Coffee shops have always been gathering places where people can enjoy their favorite brews, socialize, or find solace in a cozy environment. Recently, with changing consumer habits and market dynamics, small coffee shops have gained popularity. The average square footage of coffee shops is close to 2,000 square feet, although they are shrinking towards 800 square feet due to increasing construction costs as well as the popularity of drive-thru and mobile orders. These compact establishments offer unique experiences and cater to the evolving needs and preferences of coffee enthusiasts.
The Impact of New Brands and Increased Competition
The rise of new brands and the proliferation of coffee shops have intensified the competition in the industry. Large coffee chains and established brands have traditionally dominated the market, making it challenging for new entrants to prove themselves. However, the emergence of small coffee shops with limited square footage has disrupted the industry by offering a distinct value proposition that sets them apart from the competition.
One notable example is Starbucks, which has recognized the trend and responded by introducing smaller-format stores covering approximately 900 square feet. These compact stores have demonstrated impressive results, attracting around 15 percent more visitors per square meter compared to their larger counterparts, which are typically 2,500 square feet. Similarly, Dunkin' stores average around 750 to 3,100 square feet, while Dutch Bros. Coffee locations, known for their compact size, have an average footprint of approximately 950 square feet, resembling the dimensions of a studio apartment.
According to data from Placer.ai, Dutch Bros experienced a notable change in visitation patterns, revealing that weekday visits to Dutch Bros grew from 59.3 percent in Q1 2022 to 61.8 percent in Q1 2023, which indicates a positive shift in consumer behavior towards the brand. Starbucks secured second position in terms of visitation, followed by Tim Hortons and Dunkin'. By reducing the physical size of their locations, coffee shops can optimize operational efficiency while catering to the convenience-oriented needs of customers.
What is contributing to the popularity of smaller coffee shops?
Customization and Personalization
Coffee lovers are becoming more discerning in their preferences, seeking unique and personalized experiences. Small coffee shops excel in this aspect by focusing on perfecting a select few signature beverages and building strong connections with their customers. This personalized approach fosters loyalty and creates a unique sense of community within these establishments. According to a report by Technavio, the specialty coffee shop market is estimated to grow by $39.17 billion from 2022 to 2027, further highlighting the tremendous opportunity for small coffee shops to thrive in this expanding market. By offering exceptional quality, customized experiences, and a strong sense of community, these smaller coffee shops are reshaping the coffee industry and catering to the evolving preferences of tasteful coffee enthusiasts.
Convenience through Drive-through and Mobile Orders
Due to the increasing demand for convenience in the coffee industry, these establishments have embraced the concept of drive-thru and mobile orders, providing their customers with quick and seamless experiences. By incorporating drive-thru lanes or prioritizing efficient order pickup for mobile customers, small coffee shops have capitalized on the desire for convenience.
Drive-thrus offer a range of benefits for coffee businesses, including an additional revenue stream and expanded market reach without needing new premises. The convenience factor, coupled with the ability to save time and effort, has contributed to the significant growth of drive-thru orders, which saw a 20% increase from February 2020 to February 2022, according to a study by NDP Group.
Moreover, integrating mobile apps into the coffee industry has further enhanced customer convenience. By utilizing mobile apps such as Orda, coffee shops can offer a plethora of features such as mobile payment options like Apple Pay and Google Pay, push notifications, reordering capabilities, AI-based recommendations, loyalty rewards, and integrations with popular platforms like Instagram, Square, and DoorDash. The seamless and native experience provided by these apps has resulted in a significant surge in online coffee orders, with a staggering 46 percent increase since January 2020, as reported by the National Coffee Association. In fact, around 79 percent of online orders are now placed through native mobile apps, highlighting customers' preference for mobile ordering.
High Construction Costs
The rising popularity of smaller coffee shops can be attributed, in part, to the overall increasing cost of construction as well. Large commercial spaces come with substantial financial investments, making it challenging for aspiring entrepreneurs and small business owners to enter the competitive coffee market. In response, coffee shop owners have turned to smaller spaces as a strategic approach to reduce upfront costs and allocate resources more efficiently, ultimately establishing a sustainable business model.
The escalating cost of construction is evident in industry forecasts and expert opinions. According to the ENR Cost report, the Building Cost Index is projected to rise by 3.8 percent in 2023. Additionally, construction economists expect construction material costs to rise by 4 percent in 2023. Ken Simonson, the chief economist at the Associated General Contractors of America, further emphasizes the ongoing rise in construction input costs. He predicts that these costs will continue to outpace overall consumer prices, indicating a challenging environment for businesses seeking to establish larger coffee shops. The increasing expenses associated with construction further motivate entrepreneurs and small business owners to opt for smaller square footage, allowing them to navigate the industry's financial hurdles and pursue their coffee ventures with more manageable investments.
Intimate and Cozy Experience
Small coffee shops excel at creating intimate and cozy atmospheres that foster relaxation and social interaction. With limited square footage, these establishments can focus on creating a warm ambiance, utilizing comfortable seating arrangements, and incorporating aesthetically pleasing decor. A survey by Premise revealed that “customers are more likely to stay an hour sitting at a local coffee shop than a Starbucks Coffee” since they “care more about ambiance than those who go to Starbucks.” Additionally, Forbes contributes: “Being quirky, colorful, and overall different helps smaller businesses shine in a market where the art of making a latte has been perfected by many. As a consumer, you can be sure to expect something special by looking beyond the global giants.” The intimate setting encourages customers to engage in conversations, fostering a sense of community and enhancing the overall coffee experience.
Grayson Wright is a premier single-tenant net lease associate for Matthews Real Estate Investment Services. Grayson specializes in the disposition and acquisition of coffee shops across the U.S.
Vince Chapey, Senior Associate at Matthews, specializes in the disposition and acquisition of net lease properties nationwide, with a primary focus on restaurant properties.