Quality addiction: Ongoing demand for good has boosted industry revenue growth

IBISWorld Industry Report H4511b Cafes and Coffee Shops in April 2015 Stephen Gargano

2 About this Industry 15 International Trade 29 Key Statistics 2 Industry Definition 16 Business Locations 29 Industry Data 2 Main Activities 29 Annual Change 2 Similar Industries 18 Competitive Landscape 29 KeyRatios 2 Additional Resources 18 Market Share Concentration 18 Key Success Factors 30 Jargon & Glossary 3 Industry at a Glance 18 Cost Structure Benchmarks 20 Basis of Competition 4 Industry Performance 21 Barriers to Entry 4 Executive Summary 22 Industry Globalisation 4 Key External Drivers 5 Current Performance 23 Major Companies 7 Industry Outlook 23 Retail Group Limited 10 Industry Life Cycle 25 Operating Conditions 12 Products & Markets 25 Capital Intensity 12 Supply Chains 26 Technology & Systems 12 Products & Services 26 Revenue Volatility 13 Demand Determinants 27 Regulation & Policy 14 Major Markets 28 Industry Assistance

www.ibisworld.com.au | (03) 9655 3881 | [email protected] WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 2 About this Industry

Industry Definition The industry consists of cafes and coffee and catering services, theatre shops serving food and beverages to and establishments that customers on premises. The industry primarily sell alcohol for consumption on excludes takeaway food services, and off premises.

Main Activities The primary activities of this industry are Cafe operation including BYO, licensed, BYO and licensed, and unlicensed establishments Coffee shop operation

The major products and services in this industry are Coffee Food Other beverages

Similar Industries H4520 Pubs, Bars and Nightclubs in Australia Establishments in this industry mainly sell alcoholic beverages for consumption on the premises. Some pubs and offer basic short-term accommodation.

H4513 Catering Services in Australia Enterprises in this industry provide outsourced food services to businesses, government institutions and entertainment venues.

H4512 Services in Australia Companies in this industry sell takeaway food for consumption on and off premises.

H4511a Restaurants in Australia Businesses in this industry provide food and beverages for consumption on premises. This industry primarily engages in full table service.

Additional Resources For additional information on this industry www.acta.org.au Australian Coffee Traders Association www.ausfoodnews.com.au Australian Food News www.cremamagazine.com.au Crema Magazine www.hospitalitymagazine.com.au Hospitality Magazine WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 3 Industry at a Glance Cafes and Coffee Shops in 2014-15

Key Statistics Revenue Annual Growth 10-15 Annual Growth 15-20 Snapshot $4.3bn 3.2% 2.8% Profit Wages Businesses $256.6m $1.1bn 6,701

Revenue vs. employment growth Real household discretionary income Market Share 20 15 Limited 7.2% 15 10

10 5 5 % change % change 0 0

-5 -5 Year 07 09 11 13 15 17 19 21 Year 09 11 13 15 17 19 21 Revenue Employment SOURCE: WWW.IBISWORLD.COM.AU p. 23 Establishments

Key External Drivers 2.0%1.9% ACT Real household 5.6% TAS SA 0.5% discretionary income NT 8.6% Demand from restaurants WA Expenditure on recreation and culture 35.1% NSW Consumer sentiment index 17.5% QLD

p. 4 28.8% VIC SOURCE:SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU

Industry Structure Life Cycle Stage Growth Regulation Level Medium Revenue Volatility Medium Technology Change Medium Capital Intensity Low Barriers to Entry Low Industry Assistance Low Industry Globalisation Low Concentration Level Low Competition Level High

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 29 WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 4 Industry Performance Executive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage

Executive The Cafes and Coffee Shops industry has demand have driven the success of some Summary grown strongly over the past five years, players, but have turned into obstacles owing much of its success to Australia’s for those failing to incorporate them into love for quality coffee and vibrant coffee their business operations. Strong demand culture. This love for coffee supported for coffee has led to an influx of new industry demand in the years following operators, with many artisan the global economic downturn and has and patisseries establishing cafe fuelled revenue growth over the past five operations over the past five years. years. Industry revenue is expected to Industry revenue is forecast to grow by an annualised 3.2% over the five continue growing over the next five years, years through 2014-15. This includes a driven by coffee sales. Consumer demand forecast increase of 2.4% in 2014-15, to for high-quality, convenient food and $4.3 billion. However, competitive beverages is also projected to support pressures have pushed profitability down strong sales of other cafe products. As a slightly over the past five years. result, operators are expected to focus on Australia’s and the premium ingredients and gourmet growing number of small speciality cafes cafe-style in an effort to boost sales and coffee shops have resulted in a high of higher margin products. Strengthening level of competition, low barriers to entry economic conditions and ongoing and low industry concentration. An interest in health and ethical establishment’s success is determined by consumerism should also provide some customer service, the price and quality of support for profit margins. However, produce and the overall cafe experience. high fragmentation in the industry will The coffee quality is crucial, with coffee fuel intense competition, causing brand, texture, temperature, milk and profitability to decline further over the even the level of crema in an next five years. Industry revenue is becoming increasingly important to forecast to increase by an annualised customers. Understanding and catering 2.8% over the five years through 2019- to the specific characteristics of consumer 20, to reach $5.0 billion.

Key External Drivers Real household discretionary income contraction or growth in household The industry is directly affected by incomes and spending capacity places changes in real household discretionary pressure on industry revenue. The coffee incomes. Given the discretionary nature segment is more resistant to changes in of the industry’s products, any discretionary income, given its

Real household discretionary income Expenditure on recreation and culture

15 120

110 10 100

5 90 $ billion % change 80 0 70

-5 60 Year 09 11 13 15 17 19 21 Year 07 09 11 13 15 17 19 21

SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 5

Industry Performance

Key External Drivers perception as an affordable luxury. places where to spend leisure time. continued Discretionary incomes are expected to However, they must still fight for a share rise in 2014-15. of discretionary household expenditure against restaurants, entertainment and Demand from restaurants other leisure and recreational pursuits. Restaurants provide a significant source Expenditure on leisure activities is of competition for industry expected to grow over 2014-15, providing establishments. In many circumstances, an opportunity for the industry to grow. they are a direct substitute for cafes and coffee shops. A rise in the number of Consumer sentiment index consumers heading to restaurants would Changes in consumer sentiment affect place downward pressure on demand for expenditure on discretionary items, coffee shops and cafes, posing a including out. Negative significant threat to the industry. In movements in consumer sentiment often 2014-15, revenue generated by reduce discretionary expenditure and restaurants is expected to rise. increase savings, both of which directly affect the industry’s performance. Expenditure on recreation and culture Consumer sentiment is expected to Cafes are becoming increasingly popular decline over 2014-15.

A robust coffee culture has driven the resilient consumer demand for quality and Current success of the Cafes and Coffee Shops convenient food and . While cafe Performance industry over the past five years. Industry and coffee shop spending is discretionary, players have benefited from Australia’s many consumers consider it an affordable love of quality coffee, which supported the luxury. Therefore, consumers are often industry’s growth in the years following unwilling to forgo their daily cup of coffee, the economic downturn. Industry revenue which provides a stable underlying is expected to grow by an annualised 3.2% revenue base for the industry. Increased over the five years through 2014-15. interest in fair trade and , Revenue is forecast to rise by 2.4% during and an emphasis on premium-quality food 2014-15, to total $4.3 billion. The have also supported revenue over the past industry’s success has been fuelled by five years.

