Feb 10th 2010 Issue
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The Cost of Doing Business

Charles Cain - Feb 10th 2010

What will it cost to grow your dream?

Can you afford to be wrong?

Ask 10 people what it costs to open a tea shop and you'll get 10 totally different answers. Ask those same 10 people what it costs to open a profitable tea shop and you'll be lucky if one of them has a clue.

When asked this question, and with none of the necessary information like size, location, product mix or business strategy, I usually answer by saying that I personally would not go into the tea business unless I had at least $250,000 to invest. I've given more than a dozen speeches on this topic and talked one-on-one with more than 50 prospective entrepreneurs, and my cost estimates are probably the most controversial thing I tell people. Just about everyone I meet thinks they can do it less expensively than anyone else, and that their odds for long term success are high. About half of the people I talk to can give anecdotal evidence of some tea shop owner that opened for as little as $150,000.

What they can't tell me is whether those inexpensive shops ever made a profit, or how many years the owner went without collecting a paycheck. There is a big difference between opening a shop, and opening a shop with the layout, equipment, design and ambiance that will make it competitive and profitable. The less you spend, the lower your odds of success. And most people who are struggling to come up with $150,000 to invest, can't afford to loose it and would probably not proceed if they really believed the statistical odds off success to be well under 50% (believe it, because it's true).

Those who study the tea industry closely estimate that the number of tea shops in the US has more than doubled over the past five years, and today totals roughly 4,000. Given that more than half of new small businesses fail, it's safe to estimate that a lot more have opened in the last five years than have stayed open. That's a lot of movement for what is still a pretty small industry.

I could give you all sorts of data from my experience, but that would just be more anecdotal evidence. Instead, allow me to quote some cost estimates from the world of Franchising. Franchisors have the advantage of years of trial and error in refining their model, and benefit from some pretty impressive economies of scale. Can you open an independent shop for less than a franchise? Sure, but you have to ask yourself how many of those cost savings are due to your own brilliance and how many are due to cutting corners that the franchisors, based on their experience, have avoided cutting?

The following table lists the estimated start-up costs NOT INCLUDING FRANCHISE FEES for a range of franchises with some competitive relevance to popular tea shop strategies. You should also be aware that all of these figures are volunteered by the franchisor as part of the required public disclosure documents. They are trying to convince people to buy a franchise, so it's safe to assume that most stores will fall towards the top end of the range. All figures are in thousands.

Panera$1,000 - $1,600
Potbelly's Sandwich Shop$450 - $750
Jamba Juice$175 - $275
Cold Stone Creamery$295 - $440
Papyrus Paper Store$270 - $465
TeaGschwendner$165 - $350
Gloria Jean's Coffee$305 - $520
Biggby Coffee$240 - $300
The Coffee Beanery$270 - $520

Let me guess... my estimate of $250,000+ for a small tea shop doesn't seem so unreasonable now does it? :) This is a great business to be in, but doing it right isn't cheap. My greatest fear for so many of the potential tea entrepreneurs I've talked with is that they'll cut too many corners, never give themselves a fighting chance, and forever wonder if they might have been successful with just a little more capital.

Adagio Teas