What should be considered before investing in this sector?
Besides the infrastructural related challenges of investing in Uganda, such as frequent power cuts which could significantly affect your business, unless you invest in backup solutions, there are a few 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 hence PROS:
1) The growing middle class in Uganda.
The middle class of any country is important for a "life style" kind of business like a coffee shop. In Uganda this class is growing. In 2010, it was estimated to be 32.6%, up from 28.7% in 2006. Assuming constant growth, I estimate it to be 36% in 2013.
The 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 coffee consumption to increase over 350% from 2004 to 2012.
2) Uganda is Africa's 3rd largest producer of coffee.
About 6% of Uganda 'population relies on coffee directly for a livelihood and so as a result, not counting the indirect value chain including exporters and processors.
I believe that owing to our heavy reliance on coffee, where it is Uganda's largest export, it should be possible to develop a coffee drinking culture, as is the case with Brazil, the world's leading producer and also the 2nd largest consumer of coffee (after the USA).
3) Growth of internet usage
A significant part of the coffee shop culture is to give customers Free internet via WiFi.
This is now rather possible as internet access, and hence usage in Uganda has increased rapidly from only 2.5% in 2006 to 17% in 2012. The increase of telecom providers who offer internet data bundles has helped make internet access more affordable and so I believe this is a key factor in further developing this industry.
CONS
1. Public perception.
Coffee shops in Uganda have been typically associated as being a "Muzungu" (white person) thing. This perception can be easily countered through offering testing campaigns to say the coffee producing farmers. It is also changing with the population dynamics of Uganda. 78% of Uganda's population is under 30. This generation has grown up watching TV and movies (including Hollywood movies). They are also more affluent than their parents and many have traveled the world.
I believe that therefore sufficient demand from Ugandans themselves and not just foreigners.
2. Seasonal business.
This is a seasonal business, first in respect of the dry and rainy seasons of Uganda and secondly during the various times of the day. In order to counter this, the investor needs to consider loyalty programs that are heavily skewed to rewarding customers during down times, such as at lunch, or in hot weather.
3. Competition
I expect that in addition to the ever mushrooming independent coffee shops, there is potentially the threat of global franchises like Starbucks, Cafe Nero , Costa Coffee and the like entering the Uganda market and thus leading to the demise of the local or independent coffee shops.
The investor's option is to either consider early on being a local franchise partner for these brands or focus on heavy differentiation to maintain customer loyalty.
How profitable is the sector?
From a model I have developed, I estimate that the Return on Investment (ROI) for a Coffee shop in Uganda is as follows:
- Startup capital of Shs. 81 million (A)
- Annual revenue of about Shs. 121.5 million (B)
- Net profit of about Shs. 26 million per year (C)
- Return on Investment (ROI) of 3.1 years. (D = A / C)
The basics to get right before investing
1. Organization skills. The margins in this sector can be fairly tight and so you need to have excellent organization skills. As a start you should consider formal barista training for your team. In addition, your bookkeeping should also be regularly done.
2. Marketing. Like many consumer products in the food industry, it is critical to get your marketing right to reward customers. The coffee industry generally follows the 80/20 rule which is that 80% of your business is going to come from 20% of your customers. This means the bulk of your customers are expected to be loyal and repeat customers. You should therefore invest in a customer loyalty scheme.
Final word
The coffee culture is exploding in Uganda. We expect that 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's important to rise above the competition. In order to set up a successful coffee shop, it's crucial to have superb management skills.