Positive trends Larger workloads and an increase in with other hospitality industries fighting family and work commitments have for a larger share of the cafe trade. This driven demand for industry products competition has restricted food sales over the past five years. Busier lifestyles revenue growth to a degree. However, have led to greater demand for fast and food sales at cafes and coffee shops have convenient food and dining options. been buoyed by Australia’s entrenched Industry operators have taken advantage coffee culture, as consumers have been of this trend, providing more on-the-go purchasing meals and with their items and focusing on fast, efficient coffee. As a result, food has increased as a service. Other industries in the share of industry revenue over the past hospitality sector have also benefited five years. from this trend, with higher consumption A rising trend towards premium food at hotels and restaurants over the past has been reflected in the changing five years. As a result, the industry has products of cafes and coffee shops over the faced greater competition for customers, past five years. Operators have sought to WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 6

Industry Performance

Positive trends benefit from trends in restaurants by Shops industry growing strongly, artisan continued repositioning their businesses to target bakers and patisseries have increasingly more-discerning customers. Therefore, sought to reposition themselves as cafes, have changed dramatically as basic selling coffee together with a range of snacks and items have been gourmet pastries. As a result, the replaced with gourmet equivalents. This industry has captured a growing number trend has provided strong support for of businesses, as operators have added industry revenue, as operators have sought profitable and seating to higher margins. However, higher quality their core businesses. Enterprise and products carry associated higher purchase establishment numbers have followed an costs, which has pushed up the cost of upward trend over the past five years. doing business over the past five years. Employment has also risen to cope with A raft of new entrants from increasing demand. These trends have neighbouring industries have also increased industry revenue over the past dramatically changed the quality of five years, with growth being particularly industry food. With the Cafes and Coffee prominent since 2012-13.

Profitability Industry profitability has weakened only maintain profit margins in an industry slightly over the past five years, as characterised by fierce competition. The competition has restricted margins. highly fragmented nature of the industry However, solid demand and falling coffee has resulted in many establishments - prices for some of this period have particularly more basic coffee shops - supported profit margins. However, the competing on price. The low cost of coffee world price of coffee can be quite volatile. and its relatively homogeneous nature It fell sharply after a high in 2011 (easing have allowed consumers to switch from pressure on profit per cup of coffee) and one cafe to another with relative ease. As then rose abruptly in early 2014 (due to a result, operators have been forced to fears of drought conditions in Brazil). maintain competitive prices, even in the Weather conditions in the world’s face of changing costs. This has caused primary growing areas can affect coffee many operators to implement stricter prices, making margins on coffee sales cost controls, looking to lower labour volatile. Stable coffee consumption in the levels and minimise wastage. Australia’s United States and growing demand from obsession with high-quality coffee has Russia, Germany and China have been provided some support for wages, with supporting historically high coffee prices. quality employed in an attempt While increasing costs throughout the to differentiate stores and boost sales. industry have pushed the average price of The trend towards premium-quality food a cup of coffee upwards, demand for has also supported margins over the past coffee has remained strong. five years, despite overall profitability Some operators have struggled to declining slightly.

Coffee culture Australia’s vibrant coffee culture and the extent to which it is entrenched in daily Independent coffee shops life are underlying drivers of industry have grown at a faster rate success. Coffee is generally considered an affordable luxury and a daily ritual. The than coffee chains emphasis on quality across the industry has led independent coffee houses to which have largely declined over the past grow at a faster rate than coffee chains, five years. Additionally, local demand for WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 7

Industry Performance

Coffee culture quality coffee has boosted demand for inorganically. In December 2014, Retail continued rarer blends, and organic Food Group finalised the purchase of coffee, for which operators can charge a Gloria Jean’s . The acquisition premium price. This coffee culture has consolidated Retail Food Group’s translated into higher revenue and has position as the largest player in the sustained demand for cafes and coffee industry. The majority of the ’s shops over the past five years. With low growth has come through acquisitions, organic growth, some coffee chains have with same-store sales growth being been consolidating in an effort to grow relatively modest.

The Cafes and Coffee Shops industry is Industry expected to grow solidly over the five Industry revenue years through 2019-20, as Australians Outlook 20 remain addicted to coffee. Consumer demand for high-quality coffee and 15 convenient food products will underpin industry revenue growth. Industry 10 revenue is forecast to rise by an 5

annualised 2.8% over the five years % change through 2019-20, to reach $5.0 billion. 0 This includes forecast growth of 4.2% in 2015-16. Growth will be driven by trends -5 towards health consciousness, premium Year 07 09 11 13 15 17 19 21 eating and ethical consumerism. The prevalence of small specialty operators SOURCE: WWW.IBISWORLD.COM.AU and intense competition will continue to affect the industry, requiring greater Employment levels are also expected to operating efficiencies from participants. grow, boosted by rising establishment High demand for coffee and the numbers and the need for quality service. affordable nature of most industry However, operators may seek to temper products will support industry revenue. employment growth to control wage costs Rising discretionary incomes are and increase profit margins. A trend expected to encourage further growth towards smaller establishments will over the next five years. As a result, support operators in their efforts to limit households will spend more readily on employment growth. While operators discretionary products such as coffee, may reduce staff hours through more snacks and meals from cafes and coffee flexible and casual personnel, the shops. Increasing demand will support industry will remain highly labour- growth in both enterprises and intensive, leading operators to seek establishments over the next five years. greater cost savings elsewhere.

Convenience Cafes and coffee shops will benefit as convenient meals, particularly catering to consumers spend more on eating out over lunchtime traffic. Cafes are expected to the next five years. With consumers living take some market share from restaurants increasingly busy lives, demand will be as consumers move away from formal driven by their desire for convenient food dining in favour of more convenient and beverages. As a result, cafes are cafe-style meals and snacks. As the expected to provide a wider range of fast, quality of cafe food rises, a further shift WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 8

Industry Performance

Convenience away from restaurants is expected. quality will be particularly intense with continued Restaurants are projected to expand their regards to coffee. Australia’s coffee cafe operations in an effort to win back culture is becoming increasingly serious, customers. This trend will pose strong with consumers well aware of what competition for industry operators. constitutes a good coffee and easily able Consumer demand for healthier, to spot a poor coffee. The prevalence of premium-quality food and beverages will online reviewing websites, such as also underpin industry performance. Urbanspoon, ensures that cafes will Cafes that offer diverse menus with an continue to be judged by their quality and emphasis on fresh and premium service. This is expected to lead operators ingredients are expected to be the best to allocate funds towards higher quality performers, as discerning consumers coffee blends, better baristas and search for better quality. This focus on premium ingredients in meals.

