How many coffee shops are too many for one town to absorb? The question has come up time and time again over my years in the business and I always come to the same answer: there’s no such thing as too many good coffee shops.

Arguably the term ‘good’ is the operative term in that statement; bad coffee, poor preparation and inconvenient locations will not change consumer buying habits. Good ones, however, can change the culture of a local area: increasing volumes of coffee consumption and also frequency of use to make frequenting coffee houses a routine part of daily life in any town. I have yet to see a market anywhere in the world where the good coffee = increased demand model does not work.

The same topic was covered again recently in Toronto, a city that has lately started developing its own higher-end specialty coffee scene:

Last month, two men came into El Almacen, the two-year-old Argentinean-influenced café at Queen and Dovercourt, ordered some coffees and asked the café owner, Silvio Rodriguez, a lot of questions: Where did he buy the tall brass Elektra espresso machine and how much does it cost to operate? What type of beans does he use and how’s business doing? Rodriguez had seen the men going in and out of the Great Hall venue across the street in recent weeks, supervising a number of café-equipment deliveries. He asked why they were so curious, and they told him they were the owners of the Lakeview Lunch on Dundas and Parkdale café The Abbott, and that, in the next month or so, they would be opening a new coffee shop not 50 feet from El Almacen, across from the already bustling Starbucks and within a five-minute walk of a half-dozen other cafés.
“What’s that going to do to my business?,” a worried Rodriguez asks himself now, looking across the street. “What’s that going to do to my customers?”

It’s a question coffee-shop owners all over Toronto are asking, as independent cafés continue to colonize our retail landscape. Along certain stretches of Queen West, Leslieville, Dundas and Kensington, there are independent espresso bars, often run by baristas, on literally every single block. Few local industries, except perhaps condominiums, rival the growth of cafés. But with coffee shops opening on top of each other, serving identical products at similar price points, many owners, such as Rodriguez, are wondering how they will stay in business and continue to grow. Is our café boom sustainable, or are we about to witness the bursting of a foamy latte bubble?

The current coffee boom in Toronto is what industry insiders refer to as the third wave of shops. The first wave hit Toronto’s streets in the middle of the 20th century, when Italian and other European immigrants imported espresso machines and beans from abroad, and placed them in their neighbourhood bars and restaurants. The second wave took shape in the 1980s, when independent specialty roasters and coffee shops brought cappuccino outside this ethnic audience. “When we opened in 1988, the interest rates were higher than the interest in espresso,” says Susan Bate, owner of The Coffee Tree in Bloor West Village, one of Toronto’s oldest independent coffee shops. Bate still recalls standing on the street with a tray of espresso, begging people to try something other than their donut-shop coffee. “I felt like I was the only child in the playground for 10 years.” Then the cappuccino wars began.

Starbucks entered the Toronto market in 1996, opening five stores in one day and setting off an expansion of locations that was countered, move for move, by local chains Second Cup and Timothy’s, which quickly shifted their focus from drip brews to the foamy espresso bandwagon; collectively, they blanketed the city in macchiatos and flavoured syrups. While many now curse the chains as scourges to local businesses, almost everyone in the coffee business cites the franchise war as the catalyst for the current indie boom.

“Second Cup and Starbucks stepped up our game,” says Bate, who credits the chains with creating a market for espresso drinks, turning an imported, premium coffee into a daily staple for millions. “They upped the average sale to my customers in a way that I never could have alone.”

The third, and current, wave of coffee shops came about in the past decade, when a West Coast, barista-driven culture of espresso artistry arrived in town, just as the recession began taking its toll on the large chains. In 2008 and 2009, Starbucks shut down close to 1,000 locations worldwide (mostly in the U.S.) and switched to fully automatic espresso machines; Second Cup withered to a shell of its former self (its number of stores shrank 13 per cent in the past decade); and Timothy’s is barely on the radar, having split off and sold its lucrative roasting business from the retail franchises, which have shown little growth in recent years. The result was a boom in independents, while chains regrouped and licked wounds. (Wondering just how many Starbucks, Second Cups, Timothy’s and—because they serve lattes now, why not?—Tim Hortons there are in Toronto? The Grid found out.)

Michael Riesberry, a café consultant for Zuccarini Co. Ltd., the oldest and largest supplier of espresso machines in the city, believes the chains expanded too quickly and lost sight of quality. As a result, independents run by experienced baristas managed to pick off their customer base. “My [café clients] used to say, ‘If there’s a Starbucks across the street, I’m terrifed,” says Riesberry. “Now, I tell them to look for a Starbucks and open nearby. If Starbucks has done their research, that means a neighbourhood is primed for coffee.”

Riesberry estimates that roughly 100 independent coffee shops have opened in Toronto since 2008 (others peg the number even higher). Most of these shops are small, owner-operated and located in neighbourhoods with heavy foot traffic, reasonable rents and a mix of residential and commercial buildings nearby. They cost anywhere from $25,000 to $100,000 to open, with operating costs ranging from $500 to $1,000 a day and potential daily revenues of up to $2,000 at the high end, and a couple hundred on the low end.

Coffee shops are a relatively simple business to start up, but maintaining and growing profitability can be difficult. A good shop can make anywhere from a few thousand dollars a year in profit to close to $100,000, though rarely more. According to Vida Radovanovic, president of the Canadian Barista & Coffee Academy, who teaches courses to current and future shop owners on opening and running a successful café business, success in this industry requires shop owners to work seven days a week, 12 hours a day. A lot of people go into it with no background, she says, estimating that half of new shop owners are experienced baristas and the rest are professionals looking for an alternative to their desk jobs. The reality, Radovanovic says, is that it’s a very hard business in which to make a living, and most shops squeak by with bare-bones profitability.

