How to Start a Profitable Roasting Business
Is Coffee Roasting Profitable? How to Start a Coffee Roasting Business and Make a Profit
Along the journey of opening and growing a coffee shop, every owner wonders at some point, "Should we roast our own coffee?" Making the transition takes passion, patience, and skill-but before anything else, it has to make financial sense: is coffee roasting profitable?
Let's explore the research and break down coffee roasting profit margins vs coffee shop margins, dive deep into the financials, and analyze whether starting to roast coffee is a good move for you.
In this exploration, we'll take a look at:
Research on average profit margins for roasters vs cafes
What to expect for startup costs (+ how to save big in the beginning)
Reasonable expectations for coffee roasting ROI
How to start a coffee roasting business
Let's get into the numbers.
A Breakdown of Coffee Roasting Profit Margins
Let's cut to the chase: there's good research that demonstrates that coffee roasters are more profitable than coffee shops, on average.
The 2017 Specialty Coffee Association financial benchmark for roasters and cafes- the largest study of its kind-gave the North American industry much-needed clarity into key financial averages. Here's what the study found:
We'll dive deeper into the numbers, like average startup and green coffee costs, but let's review a few initial takeaways first.
Coffee retailers (shops and cafes) have a solid average gross margin on each item sold (54%), but the added expenses of operating a retail location make it the least profitable business model of the bunch (6.86% profit).
Roaster retailers roast and serve their own brand of coffee, naturally giving them the highest gross margin on each item sold (65%) and a relatively high profit margin (8.79%).
Wholesale-focused roasters have the lowest gross margin (44%), but they also experience significantly higher sales ($750,000 annual) due to large, frequent, and long-term customer relationships.
At the end of the day, roasters who offer both wholesale and retail locations fared the best when it comes to business profit margins-by a wide margin-at 11.92%.
These findings confirm the intuition of most coffee business owners, and are probably not too surprising. For the coffee shop that wants to keep growing, starting to roast coffee is a natural next step.
That's what Jordan Thompson of Retrograde Coffee in Nashville, TN told us when we asked why his shop started looking at adding a roasting operation:
When we opened, we were getting feedback that other shops started seeing things turn around when they started roasting. We were hearing over and over again: "the only way to be profitable remotely quickly in this business is to roast coffee."
Retrograde went on to start roasting in-house in early 2020-just in time to sell retail bags to customers stuck at home during the pandemic.
Averages aren't the full picture, however, and the decision to start roasting needs to involve a more nuanced look at initial costs, years to return on investment, and an honest look at how you see yourself investing in this new revenue model.
Also Read: Why Coffee Shops Should Start Roasting Coffee In-House
Startup Costs: How Much Does a Coffee Roaster Cost?
The profit margins of roasting in-house might look good on the surface, but it's the initial startup cost that keeps most coffee shop owners from starting down the roasting path. The SCA study revealed that the average startup capital required to open a Roaster Wholesaler & Retailer operation was $120,000.
The largest expense, of course, is the commercial coffee roaster itself. Commercial roasters range anywhere from $20,000 to $150,000. Plus there's the costs of installing ventilation, attaching an afterburner to comply with local regulation, packaging equipment, and warehouse space-often adding another few thousand to the bill.
Training, Waste, and Hidden Costs of Roasting
Beyond the roaster and setup itself, there are additional costs that need to be taken into consideration. One of the biggest ones is training and education.
Back to Jordan from Retrograde:
When a company starts roasting on a traditional gas roaster, you're not really going to be stoked about that coffee quality for at least six months.
Retrograde was selling beans from Onyx Coffee Lab, the most awarded roaster in the United States. They knew that if they started building the skill to roast from scratch, it would take months-if not years-to catch-up to Onyx's quality. They couldn't afford to pay a team to figure out how to roast at a high level in the in-between time of taking out the loan and beginning to sell bags of coffee.