Competition Small and specialised operators are down and quality forces costs up, expected to dominate the industry over operators will need to control efficiencies the next five years. Franchised operations to support profit. Operators will seek to will struggle as consumers generally minimise wage costs, reduce wastage and associate better quality, ambience and reduce purchase costs. Efforts to increase experience with smaller independent profit will also result in a stronger focus cafes. As a result, the industry will on higher margin products. With coffee remain highly fragmented, with larger sales remaining solid, cafes are expected chains unable to expand their market to focus on selling quality meals and share. Operators will seek to differentiate enhanced breakfast and offerings. themselves to drive sales, with Despite this, strong competition will competition focused on price and quality. cause overall profit margins to ease As price competition forces revenue slightly over the next five years.

Opportunities Over the next five years, niche markets will provide opportunities for the industry, Fair trade products will with the growing trend towards ethical consumerism particularly prominent. become more prevalent Industry players will promote their ethical and contribute to industry business practices by using fair trade revenue growth coffee and food products. Fair trade products ensure that multinational corporations are not exploiting coffee consumers become more concerned with growers and food producers in the the provenance of food and beverages, developing world. Fair trade growers and ethically sourced products will become farmers typically have better working increasingly popular and more people will conditions, obtain higher prices for their be willing to pay a premium for them. This product and receive education about trend is expected to support growth in sustainable agricultural practices. As industry revenue over the next five years. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 9

Industry Performance

Coffee chains While the past five years have firmly foreign brands. The group already owns a established the dominance of large number of prominent locations independent operators, a shake-up of through the 7-Eleven brand, which opens major coffee chains is expected over the up the possibility of some combined or next five years. , which is the small-format stores. Coffee chains will world’s most renowned coffee chain, is also receive a boost through Retail Food expected to relaunch under the Group’s acquisition of Gloria Jean’s ownership of the Withers Group, the Coffees. Retail Food Group manages a owner of the 7-Eleven brand. While number of successful franchised Starbucks was unsuccessful in its restaurants and cafes, targeting shopping previous attempt to capture the hearts of malls and regional and suburban centres, Australian coffee drinkers, the Withers where passing traffic is high and the Group has a track record of success with importance of quality is less pronounced. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 10

Industry Performance Life Cycle Stage The industry’s contribution to the economy is growing faster than GDP The rapid increase of new cafes and coffee shops in Australia is a strong indication of a growth There is scope for operators to capitalise on the introduction of new products and popular consumer trends Technology is enabling industry operators to reach more consumers and increase brand recognition

20 Maturity Quality Growth Key Features of a Growth Industry Company High growth in economic consolidation; importance; weaker companies Revenue grows faster than the economy level of economic close down; developed Many new companies enter the market importance stable technology and markets Rapid technology & process change Growing customer acceptance of product 15 Rapid introduction of products & brands % Growth in share of economy in share % Growth

10

Quantity Growth Many new companies; minor growth in economic importance; substantial 5 technology change

Tea, Coffee and Other Food Manufacturing 0 Cafes and Coffee Shops Catering Services Restaurants Fast Food Services Meat, Poultry and Smallgoods Wholesaling

-5 Decline Shrinking economic importance

-10 -10 -5 0 5 10 15 20 % Growth in number of establishments

SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 11

Industry Performance

Industry Life Cycle The Cafes and Coffee Shops industry is becoming more widespread, driven by currently in the growth phase of its trends in health consciousness, ethical economic life cycle. Industry value added, consumerism and an increased focus on  This industry which measures the industry’s product provenance. Operators are able is Growing  contribution to the overall economy, is to charge a premium for these products forecast to grow by an annualised 3.1% as consumers become more concerned over the 10 years through 2019-20. In with ethical sourcing. contrast, Australia’s GDP is forecast to The rate of industry technological grow at 2.7% over the same period. This change is moderate, and has largely outperformance indicates that the focused on efficiencies. This may industry is growing as a share of the indicate that the industry is moving overall economy. towards the mature stage of its life cycle. The number of businesses and However, the industry has turned to products in the industry is rising swiftly. technology in marketing and promotion, The rapid growth in new cafes and coffee with operators cultivating a strong shops in Australia is one of the strongest online presence. This has been achieved indications that the industry is currently primarily through company websites in the growth phase of its life cycle, with and social media. Online review enterprises and establishments rising websites, such as Urbanspoon, have also strongly over the 10 years through changed the operating landscape. 2019-20. This growth is also evident in Consumers are increasingly turning to the increased range of new products. online sources in choosing cafes, with Opportunities exist for operators to the ability to quickly access information capitalise on new consumer preferences. including operating hours, prices, Organic products and fair trade coffee are menus and reviews. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 12 Products & Markets Supply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations

Supply Chain KEY BUYING INDUSTRIES Z9901 Consumers in Australia Households account for the majority of industry demand and revenue.

KEY SELLING INDUSTRIES C1199 , Coffee and Other Food Manufacturing in Australia Manufacturers in this industry supply coffee and tea to cafes and coffee shops for resale. F3602 Meat, Poultry and Smallgoods Wholesaling in Australia Wholesalers in this industry supply meat for preparation of items. F3603 Dairy Produce Wholesaling in Australia Firms in this industry supply dairy and produce used in the preparation of foods. F3605 Fruit and Vegetable Wholesaling in Australia This industry supplies fruit and vegetables to accompany main menu items. F3606a Liquor Wholesaling in Australia Companies in this industry supply a range of liquor to licensed industry venues.

Products & Services Over the past five years, cafes and coffee shops to purchase coffee, particularly shops have grown in both number and outside lunch hours. Niche and diversity. The industry has moved further independent coffee houses tend to into restaurant territory, going beyond differentiate themselves based on the standard hot drinks and cafe snacks to quality of their coffee. As a result, the provide more gourmet meals. The type of coffee beans used, the strength industry has also diversified its offering and the style of preparation can vary of food as many artisan bakers have significantly across operators. opened cafes. Industry products can be Consumers are increasingly paying broadly segmented into coffee, other attention to the origins of their coffee, beverages and food. with growing demand for fair trade and organic blends. Larger generic coffee Coffee chains tend to offer a more standard Coffee is the largest segment in the range of coffees, with an emphasis on industry and has increased as a share of added flavours and syrups. Growth in revenue over the past five years. The demand for coffee is expected to majority of customers visit cafes or coffee continue over the next five years,

Products and services segmentation (2014-15)

21.5% Other beverages 51.0% Coffee

27.5% Food

Total $4.3bn SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 13

Products & Markets

Products & Services although at a slower rate as the market patisseries have opened cafe continued reaches saturation. operations, adding coffee service and seating to their businesses. As a result, Food this segment has grown strongly as a The food sold by cafes and coffee shops share of revenue over the past five predominantly consists of breakfast years, with more cafes focusing on food and lunch items such as eggs and , as a point of difference. sandwiches, wraps, muffins, tarts, cakes and cookies. Coffee shops tend to Other beverages sell more sweet food items. Cafes In addition to coffee, industry operators typically offer a more extensive menu offer a range of other beverages. This with both sweet and options, segment accounts for the smallest share with an emphasis on breakfast trade. of industry revenue. Beverage sales can be However, many cafe-style operations contingent on season and location. Cold with large breakfast menus also provide beverages, such as milkshakes, sell better service, thus falling into the in warmer seasons, while consumers are Restaurants industry. This product more likely to purchase hot beverages segment has increased as a share of such as tea, and chai in the industry revenue over the past five winter months. This segment also years, as cafes have broadened their includes bottled water, juices and menus to compete with restaurants and carbonated drinks. These products often fast-food providers. Over the past five come in premium glass bottles, attracting years, the profitability of coffee sales a higher price. This segment has declined has also driven a range of premium significantly as a share of revenue over food producers into the industry. A the past five years, as coffee has become number of niche artisan bakeries and increasingly sophisticated and popular.

