What should be taken into account before investing in this sector?
Apart from the infrastructure related challenges of investing in Uganda, such as frequent power outages which could significantly affect your business unless you invest in backup solutions, there are some key PROS and CONS before investing in this sector.
PROS
As I highlighted in the article summary, the opportunity to invest in a coffee shop business in Uganda is driven by 3 key factors and therefore PROS:
1) The growing middle class in Uganda.
The middle class of any country is important to a “lifestyle” type of business like a coffee shop. In Uganda this class is growing. In 2010, it was estimated at 32.6%, compared to 28.7% in 2006. Assuming constant growth, I estimate that it will be 36% in 2013.
Demand for this business is expected to continue to grow. This is consistent with trends in other countries, such as Brazil, where the growth of the middle class resulted in an increase in coffee consumption of more than 350% between 2004 and 2012.
2) Uganda is the third largest coffee producer in Africa.
Around 6% of the Ugandan population depends directly on coffee for their livelihood and as a result not counting the indirect value chain, including exporters and processors.
I believe that because of our heavy dependence on coffee, where it is Uganda’s largest export, it should be possible to develop a culture of coffee consumption, as is the case in Brazil, the world’s leading producer and also the second largest consumer of coffee (after from USA).
3) Growth of Internet use
An important part of coffee shop culture is providing customers with free Internet via WiFi.
This is now increasingly possible thanks to internet access and therefore usage in Uganda has risen rapidly from just 2.5% in 2006 to 17% in 2012. The rise of bundled telecom providers Internet data has helped make Internet access more affordable, so I believe this is a key factor in further developing this industry.
CONS
1. Public perception.
Coffee shops in Uganda have typically been associated with something “Muzungu” (white person). This perception can be easily countered by offering trial campaigns to coffee farmers. It is also changing with the population dynamics of Uganda. 78% of Uganda’s population is under 30 years of age. This generation has grown up watching TV and movies (including Hollywood movies). They are also wealthier than their parents and many have traveled the world.
I think therefore there is enough demand from the Ugandans themselves and not just from foreigners.
2. Seasonal business.
This is a seasonal business, first with respect to Uganda’s dry and rainy seasons and second during the various times of the day. To counteract this, the investor needs to consider loyalty programs that are heavily skewed to reward customers during down times, such as during lunch or in hot weather.
3.Competition
I expect that in addition to the ever-growing independent coffee shops, there is the potential threat of global franchises like starbucks, black coffee, coffee coast and the like entering the Uganda market and thus leading to the demise of local or independent coffee shops.
The investor’s choice is to either consider being a local franchise partner for these brands early on or focus on strong differentiation to maintain customer loyalty.
How profitable is the sector?
Using a model I have developed, I calculate the return on investment (ROI) for a coffee shop in Uganda as follows:
- Initial capital of Shs. 81 million (A)
- Annual income of around Shs. 121.5 million (B)
- Net profit of about Shs. 26 million per year (C)
- Return on investment (ROI) of 3.1 years. (B=L/D)
The basics to get it right before investing
1. Organizational skills. Margins in this sector can be quite tight, so you must have excellent organizational skills. For starters, you should consider formal barista training for your team. In addition, your bookkeeping should also be done regularly.
2. Marketing. Like many consumer products in the food industry, the right marketing is critical to rewarding customers. The coffee industry generally follows the 80/20 rule, which is that 80% of your business will come from 20% of your customers. This means that most of your customers are expected to be loyal and repeat customers. Therefore, you should invest in a customer loyalty program.
last word
The coffee culture is exploding in Uganda. We expect there will be an increase in the number of coffee shops, not counting the possibility of global franchises entering the market.
With such a competitive market, it is important to outperform the competition. To set up a successful coffee shop, excellent management skills are crucial.