Another hidden cost of launching a roasting operation is the initial waste. During the training and education period, new roasters toss thousands of pounds of roasted coffee away due to the trial and error required to learn the skill. And the cost of those unsold beans adds up.
That was the biggest hang-up, the expense, the waste, and... how long was it going to take before we could have something that could compare to Onyx? It was going to be noticeable if our coffee went downhill.
Despite enjoying higher margins, commercial coffee roasters often find themselves in additional layers of debt due to these high startup costs.
Also Read: Coffee Bags and Packaging: Everything A Coffee Roaster Needs To Know
Coffee: How Much Do Green Coffee Beans Cost?
According to our community of shops and roasters, wholesale coffee tends to cost between $8 and $13 per pound of beans. For roaster suppliers with high levels of brand awareness and exceptional quality, costs can go as high as $15 per pound, like in the case of Onyx.
In the specialty coffee industry, green (unroasted) coffee sells for $2.75 to $5.00 per pound. It's possible to pay less, but if flavor quality and consistency are important to you, we don't recommend it.
For Onyx we were paying $9.50 to $15 per pound. When they saw the cost of green coffee, our owners were mind blown, like 'Wait. We could have been paying $4 per pound this whole time?
For the team at Retrograde, this dramatic drop in Cost of Goods Sold (COGS) meant significant savings on coffee beans. Naturally, this level of savings is one of the benefits of roasting that's most compelling to cafes paying $10 or more per pound of coffee.
How to Price Roasted Coffee Beans
When you've installed your roaster, received training, and are finally ready to start selling coffee to customers, it's time to set your pricing. Here are two pricing examples based on typical wholesale and retail cost structures.
Cost Breakdown: Wholesale Coffee per Pound
Wholesale margins are lower, because you're giving customers a price break in exchange for higher volume orders. So despite lower margins over COGS compared to retailers, wholesale roasters generated far more in total revenue according to the SCA study.
Cost Breakdown: Retail Coffee per 12 oz Bag
Specialty coffee bags retails anywhere between $14 and $24. Most roasters opt for smaller 12-ounce bags to account for "shrinkage", or the natural loss of weight in beans during the roasting process, per pound of beans.
Traditional vs Bellwether Roasters: A Profitability Comparison
So far, we've explored margins and startup costs related to traditional gas roasters. These are the classic industrial machines we all know and love. As we've discussed, getting started with a traditional roaster requires significant up-front investment-and it's this major investment that keeps so many coffee shops from taking the next step.
This is one of the barriers to growth that we wanted to tear down with the Bellwether roaster, the most simple and affordable commercial roaster on the market. Here's how we do things differently:
All electric, no gas. The Bellwether coffee roasting machine plugs directly into a standard outlet. No gas line installation means you can put it anywhere (no extra warehouse space needed!).
No ventilation required. You can start roasting without installing ventilation and an afterburner, or waiting on permits from local health departments.
Create revenue before you train. Coffees sourced in the Green Coffee Marketplace come with roast profiles created by our in-house industry veterans that you can download and use right out of the box. Rather than needings months of training and waste, you can start selling high-quality coffee immediately, then learn to develop your own roast curves over time (while you're already generating revenue).
Risk-free green buying. Don't spend months figuring out how to even evaluate and purchase unroasted beans. Our green coffee team has decades of experience sourcing quality beans from reputable farm partners. Each coffee includes transparent reporting, quality assurance, and marketing materials.
We've meticulously designed a roaster and sourcing experience that's so fast and affordable, that our average customer saves 30% on coffee costs right away.
Let's break down the costs of roasting on a Bellwether vs buying wholesale beans to demonstrate how our roaster flips the script on whether you need major capital investment to make roasting financially viable.
For the team at Retrograde Coffee, the ability to skip the training, lease a roaster, and avoid months of costly trial and error before they ever sold a single bag meant they were able to launch a roasting program years before they would have been able to afford with a traditional roaster.
