What should be considered before investing in this sector?

In addition to 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 cafeteria 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 type of “lifestyle” 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 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 coffee consumption increasing by more than 350% between 2004 and 2012.

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

Approximately 6% of the Ugandan population depend directly on coffee for a living and thus 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 from USA).

3) Growth of Internet use

An important part of the coffee shop culture is offering customers free internet via WiFi.

This is now increasingly possible as Internet access and thus usage in Uganda has increased rapidly from just 2.5% in 2006 to 17% in 2012. The rise of telecom providers that Offering Internet data packages has helped make Internet access more affordable, which is why I believe this is a key factor in further developing this industry.

CONS

1. Public perception.

Coffee shops in Uganda have typically been associated as a “Muzungu” (white person) thing. This perception can easily be countered by offering test campaigns to tell coffee growers. It is also changing with Ugandan population dynamics. 78% of Uganda’s population is under 30 years of age. This generation has grown up watching television and movies (including Hollywood movies). They are also richer 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 regard to the dry and rainy seasons of Uganda and secondly during the different hours of the day. To counteract this, the investor should consider loyalty programs that are heavily biased towards rewarding customers during times of downtime, such as at lunch or in hot weather.

3. Competition

I hope that, in addition to the ever-growing independent coffee shops, there is potentially the threat of global franchises like Starbucks, Nero 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 focus on high differentiation to maintain customer loyalty.

How profitable is the sector?

From a model that I have developed, I estimate that the return on investment (ROI) for a coffee shop in Uganda is 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. (D = A / C)

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 accounting should also be done regularly.

2. Marketing. Like many consumer products in the food industry, correct 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 regular. Therefore, you must invest in a customer loyalty program.

Final word

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 is important to outperform the competition. To establish a successful coffee shop, excellent management skills are essential.