Demand Demand for cafes and coffee shops is increase in income-rich and time-poor Determinants reliant on several factors, including households. This trend has arisen largely consumer discretionary income and due to rising work commitments. With lifestyle trends. The level of discretionary more consumers living on-the-go, cafes income is a major driver of demand for have also become popular locations for industry products. As most industry business meetings, discussions and products are discretionary, consumer general leisure time. confidence levels are also important. A Australia’s vibrant coffee culture is rise in real income can boost demand for another driver of industry demand. The higher value food or products sold national obsession with high-quality through cafes and coffee shops. coffee took off with the influx of Alternatively, a fall in real household European migrants after World War II income can lead to restricted spending on and the subsequent emergence of discretionary items, decreasing industry European-style cafes. Competition within demand. Many consumers consider coffee the industry is intense, with local cafes an affordable luxury, making demand for competing fiercely. Success is reliant on a the product more resilient, while cafe better understanding and incorporation meals are much more discretionary. of the nation’s coffee culture. Therefore, Changing lifestyles can affect demand size or global market share is not for cafe and coffee shop products. necessarily a determinant of success. Convenience, value for money and time Rather, it is crucial for operators to all affect demand to some degree. The understand the national preference for increase in the number of cafes over the quality, taste, presentation, ambience past five years has corresponded with an and customer service. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 14

Products & Markets

Major Markets Given the nature of the industry’s to focus spending primarily on coffee and products and services, discretionary other beverages. While there may be a income levels have a significant effect on small increase in food consumption, the product demand. As a result, the major daily coffee is expected to contribute the markets are based on income largest share to this market’s distribution. While the industry’s food consumption. This market has increased offering is highly dependent on income as a portion of industry revenue over the levels, the strength of Australia’s coffee past five years. However, this trend faces culture makes coffee consumption less a significant threat from cheaper reliant on income. alternatives over the next five years.

Lowest income quintile Middle income quintile Many consumers, across all income The largest contribution to industry quintiles, consider coffee an affordable revenue comes from the middle income luxury. As a result, consumers in the quintile. This proportion is a result of the lowest income quintile are more likely to mixture of high expenditure on more cut spending in the competing expensive cafe meals and beverages, and Restaurants industry rather than forgo a high levels of on-the-go of coffee. Many consumers view their consumption from independent brewers. coffee as an affordable and essential part Total spending by this market has of their daily routine. This market is increased over the past five years, but its expected to spend at coffee chains and contribution to the industry has declined cafes, purchasing beverages rather than as the lower income quintiles have grown food, due to the relatively inexpensive at a faster rate. nature of on-the-go coffees. This market has grown over the past five years as Fourth income quintile coffee has become an integral part of The fourth income quintile is expected to daily life for all income quintiles. contribute the second-largest share of However, competition from convenience industry revenue. Coffee is entrenched in stores and fast-food operators has the daily life of consumers in this market. provided a cheaper alternative for lower While this market typically has high earners, which will likely restrain growth expenditure on food in addition to coffee, from this market over the next five years. some restaurant substitution does occur. The popularity of coffee has led many Second income quintile restaurants to introduce cafe-style The second income quintile is also likely operations during the breakfast period,

Major market segmentation (2014-15)

11% Lowest income quintile 30% Middle income quintile 16% Second income quintile

19% Highest income quintile 24% Fourth income quintile Total $4.3bn SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 15

Products & Markets

Major Markets encouraging consumers away from cafes contribute a lower share of revenue due to continued and coffee shops. This has resulted in this market’s tendency to spend more lower industry-based consumption time and money at higher end restaurant relative to income levels over the past five and dining establishments. Fine coffees years. As a result, the share of brewed by specialty coffee houses and consumption has decreased modestly cafes are becoming increasingly popular over the past five years. with this market. However, with many restaurants introducing similar products, Highest income quintile this market has declined as a share of The highest income quintile is expected to industry revenue over the past five years.

International Trade The industry primarily services the needs international trade occurs within the of domestic customers. Food and industry. While the consumption of beverages from cafes and coffee shops are international visitors is significant, it is made for the purpose of consumption outweighed by domestic consumption of within Australia. As a result, no industry goods. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 16

Products & Markets

Business Locations 2014-15

NT 0.5

QLD 17.5

WA 8.6

SA 5.6

NSW 35.1

ACT 2.0

VIC 28.8

Establishments (%) Cold Zone (<10) TAS 1.9 <25 <50 Hot Zone (<100) Not applicable

SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 17

Products & Markets

Industry business locations are generally Business Locations Distribution of establishments vs. population spread according to population and income distribution. As a result, the 40 majority of industry establishments and revenue earned is concentrated in the eastern states, where the majority of the 30 Australian population lives. Businesses also rely on population density to provide 20 strong markets for clients. This provides Percentage further grounds for the concentration of 10 businesses along the eastern seaboard, where population is more concentrated. 0 SA accounts for the NT WA VIC TAS ACT QLD largest share of industry revenue and NSW establishment numbers, followed by Victoria. Over the past five years, the relative share of retail revenue generated Establishments by New South Wales has fallen, in Population keeping with weak growth in the state’s SOURCE: WWW.IBISWORLD.COM.AU share of total population and stronger growth elsewhere. Victoria’s share of the Tasmania, the Northern Territory and total industry revenue has grown steadily the Australian Capital Territory have over the past decade due to Melbourne’s distributions similar to their share of the entrenched coffee culture. This trend, total population. These states and reflected in the European-style cafes and territories are the least populous in coffee shops mostly in the inner city Australia and exhibited a slower rate of areas, is becoming more widespread. population growth. Western Australia Queensland also holds a large portion of has been strengthened by growth during establishments, although substantially the mining boom, although its more less than New South Wales and Victoria. dispersed population hinders industry Western Australia, South Australia, revenue growth. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 18 Competitive Landscape Market Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalisation

Market Share The industry has a low level of market unable to influence the industry in terms Concentration share concentration, with only one of price or product trends. The strong company holding over 5.0% of the independent coffee culture in Australia, market. The industry is highly which places an emphasis on quality over Level fragmented and traditionally quantity, has restricted the influence and Concentration in encompasses a large number of single- growth of chain stores. This is especially this industry is Low  establishment owner-operated cafes. This true in urban centres, where the coffee fragmentation is not expected to change culture is most prominent. However, much over the next five years. Consumers changing ownership within the industry are expected to drive the trend towards has pushed concentration higher over the smaller operators and niche providers, past five years, as major chains continuing to choose independent cafes consolidated. Retail Food Group (RFG) and coffee shops over chain stores. has aggressively expanded its portfolio of While independent operators dominate coffee shops, acquiring Michel’s the market, there are some franchised Patisserie, BB’s Cafe, Esquires Coffee, and coffee shop or cafe operators in the most recently, Gloria Jean’s Coffees. As a industry. The most prominent chains result, RFG is now the industry’s largest include , Gloria Jean’s player. A relaunch of the Starbucks brand Coffees and Michel’s Patisserie. While also appears imminent, with the local these chains operate a number of stores, rights purchased by the Withers Group in they have limited market power and are May 2014.