There's no way with the state we were in that we could have gone and just purchased a roaster. The Bellwether really makes that dream of roasting possible a lot sooner.
You can learn more about Bellwether's affordable pricing model here.
The Verdict: Is Coffee Roasting Profitable?
When you look at all the numbers, on average, roasting coffee is profitable and a good avenue for business growth for coffee shops. The major hangup is the starting cost, which tends to be $100,000 or more according to the SCA research.
How to Start a Coffee Roasting Business
Now that you know what to expect when it comes to startup and ongoing costs, as well as how much profit you can make as a coffee roaster, let's look into which steps you should take for starting your coffee roasting business.
Create a Business Plan
One of the first steps you should take when considering being a business owner is to create a business plan. You’ll need to determine how much money you’ll need and how much money you’re willing to invest. Take note of the items you’ll need to start your business, including roasting equipment, business location, green coffee, and packaging. Then factor in any regulatory and licensing fees you’ll be required to pay.
Other things to consider as you create your business plan include researching your ongoing business costs, figuring out how much you can charge your customers, and naming your coffee roasting business. Once you’ve settled on a business name, you should establish a legal business entity such as an LLC or corporation. This protects you from being personally held liable if your coffee roasting business is sued.
Define Your Coffee Roaster Brand and Target Audience
Your brand is more than just roasted coffee. It’s what your coffee roasting company stands for and how it’s perceived by the public. A strong brand will allow your business to stand out against competitors. Consider your target audience as you start to define your brand and create your logo and other business materials.
Is your ideal customer a coffee shop? A grocery store? Will you sell directly to customers? Research your competition to learn more about what they are offering to their customers and offer an alternative solution. For example, if a majority of your competitors are offering light coffee, your coffee roasting business should consider offering something rich.
Prepare to Launch Your Coffee Roasting Business
Once you’ve created your business plan and defined your brand and target audience, it’s time to prepare to launch your coffee roasting business. While these aren’t the most exciting tasks, they are essential when starting a business. First, you’ll need to register for state and federal taxes prior to opening your business. To do this, you’ll need to apply for an Employer Identification Number (EIN). Not only is this easy, it’s free. Keep in mind that you may have different options for how your roasting business will be taxed, depending on which business structure you choose
Next, you'll want to obtain any necessary permits and/or licenses. Failure to do so can result in fines or even lead to your business being shut down. Be sure to look into your state and local requirements to see which permits and licenses are required.
You'll then want to get business insurance. This protects your coffee roasting company’s financial wellbeing in the event of a covered loss. There are several types of insurance policies created for different types of businesses with different risks, so it’s important to read through and understand the coverage options. If your roasting business will have employees, you’ll need to look into workers’ compensation service as well.
Lastly, you’ll want to set up accounting and open a business bank account and credit card. This is essential for personal asset protection and makes filing for taxes easier. From here, you can work on establishing your business credit to open net-30 accounts.
Market Your Roasting Business
Your brand story is what connects your coffee roasting business with your customers. You’ll want to create a website as well as social media accounts for your business right away. This will help tell your brand’s story and build brand awareness.
One of the easiest ways to market and promote your coffee roasting business is by offering coffee tastings, or cuppings. This gives potential customers the opportunity to connect with you, learn more about your coffee, and try your roasted coffee.
To help stand apart from other roasters in the coffee industry, consider specializing in a certain coffee from a particular region or a certain roast level. You may also want to look into getting Fair Trade Certified, Organic Certified, or Rainforest Alliance Certified coffee.
Consider your coffee bag packaging and design as marketing materials as well. Putting the roast date on your coffee bags shows your customers that the coffee beans inside have been recently roasted, ensuring quality freshness.
Want to see how using a Bellwether roaster can get you roasting and selling exceptional beans for under $10,000 in a matter of weeks, not months?
Explore how the Bellwether technology makes roasting more accessible than ever before.