David Ginsberg, co-owner of The White Squirrel, across from Trinity Bellwoods Park, sees a zero-sum game playing out in café-rich neighbourhoods, as coffee shops cannibalize each other’s market share. “I don’t think it’s the more the merrier,” he says. “You can’t have several coffee shops along the same strip doing well. We’re not creating new coffee drinkers. People can only physically drink so much coffee each day. Everyone who opens gets some sized bite of another café’s business. If I open near someone else, the best I can hope for is 50 per cent of their business.”

Ginsberg cites the strip of Dundas just north of the park as an example of this. In the past three years, at least half a dozen new cafés opened on the stretch from Bathurst to Dufferin, but in the past several months, Zoots Café, the Communal Mule and Naco Gallery Café have all closed. Ginsberg thinks things will only get tougher as the market price of quality arabica coffee continues to rise thanks to giants like McDonald’s entering the trade. “There’s the real possibility that a small latte could cost $5 in the near future,” Ginsberg says, not just in indie shops like his, but everywhere. “If that’s the case, the coffee business will change,” he says, as the daily staple moves back to an occasional luxury.

Suppliers have already begun to notice the crowding of the marketplace and are taking measures to deal with it. John Rufino, whose company, Classic Coffee, roasts beans and sells them to several hundred shops around town, now refuses to sell to a shop opening within a certain distance of an existing customer. “I don’t feel it’s right when they have to compete with the same product,” says Rufino. “If there’s a certain amount of business within a block, and two or three cafés share it, it doesn’t make sense. They work 12 hours a day, and they won’t make it.”

Still, most café owners feel that competition is healthy and only encourages more business. Andy Wilkin, co-owner with his wife, Jessie, of Leslieville café and roastery Te Aro Coffee Roasters and Ossington’s Crafted by Te Aro, believes each new shop expands the potential market. Though much of Te Aro’s business comes from bean sales to other cafés, both of their shops are in the most populated coffee corridors in the city. Toronto’s had a lot of growth, but the market will get tighter, says Wilkin, who previously worked in commercial real estate in his native Wellington, New Zealand, a small city packed with espresso bars. It’s just supply and demand.

Andrew Hetzel, a specialty-coffee industry consultant, whose company, CafeMakers, works with coffee shops around the world, believes we’re far from a bust. “There’s really no such thing as a point of saturation in specialty coffee,” writes Hetzel, in an email. “If you look at countries and cities with the highest rates per capita of cafés, you find that consumption rises dramatically (three to five times what it is in North America), as does the quality of coffee served. Competition improves taste, which makes coffee consumption more desirable and a part of daily life.”

Far more than other retail trends that blossomed and fizzled in past years—say, crepe restaurants or martini bars—coffee serves as an important indicator. Statistics Canada cites coffee as the country’s second most popular beverage (after water), and the most recent survey by the Canadian Coffee Association has over 60 per cent of Canadians drinking coffee on a daily basis, compared to just 49 per cent of people in the U.S.

Still, new independent shop owners, determined to make it work, are hedging their bets. Entrepreneurial café owners are using increasingly brazen gimmicks, like pairing their shops with dry cleaners, flower shops, furniture and clothing stores, both to differentiate their shop from the one across the street and to bring in other revenue streams. (See: “Coffee Joint Ventures.”)
Successful indie shops have started branching out into mini-chains in order to grow their market share and create economies of scale. Crema Coffee Co., Dark Horse Espresso Bar, Bulldog Coffee, Lit and I Deal Coffee all now operate multiple locations, heralding the start of a new era for the industry. Sam James, the tattooed barista who opened his eponymous shop on Harbord Street in 2009 for under $20,000, opened a second location blocks away on Bloor in late 2010, and will soon open another location in the PATH, by St. Andrew station.

“When I opened the first one, I was 25 years old,” says James. “I had no idea of the economic potential of it all…I just needed to open a shop…. I would have never been able to buy a car or a house or anything like that from that one store.” James expects the PATH store will see as much traffic in a day as Harbord does in a week, which will compensate for the rent, which is quadruple the original shop’s. “You’re talking a business that’s selling something for $2–$3. Your margins are $1. You’ve got to sell a shitload of that stuff to make a buck. That’s the catalyst to open multiple locations.” (For more on the costs of starting a coffee shop, see this breakdown of expenses for Sam James’ Harbord location.)

Back at El Almacen, Rodriguez is chatting with his friend and customer Louie Turiziani, a 30-year veteran of the independent-coffee-shop business, who is assuring Rodriguez he needn’t let the incoming competition across the street get to him. “Don’t worry about it, Silv,” he says. “They can’t do what you do.”

Turiziani himself previously owned Café 163 on College and Saving Gigi on Bloor. In 2009, he opened Rockabilly Rock at the corner of Oakwood and Davenport. It cost him just $4,000 to start and only $700 a month to run, but in the past year, he said he was lucky to make $50 a day. This month, he’s closing it down. Despite this failure, Turiziani plans to open a new shop later this year with a Mexican theme, ideally in the crowded Dundas/Ossington area.
“There’s no way I’m leaving this business,” he says. “I’ll die a café owner.”