Key Success Factors Having a clear position in the market wastage, especially with regard to food As the industry is highly competitive, it is inputs. critical for operators to have an excellent IBISWorld identifies understanding of their market and the Effective quality control 250 Key Success ability to quickly respond to changing A consistently high level of quality in the Factors for a customer tastes and preferences. preparation, presentation and serving of business. The most coffee and food items is required to important for this Business expertise of operators satisfy customer expectations and to Business expertise, such as experience in maintain positive word-of-mouth. industry are: hospitality or retail, is a crucial factor to succeeding in an industry characterised Access to multiskilled and by high revenue, low profit and high flexible workforce propensity for losses. Operators need access to a high number of skilled, casual and permanent wait Effective cost controls staff, cooks, chefs and hands to For an industry characterised by low maintain quality customer service, profit margins, it is important that especially during periods of peak industry players minimise costs and demand.

Cost Structure The cost structures of industry operators to increase the popularity of their Benchmarks are largely alike, with the majority of establishment and sell high-margin food establishments being similar in size and products while minimising costs. operations. High levels of competition over the past five years have placed Profit pressure on profit, forcing companies to Profit can vary substantially among implement stricter cost controls. Profit is players, depending on the size of highly dependent on an operator’s ability operations, economies of scale, cost WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 19

Competitive Landscape

Cost Structure control and the ability to develop a leading operators to employ highly Benchmarks fashionable image. With low margins, the skilled and expensive baristas to boost continued ability to drive sales while limiting costs is sales. Wages are expected to decline pivotal in boosting profit and avoiding mildly as a share of revenue over the next losses. Profit margins have fluctuated over five years due to a trend towards smaller the past five years, but have fallen overall. cafes that require less staff. Substantial competition and rising wage costs have driven this decline. Operators Purchases have sought to support profitability by Purchases account for the largest share of providing a wider range of food options, industry revenue. This segment includes which attract higher margins and increase the cost of coffee beans, food items and revenue per customer. other ingredients, and beverages for resale. Pre-packaged items, such as soft drinks Wages and bottled water, are typically purchased The Cafes and Coffee Shops industry is from wholesalers. Cakes, pastries and highly labour-intensive, as are most other savoury items are often sourced from hospitality industries. All aspects of cafe local suppliers and bakers, although some operation require manual labour. These premium items are made on site. Purchase include food preparation, coffee making, costs have increased over the past five , cleaning and customer service. years due to a wider variety of Wages account for the second-largest complementary items being available, such share of industry revenue in 2014-15, and as cakes and sandwiches. The availability this share has increased over the past five of premium food provides a significant years. Australia’s obsession with high- competitive edge for operators, resulting in quality coffee has supported some wage higher purchase costs. However, operators growth among baristas. Coffee quality need to be careful to monitor stock of food has become pivotal in attracting clientele, to avoid wastage. Operators have received

Sector vs. Industry Costs

Average Costs of all Industries in Industry Costs sector (2014-15) (2014-15) 100 5.9 n P r o fi t 8.0 n Rent 7.9 14.3 n Utilities 2.5 n 80 3.7 Depreciation 2.4 1.5 n Other 18.3 12.5 n Wages n Purchases 60 25.0 26.2 40 Percentage of revenue Percentage

20 33.5 38.4

0 SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 20

Competitive Landscape

Cost Structure some respite from coffee prices, which segment reflects capital expenditure, Benchmarks have fallen from their 2011 peak. which includes the fitting out of cafes and continued coffee shops. Over the past five years, Rent depreciation has declined as a proportion Rent costs involve the leasing of premises of industry revenue, as smaller coffee for the operation of cafes. Over the past establishments with lower capital five years, rent has been a significant cost investments have become more for industry players and has increased as prevalent. Operators are also increasingly a share of revenue. Rent varies greatly by seeking to lease equipment such as location and is highest in major cities expensive coffee machines to reduce such as Sydney and Melbourne. Desirable start-up costs, further reducing locations are typically found in areas with depreciation. The trend towards leasing high passing traffic, enabling operators to equipment has been exacerbated by a attract customers for a quick coffee. With high failure rate, with operators choosing the number of establishments rising, to reduce risk by leasing equipment. desirable locations are becoming harder to find. This competition is pushing up Other rental costs, and this trend is expected to Other costs for the industry include continue over the next five years. As a payments for subcontractors, utilities, result, new entrants are increasingly insurance, repairs and maintenance. Cafe choosing smaller locations to establish operators also incur costs for tax, their businesses. marketing, transport, cleaning, laundry, legal and accounting services and other Depreciation administrative costs. Many of these costs Depreciation accounts for a small are relatively fixed and decline in share as proportion of industry revenue. This cost revenue increases.

Basis of Competition Operators in the industry face a high level The broad range of cafes available has of competition. Players are forced to also minimised switching costs for compete both against other cafes and consumers. Most operators now provide Level & Trend coffee shops, and against other hospitality a range of quality food in addition to Competition in industries. Furthermore, over the past coffees such as espresso, , cafe this industry is two years, significant price competition , and with a High and the trend has emerged from external sources. range of milk options. This quality focus is Increasing  has extended to food, with more gourmet Internal competition options available. The overall trend Internal competition is fuelled by the towards higher quality has also been industry’s low barriers to entry. The ease supported by a focus on ambiance, with a of entry stems from low start-up costs, strong emphasis on providing the best especially when operators have the overall coffee experience. Internal option to lease major items instead of competition is not significantly based on having to buy them upfront. These low price, with most cafes applying similar barriers have resulted in the development prices to their range of coffees. of a highly fragmented industry. The high number of small coffee shop and cafe External competition establishments in Australia further Industry players face competition from intensifies competition. Cafes and coffee other hospitality establishments such as shops compete on the basis of location, as restaurants, casinos, hotels, pubs, bars consumers demand convenience from and clubs. Cafes and coffee shops are their coffee provider and are unlikely to particularly susceptible to competition travel long distances for a coffee. from restaurants, many of which also WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 21

Competitive Landscape

Basis of Competition serve coffee and other substitutable With many individuals consuming continued products. Industry operators have sought coffees on their way to work, these to compete on convenience and cost, operators have marketed themselves as increasing their range and quality of food fast, convenient and cheap. This has choices. This has been particularly evident allowed these operators to capture a in city areas in competition for lunch-time share of the coffee trade and has also trade, with many consumers moving away encouraged some consumers to purchase from traditional restaurants towards more an additional coffee due to the low convenient, cheaper cafe meals. prices. 7-Eleven initiated this trend Over the past two years, fast-food through the introduction of $1.00 operators and convenience stores have coffees, with fast food operators quickly sought to cash in on the coffee market. following suit.

