Drink

Here’s how the cost of your ‘expensive’ cup of coffee breaks down

Yes, coffee beverages sold in a business are the best-margin product in the shop, but the bottom line is coffee sales keep cafes open

It is crazy to think that your coffee is subject to seven Government levies/taxes before you’ve taken a sip. Photograph: Getty Images

Jamie O'Connell
Sun May 26 2024 - 06:00

When I was a teenager I worked part-time in a local shop in Fermoy, Co Cork, and I used to marvel at the volume of money that went through the till each day. To my young eyes, the amounts seemed astronomical. I couldn’t understand why the owners of the business weren’t living it up in the Cayman Islands. Even as an adult when I worked for various SMEs, the gross figures/turnover quoted in meetings seemed outrageous compared with my average industrial wage

However, in the past few years, I have opened a coffee shop, and so I have got to see those figures from the other “side”, from the viewpoint of the employer/owner of an SME. I now realise those numbers are a fantasy, “Monopoly money”, and have no bearing to the actual figures the average owner/employer takes home.

One of the complaints I regularly see online is people saying cafe and restaurant owners are fleecing customers with the price of coffee. I thought it might be helpful for the consumer to see why a coffee is the price it is. Before I break down the costs of a cup of coffee, what goes to who, I will flag that coffee beverages sold in a business are the best margin product in the shop, often nearing 80 per cent (the sale price vs the cost of the raw materials). However, as you’ll see from the figures below, a cafe/restaurant will lose money on any product that makes less than 70 per cent margin (which is where sandwiches, and most other foods, are very close to). The bottom line is coffee sales keep cafes open.

[ ‘I feel like I didn’t choose this coffee; this coffee chose me’ ]

The figures (below) will vary somewhat depending on location and suppliers. However, they are based on conversations with other cafe owners around the country, so I feel confident this gives a good overall impression of things industry wide.

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Here is how your €3.50 coffee breaks down:
  • Gross VAT at 13.5 per cent: 47c
  • Cost of disposable cup and lid (VAT removed): 15c
  • Building rates: 3.5c
  • Water rates: 2c
  • Staff wages: 119c (this includes about 25c in taxes paid by staff to the Government and employee/employer contributions)
  • Electricity/energy costs (VAT removed): 10c
  • Rent of building: 21c
  • Other costs (VAT removed), such as bins, insurance, social media, recruitment, website, accountancy fees, telephone, visa charges for using “tap” facilities, cleaning supplies, pest control, etc: 14c
  • Milk (VAT exempt): 20.5c (If a non-dairy milk is used, this can be up to 70c, hence the added surcharge by most cafes)
  • Coffee beans (VAT exempt): 41c (this can vary somewhat on the brand)
  • Wear and tear/repair and machine replacement: 14c
  • Loan repayments (most businesses will have loans for set-up/expansion costs/HP on expensive items such as €20,000 coffee machines): 13c
Coffee

Graphic: Paul Scott

This all amounts to €3.20 costs. So, the net profit of the coffee is: 30c. Now, there is a 12.5 per cent corporation tax to be deducted from that (30c = 3.75c). So, the real profit for the business per coffee is 26.25c. As I said above, coffee is the most profitable item in the shop by some distance. Foodstuffs – notably sandwiches – don’t make anywhere near the same percentage margin as this. Cold drinks (water, bottles, cans, juices) and ice cream/snacks are charged with 23 per cent VAT (not 13.5 per cent), so you can imagine how that alters their margins.

It works out like this. With a cup of coffee, the business makes just more than 26.25c but the Government, if you add up all the taxes, PRSI, rates, etc paid by everyone (business and employees) involved is 81.25c. Of course, if the owner wishes to take this 26.25c out of the business as their own wage they will be subject to income tax on top of this, just like an employee. Crazy to think that your coffee is subject to seven Government levies/taxes before you’ve taken a sip: VAT, water rates, business rates, employee tax, PRSI from employee, PRSI from employer, corporation tax and finally the income tax of the owner.

The situation is only getting worse due to inflation and policies by the Government, including in 2024 the doubling of rates for premises in certain Irish country towns as well as returning the VAT rate from 9 per cent to 13.5 per cent at a time of record worldwide inflation, making the situation far worse. On top of this, there has been an increase of €1.40 per hour on the minimum wage and increased sick pay entitlements, while the pensions employer auto-enrolment is on the way in 2025. No one argues that these changes will help employees at this time of inflation, but there simply isn’t room in the profit margin of most SMEs, notably those in the food industry, to pay for so many cost increases in a twelve-month (and these are only the key ones, there have been other Government policies, such as the new February bank holiday, that add a further financial burden).

From the cafe management books I have researched, a thriving cafe will make up to 8 per cent net profit on its turnover, though most, in real terms, are making 2-4 per cent on gross sales. However, what seems to be happening is this, despite every Irish worker paying PRSI to the Government each week, and employers contributing a further PRSI contribution for each employee, the Government is pushing its fully funded PRSI responsibility back on to business owners.

Think of it this way, why on earth should entrepreneurs bother setting up businesses if that 26.25c is eroded to the point where their seven-day working weeks, along with huge initial financial investment and personal risk, brings no reward? We are in very dangerous waters economically as a country if we no longer “dangle the carrot” to encourage innovative, hardworking people to open businesses. Remember, every penny the Government gets is from taxes, and comes either directly from business or from someone working for a business. As the Government does not generate any significant income on its own, without healthy businesses, there is no money for it to pay for all our services.

[ Why independent coffee shops in Ireland are in trouble: ‘Big chains can weather these increases. We can’t’ ]

Because of the hostility to entrepreneurship in Ireland by the current Government, I shrug, as I’ve heard many other cafe owners do, and wonder why to even bother trying any more. Weariness and apathy from hardworking business owners perhaps explains why 212 Irish cafes and restaurants closed in the first quarter of 2024, according to the Restaurants Association of Ireland. This has cost the Irish economy an estimated €288 million, not to mention all the rural communities have lost important hubs that connect people. It’s a horrible sight to drive through many rural Irish towns and see mostly empty premises.

Trust me, if cafe owners were getting a gratuitous portion of your €3.50 coffee, 200 establishments would not have closed. In fact, 200 would have opened. Of course, inflation has been a worldwide problem and only so much can be done to mitigate it. However, the rest of the blame lands squarely with the Government creating a myriad of policies that have driven up the costs for small businesses while inflation is at an all-time high.

Jamie O’Connell and his husband, John Hallissey, own Bean & Batch, with locations in Kenmare and Killarney, Co Kerry @beanandbatchkenmare on Instagram

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