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 that 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 for a “lifestyle” type of business like a coffee shop. In Uganda this class is growing. In 2010, it was estimated at 32.6%, up from 28.7% in 2006. Assuming constant growth, I estimate it will 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 an increase in coffee consumption of more than 350% between 2004 and 2012.

2) Uganda is the third largest coffee producer in Africa.

About 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 due to 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 of USA).

3) Internet usage growth

An important part of coffee shop culture is providing customers with free internet via WiFi.

This is now increasingly made possible by access to the internet, and therefore usage in Uganda has risen rapidly from just 2.5% in 2006 to 17% in 2012. The rise of telecom providers offering bundled Internet data has helped make Internet access more affordable, so I think this is a key factor in further developing this industry.

CONS

1. Public perception.

Coffee shops in Uganda have typically been associated as something “Muzungu” (white person). This perception can easily be countered by offering trial campaigns to coffee farmers. It is also changing with the dynamics of the Ugandan population. 78% of the Ugandan 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 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 hours 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 hope that in addition to the ever-growing independent coffee shops, there is the potential threat of global franchises like starbucks, black coffee, Costa Coffee and the like entering the Ugandan market and thus leading to the demise of local or independent coffee shops.

The investor’s choice is to consider early on being a local franchise partner for these brands or to focus on high differentiation to maintain customer loyalty.

How profitable is the sector?

From a model I have developed, I calculate the return on investment (ROI) for a coffee shop in Uganda to be as follows:

• Initial capital of Shs. 81 million (A)
• Annual income of around Shs. 121.5 million (B)
• Net profit of around Shs. 26 million per year (C)
• Return on investment (ROI) of 3.1 years. (B=L/C)

The basics to get right before investing

1. Organization skills. Margins in this sector can be quite tight, so you need to have excellent organizational skills. For starters, you should consider formal barista training for your team. In addition, your accounting should also be done regularly.

2. Marketing. Like many consumer products in the food industry, doing 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 must invest in a customer loyalty program.

last word

Coffee culture is exploding in Uganda. We expect there to be an increase in the number of coffee shops, not to mention the possibility of global franchises entering the market.

With such a competitive market, it is important to outperform the competition. To establish a successful coffee shop, it is crucial to have excellent management skills.