Barriers to Entry Barriers to entry in the Cafes and Coffee Shops industry are low, as indicated by Barriers to Entry checklist Level & Trend the high number of entries and exits. Competition High New operators can enter with relative  Concentration Low Barriers to Entry ease, minimising establishment costs by in this industry are Life Cycle Stage Growth leasing premises, equipment, furniture Capital Intensity Low Low and Increasing  and fittings. Furthermore, many Technology Change Medium prominent coffee manufacturers also Regulation & Policy Medium reduce start-up costs by supplying Industry Assistance Low branded items such as windbreaks,

umbrellas, signs, cups and plates and SOURCE: WWW.IBISWORLD.COM.AU even staff uniforms. Entry to the industry is often available through franchising, making a loss, which may discourage with start-up costs covering outfitting some potential entrants. and equipment, as well as training and The level of competition between computer systems for a cost. industry players can be fierce, deterring There are no formal qualifications new entrants. Competition is higher in required to operate in the industry, desirable, more populated locations as although experience and training in the many cafes and coffee shops are located hospitality industry can be crucial in in close vicinity. New entrants also have a running a successful cafe. Low barriers to high propensity for failure, which can be entry, coupled with the fragmented costly. These pressures may provide as nature of the industry, means that new significant deterrent to new entrants. entrants can gain market share without However, new players can boost their competing with dominant major players. competitive advantage through product The majority of cafes and restaurants are differentiation, promotions, branding small businesses, employing less than 20 and skilled staff to ensure the quality of people. This suggests plenty of scope for food, beverages and customer service. new entrants to compete with existing Regulation also provides a barrier to establishments, and subsequently carve entry, covering areas including food out their own position in the market. handling and safety. Finally, licences are However, low margins across the necessary for liquor sales, although these industry increase the possibility of are becoming easier to obtain. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 22

Competitive Landscape

Industry The level of globalisation in the Cafes and company was unable to establish Globalisation Coffee Shops industry is low, although the significant market share, closing trend is increasing. The majority of underperforming stores in 2008. This operators in the industry are Australian- failure demonstrates the importance of Level & Trend owned and operate solely within the understanding the local coffee culture and Globalisation in domestic market. However, several coffee providing a coffee experience that meets this industry is chains within Australia are owned by with consumer preferences. However, Low and the trend international coffee houses, or have a with the local rights to Starbucks having is Increasing  strong international presence. The Coffee recently been purchased by the Withers Club and Coffee Hit are ultimately owned Group, it is likely that the brand will be by Minor International PCL - based in relaunched in Australia. Thailand - while is owned A number of Australian cafe owners by the Dubai-based Group. have taken their concepts overseas. Both However, major coffee chains have been New York and London are increasingly unable to increase their market share awash with Australian cafes, with significantly in the local industry. US- Australian-born and trained baristas based Starbucks exemplified the failure of seeking to introduce fine coffee to chains in the Australian market. The markets traditionally perceived as serving company grew quickly in the early 2000s lower quality coffee. The Australian after entering the Australian market. coffee scene is now internationally Despite this rapid expansion, the recognised as among the world’s best. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 23 Major Companies Retail Food Group Limited | Other Companies

Major players (Market share) 92.8% Other

Retail Food Group Limited 7.2% SOURCE: WWW.IBISWORLD.COM.AU

Player Performance Retail Food Group Limited is a publicly listed company that operates in the Retail Food Group Limited - industry through Michel’s Patisserie, industry segment performance* Retail Food Group BB’s Cafe, Esquires Coffee and the recently acquired Gloria Jean’s Coffees. Revenue Limited Year ($ million) (% change) Market share: 7.2% The company manages a diversified 2009-10 232.3 -6.5 Industry Brand Names  range of food service brands, and has Michel’s Patisserie sought to grow primarily through 2010-11 237.7 2.3 Gloria Jean’s Coffees acquisitions over the past five years. 2011-12 241.3 1.5 BB’s Cafe Michel’s Patisserie has traditionally 2012-13 193.2 -19.9 contributed the largest share of the Esquires Coffee 2013-14 191.3 -1.0 company’s industry segment revenue. The brand was acquired by Retail Food 2014-15 314.1 64.2 Group in 2007 and has over 320 stores **Estimated income from all stores, excluding franchise fees across Australia. SOURCE: ANNUAL REPORT AND IBISWORLD Retail Food Group acquired Gloria Jean’s Coffees for $163.5 million in December 2014. The acquisition has company’s focus on regional shopping significantly increased Retail Food centres has proven successful. The Group’s market share, making them the closure of several underperforming industry’s only major player. The global Michel’s Patisserie cafes and stores with Gloria Jean’s Coffees brand is composed unfavourable leases pushed network of over 800 cafes worldwide, including sales lower during 2012-13, although over 354 in Australia. As a result of the same-store sales grew modestly. More purchase, Retail Food Group now owns recently, the acquisition of Gloria Jean’s the two largest chains in the industry. Coffees is expected to provide a strong boost to revenue, contributing to growth Financial performance during the second half of 2014-15. The Retail Food Group’s industry segment company’s industry segment revenue is revenue has grown strongly over the expected to grow by an annualised 6.2% past five years as the company over the five years through 2014-15, established itself as the industry’s outperforming the wider industry in dominant player. While the local coffee nominal terms. This growth is expected market has not been traditionally to continue as the brand will contribute favourable for large brands, the a full year of revenue during 2015-16.

Other Companies The Cafes and Coffee Shops industry is small businesses employing less than 20 highly fragmented and industry players people, although there has been some are often owner-operators with one growth in the number of franchised establishment. The majority of cafes are operators over the past five years. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 24

Major Companies

Other Companies Minor DKL Food Group Pty Ltd 1998. The company has since grown to continued Estimated market share: 4.0% over 70 locations throughout Australia, Minor DKL Food Group Pty Ltd most of which are concentrated in the represents the Australian operations of Melbourne CBD and other capital cities. the Thailand-based Minor International In 2009, ’s hospitality PCL. The company is the franchisor for division acquired Hudsons Coffee, with the Coffee Club and Coffee Hit. The plans to expand the company in Australia Coffee Club accounts for the majority of and abroad. the company’s industry segment revenue. The Coffee Club is a franchised chain that Starbucks Coffee Australia Pty Ltd began in in 1989. The brand has Estimated market share: Less than 1.0% since grown to over 360 outlets Starbucks is the world’s largest coffee throughout nine countries worldwide, chain. The company started operations in with over 260 of these stores in Australia. 1971 and has over 15,000 stores The Coffee Club has been the fastest worldwide. Starbucks entered the growing coffee chain over the past five Australian market in 2000 and opened 81 years, supported by its emphasis on food stores nationwide. Over the first three sales. The company’s other chain of years, the company’s revenue grew by coffee shops - Coffee Hit - is represented 18.0%. However, in 2008 the company by seven stores throughout Australia. closed 61 underperforming sites in Sydney, Melbourne and Brisbane, with a Emirates Leisure Retail (Australia) loss of 685 jobs. Only 24 coffee shops Pty Ltd continue trading in metropolitan areas. In Estimated market share: 1.0% May 2014, the Withers Group - the local Emirates Leisure Retail (Australia) Pty owner of the rights to 7-Eleven - acquired Ltd operates in the industry through the the Australian rights to Starbucks. The Hudsons Coffee chain. Hudsons Coffee is company intends to expand the a franchise chain of coffee stores that Australian presence of Starbucks through commenced operations in Melbourne in a network of company-owned stores. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 25 Operating Conditions Capital Intensity | Technology & Systems | Revenue Volatility Regulation & Policy | Industry Assistance

