market, think do you want to undercut local competition and gain market share quickly or allow time and go aat a slightly higher price.

We opened at the start of August and chose to go at 5-10p under the chains. This emans our margins are lower than theirs, however we are growing steadily due to this, also offering a much better product. I'd do some research, check what local competition are doing and maybe visit some successful shops in other towns and see what they're doing - maybe you an bring some new ideas to an area setting yourself apart from the competition.


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## Mr8ean

Thanks guys.

Question, is VAT applicable to coffee? At 20% that would be 40 on a 200 cup.


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## MikeHag

It depends. It's complicated.

http://www.ukbusinessforums.co.uk/forums/archive/index.php/t-82027.html

I'd say that if you're planning to have annual revenues over the £73000 threshold then make your business plans to include collection of VAT for payment to HMRC. Similarly, much of your stock purchases will be vatable so you can offset the amount of VAT you pay to suppliers against the amount you collect from customers.

One word... accountant. (I used to be one and even I wouldn't want to risk doing my own accounts!)


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## Mr8ean

So Mike, At a huge risk of over simplifying the solar system. If you do include VAT in the sales calculations then you should also reduce the cost of the ingredients, so there is - to an extent - a swings and round about affect?

Basically my back of cigarette packet calculation of gross profit was between 80 and 100 depending on how conservative I was with regard to wastage and costs of the beans and milk. And then I realised I had not included tax anywhere.

Hopefully I am in the right ball park.


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## MikeHag

Hmm, not quite but almost. Just because you charge VAT on sales doesn't mean there is VAT on purchases. It depends whether your supplier is VAT registered. Like I say, it depends.

OK, first thing to say is that HMRC says coffee is zero-rated. BUT you need to check this with your accountant, because the HMRC VAT Guide is open to interpretation. For example, a roaster selling whole beans may have to charge VAT on the sale because they have added value to the item by roasting it.

But as far as financial planning/forecasting goes... IF you are including VAT on items because you're over the threshold then yes, I would suggest that you calculate VAT on both your sales and your purchases. That's the simple answer, but not necesarily the accurate one! There are too many factors for an accruate simple answer.

To illustrate the maths of it, here's an example using simple figures... these aren't necessarily real life costs and prices.

Assumptions:

1. You get 50 double shots per kg

2. Cost price of beans per kilo is £12 including VAT (and delivery! Don't forget delivery costs.)

3. VAT is 20%

4. You and your supplier are both VAT registered

5. The coffee in question is VATable at 20% (which might not be true in real life)

Figures:

- Your espresso cost per double shot is £12/50 = 24p including VAT of 4p. (24/1.2 = 20p)

- Your sell price per double espresso is £2, including VAT of 33p (2/1.2 = £1.67)

- Your VAT liability to HMRC is Output VAT (vat on sales) less Input VAT (vat on purchases) ... 33p-4p = 29p

- Your true gross profit is your net sales less your net costs, i.e. £1.67-20p = £1.47 (per double shot)

- Your true gross profit % is gross profit/net sales = £1.47/1.67 = 88% (per double shot)

(Before anyone reading this gets carried away, you then need to add in rent, rates, wages, utilities, banking etc. Assuming they are equal to 70% of your net sales, that is 1.67 x 0.7 = 1.17. So your net profit BEFORE TAX is £1.47 - 1.17 = 30p. Pay tax at say 20% and you're left with 24p profit. Not as huge as you thought, huh?)

There are various exceptions to this scenario. For example, your coffee roaster may not be VAT registered, in which case you are not paying VAT and therefore there is no 4p reduction in your liability to HMRC.

I don't want to make it confusing for you. The main thing I think is that you might want to assume VAT on all your sales... it's the most prudent approach as it is a worst case scenario (because your gross profit margin is reduced ... unless you increase your prices to account for VAT, which would be unusual). If you can make your business profitable on paper whilst assuming the above, things can only get better if you subsequently find that your coffee sales are not liable for VAT.

Hope that helps! The problem with discussions like this is that there are always opposing opinions, since there is no one-size-fits-all answer. Welcome to accountancy, and one of the reasons I chose not to do it any more!!


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## Mr8ean

I think I need to sit down and read that again.

But thank you very, very much for the (not even) detailed response.


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