Capital Intensity The Cafes and Coffee Shops industry exhibits a low level of capital intensity. Capital intensity Operators spend an estimated $0.06 on Capital units per labour unit Level capital investment for every dollar paid 0.5 The level of capital as wages. Cafe and coffee shop operators intensity is Low  require significant labour input in all 0.4 areas, ranging from coffee and food 0.3 service to cooking and cleaning. Most positions are relatively unskilled, with 0.2 some training required for roles such as 0.1 coffee making. Many cafes and coffee 0.0 shops lease both their premises and Economy Accommodation Cafes and much of their equipment to lower the and Food Coffee Shops Services initial capital outlay and reduce risk. This Dotted line shows a high level of capital intensity significantly lowers capital intensity and SOURCE: WWW.IBISWORLD.COM.AU decreases start-up costs for new entrants. Cafes and coffee shops typically require of the business. Larger operators may more basic than restaurants. As own more specialised equipment and a result, capital intensity is also lower, invest in higher quality coffee machines. with less equipment required to operate The costs for initial setup and the types in the industry. of equipment needed can also differ The level of capital intensity can differ greatly between larger cafes and smaller among players, depending on the scale coffee vendors. Capital intensity has

Tools of the Trade: Growth Strategies for Success

New Age Economy Investment Economy Recreation, Personal Services, Information, Communications, Health and Education. Firms Mining, Finance and Real benefi t from personal wealth so Estate. To increase revenue stable macroeconomic conditions fi rms need superior debt are imperative. Brand awareness management, a stable and niche labour skills are key to macroeconomic environment product differentiation. and a sound investment plan. Capital Intensive

Cafes and Coffee Shops Restaurants Labour Intensive Catering Services Tea, Coffee and Other Traditional Service Economy Food Manufacturing Old Economy Wholesale and Retail. Reliant Fast Food Services Agriculture and Manufacturing. on labour rather than capital Traded goods can be produced to sell goods. Functions cannot using cheap labour abroad. be outsourced therefore fi rms To expand fi rms must merge must use new technology or acquire others to exploit or improve staff training to economies of scale, or specialise increase revenue growth. in niche, high-value products.

Change in Share of the Economy SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 26

Operating Conditions

Capital Intensity remained steady over the past five years, also find some support in the push by continued although an increasing focus on food - operators to improve the coffee such as in-house baked products - may experience. This will lead to more cause capital intensity to rise over the frequent remodelling of cafes to next five years. Capital expenditure will maintain a fashionable edge.

Technology & Systems The Cafes and Coffee Shops industry cashier systems that are able to manage exhibits a medium level of technology payments, inventory, employees, Level change. Most functions in the industry reporting, analytics and also allow are heavily labour oriented, decreasing operators the mobility of this data. The level of the need for technology. As a result, most Operators are also able to easily move Technology Change technological advancements in the data between tablets, smartphones and is Medium  industry aim to improve systems and computers, simplifying the daily procedures to provide better quality of operation of businesses and improving service and reduce customer wait time. convenience in sharing information Wireless electronic ordering systems that with third parties such as accountants. link front-of-house orders to the kitchen Providers of these applications such as are an example of such innovation. With Revel or POSLavu also sell related a high customer focus on quality, hardware in order to easily integrate technology has also sought to support tablet applications into daily business. this trend. Advances in coffee machines These systems are relatively are a prominent example, as operators inexpensive, user friendly and compact, aim to provide better quality coffee to making them appealing for operators more discerning customers. with small businesses. The industry has also been affected by Loyalty card applications are moving changing technology in the supply chain. the traditional coffee card into online Successful operators need to maintain platforms. Applications such as strict stock controls to avoid wastage. eCoffeeCard allow consumers to keep They also require access to a range of their coffee cards from various cafes on good-quality, fresh ingredients. Online their phone, simply scanning a barcode ordering systems with wholesalers and when they purchase a coffee. The suppliers has provided operators with a application has also moved to provide greater level of control over ordering and payment services through its CafeWallet has increased efficiencies in coordinating function, where users can pay for their supplies such as coffee beans and other coffee via an account. The uptake of such pre-prepared food items. technology is increasing among users and Smartphone and tablet technology is cafes, with the convenience of online also driving change in the industry. platforms particularly attractive to Operators are introducing tablet-based operators and customers.

Revenue Volatility Revenue volatility in the Cafes and Coffee rebounded after the global financial Shops industry is moderate, mainly due crisis. However, the relatively to relatively strong growth over the past inexpensive nature of industry products Level five years. Australia’s vibrant coffee and strong demand have fuelled the The level of culture and expanding range of quality perception of coffee as an affordable Volatility is Medium  cafe food has driven growth. Despite this luxury. This has allowed the industry to strong performance, overall volatility was survive during tough economic times as driven upwards by a spike in revenue consumers sought larger savings growth during 2009-10, when demand elsewhere, unwilling to sacrifice their WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 27

Operating Conditions

Revenue Volatility daily coffee. Volatility is also typically convenient food and beverages. Changes continued dependent on the product being sold. in consumer preferences and lifestyles Higher cost food items are more can increase volatility. For example, the dependent on discretionary income and general increase in health consciousness are likely to be more affected by weaker over the past few years has led to economic performance. healthier eating patterns. This works to Revenue volatility within the industry the advantage of those operators that can is also largely affected by consumer cater to these changes. Healthier eating trends. Industry revenue is currently may also be detrimental to operators that buoyed by the fashionable nature of primarily sell unhealthy products such coffee and consumers’ desire for sweets and cakes.

A higher level of revenue Volatility vs Growth volatility implies greater industry risk. Volatility can 1000 Hazardous Rollercoaster negatively affect long-term strategic decisions, such as 100 the time frame for capital investment. 10 When a fi rm makes poor Cafes and Coffee Shops investment decisions it may face underutilised 1

capacity if demand (%) volatility* Revenue suddenly falls, or capacity 0.1 Stagnant Blue Chip constraints if it rises –30 –10 10 30 50 70 quickly. Five year annualised revenue growth (%)

* Axis is in logarithmic scale SOURCE: WWW.IBISWORLD.COM.AU

Regulation & Policy The Cafes and Coffee Shops industry is appropriate food handling. subject to a medium level of regulation. The rapid increase in the number of Regulation is focused mainly on food cafes, particularly in high traffic areas has Level & Trend safety, service and hygiene, with some made planning, building and conversion The level of more bureaucratic requirements also in regulations more significant. New Regulation is place. Food hygiene is governed by the entrants seeking to convert an existing Medium and the Food Standards Code in Australia. This premises into a cafe are required to trend is Steady  code, developed by Food Standards adhere to planning laws, which vary Australia New Zealand, places greater across different states. These regulations emphasis on self-regulation. Under the govern the manner in which building can code, operators are responsible in be carried out, the appearance of the new ensuring the delivery of optimal hygiene. structure and whether the location is Inspections by officers do occur, with a zoned for use as a cafe. As desirable focus on educating operators and locations become increasingly scarce, the identifying safety concerns. Victoria has construction or conversion of buildings is gone further, requiring compulsory Food expected to become more prominent. Safety Plans since 2002. This again Legislation regarding the service of emphasises self-regulation as operators alcohol is also significant to the industry. must demonstrate that they have suitable This includes the regulation of licensed plans for their establishment. Operators premises by the state government liquor are also typically required by council licensing authorities and appropriate staff legislation to undertake some training in training. The industry also has to comply WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 28

Operating Conditions

Regulation & Policy with local council regulations regarding dining, street signage and licensing costs continued the provision of liquor licences for on- involved in the use of certain background premises consumption. Other legislation music. These minor regulations can affecting the industry includes bans on significantly increase costs and the smoking in covered areas, fees for footpath administrative burden on operators.

Industry Assistance The Cafes and Coffee Shops industry in have natural levels of protection due to Australia receives little to no direct its highly fragmented composition and government assistance. The minimal an entrenched local coffee culture. Level & Trend level of assistance is in part due to the Global chains have found it difficult The level of relative ease of entry to industry and to gain strong market share or Industry Assistance absence of international competition. influence over the industry. Consumers is Low and the The majority of establishments are have largely preferred small boutique trend is Steady  locally owned, minimising the need for coffee houses and cafes over industry protection. The industry does international chains. WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 29 Key Statistics

Industry Data Industry Revenue Value Added Wages Domestic ($m) ($m) Establishments Enterprises Employment Exports Imports ($m) Demand 2005-06 3,083.9 986.8 6,172 4,614 61,698 -- -- 766.6 N/A 2006-07 3,258.0 1,042.6 6,558 4,862 65,973 -- -- 880.0 N/A 2007-08 3,270.8 915.8 7,137 5,218 72,277 -- -- 897.7 N/A 2008-09 3,304.1 991.2 7,643 5,842 74,359 -- -- 855.3 N/A 2009-10 3,720.3 1,153.3 7,894 5,925 76,517 -- -- 858.5 N/A 2010-11 3,738.4 1,157.7 8,097 6,054 79,535 -- -- 951.1 N/A 2011-12 3,813.8 1,206.7 8,303 6,261 81,198 -- -- 975.6 N/A 2012-13 4,075.0 1,313.5 8,570 6,488 83,719 -- -- 1,066.3 N/A 2013-14 4,246.1 1,363.9 8,779 6,613 84,867 -- -- 1,070.1 N/A 2014-15 4,349.0 1,410.5 8,950 6,701 86,243 -- -- 1,087.7 N/A 2015-16 4,530.3 1,443.9 9,303 6,951 90,285 -- -- 1,149.4 N/A 2016-17 4,675.3 1,502.7 9,493 7,077 91,898 -- -- 1,157.0 N/A 2017-18 4,698.7 1,500.7 9,659 7,189 93,650 -- -- 1,167.9 N/A 2018-19 4,811.5 1,527.7 9,783 7,315 94,512 -- -- 1,182.5 N/A 2019-20 5,003.9 1,565.9 9,908 7,392 96,211 -- -- 1,226.1 N/A Sector Rank 7/25 8/25 3/25 4/25 2/25 N/A N/A 7/25 N/A Economy Rank 238/776 235/775 87/776 85/775 48/775 N/A N/A 180/775 N/A

Annual Change Industry Domestic Revenue Value Added Establishments Enterprises Employment Exports Imports Wages Demand (%) (%) (%) (%) (%) (%) (%) (%) (%) 2006-07 5.6 5.7 6.3 5.4 6.9 N/A N/A 14.8 N/A 2007-08 0.4 -12.2 8.8 7.3 9.6 N/A N/A 2.0 N/A 2008-09 1.0 8.2 7.1 12.0 2.9 N/A N/A -4.7 N/A 2009-10 12.6 16.4 3.3 1.4 2.9 N/A N/A 0.4 N/A 2010-11 0.5 0.4 2.6 2.2 3.9 N/A N/A 10.8 N/A 2011-12 2.0 4.2 2.5 3.4 2.1 N/A N/A 2.6 N/A 2012-13 6.8 8.9 3.2 3.6 3.1 N/A N/A 9.3 N/A 2013-14 4.2 3.8 2.4 1.9 1.4 N/A N/A 0.4 N/A 2014-15 2.4 3.4 1.9 1.3 1.6 N/A N/A 1.6 N/A 2015-16 4.2 2.4 3.9 3.7 4.7 N/A N/A 5.7 N/A 2016-17 3.2 4.1 2.0 1.8 1.8 N/A N/A 0.7 N/A 2017-18 0.5 -0.1 1.7 1.6 1.9 N/A N/A 0.9 N/A 2018-19 2.4 1.8 1.3 1.8 0.9 N/A N/A 1.3 N/A 2019-20 4.0 2.5 1.3 1.1 1.8 N/A N/A 3.7 N/A Sector Rank 12/25 4/25 5/25 11/25 4/25 N/A N/A 7/25 N/A Economy Rank 326/776 252/775 199/776 237/775 291/775 N/A N/A 376/775 N/A

Key Ratios Revenue per Share of the IVA/Revenue Imports/Demand Exports/Revenue Employee Wages/Revenue Employees Average Wage Economy (%) (%) (%) ($’000) (%) per Est. ($) (%) 2005-06 32.00 N/A N/A 49.98 24.86 10.00 12,425.04 0.08 2006-07 32.00 N/A N/A 49.38 27.01 10.06 13,338.79 0.08 2007-08 28.00 N/A N/A 45.25 27.45 10.13 12,420.27 0.07 2008-09 30.00 N/A N/A 44.43 25.89 9.73 11,502.31 0.07 2009-10 31.00 N/A N/A 48.62 23.08 9.69 11,219.73 0.08 2010-11 30.97 N/A N/A 47.00 25.44 9.82 11,958.26 0.08 2011-12 31.64 N/A N/A 46.97 25.58 9.78 12,015.07 0.08 2012-13 32.23 N/A N/A 48.67 26.17 9.77 12,736.65 0.09 2013-14 32.12 N/A N/A 50.03 25.20 9.67 12,609.14 0.09 2014-15 32.43 N/A N/A 50.43 25.01 9.64 12,612.04 0.09 2015-16 31.87 N/A N/A 50.18 25.37 9.70 12,730.80 0.09 2016-17 32.14 N/A N/A 50.87 24.75 9.68 12,590.05 0.09 2017-18 31.94 N/A N/A 50.17 24.86 9.70 12,470.90 0.09 2018-19 31.75 N/A N/A 50.91 24.58 9.66 12,511.64 0.09 2019-20 31.29 N/A N/A 52.01 24.50 9.71 12,743.87 0.09 Sector Rank 19/25 N/A N/A 25/25 13/25 9/25 25/25 8/25 Economy Rank 415/775 N/A N/A 768/775 239/775 276/775 766/775 235/775

Figures are in inflation-adjusted 2015 dollars. Rank refers to 2015 data. SOURCE: WWW.IBISWORLD.COM.AU WWW.IBISWORLD.COM.AU Cafes and Coffee Shops in Australia April 2015 30

Jargon & Glossary

Industry Jargon COFFEE CULTURE Coffee consumption as part of the FOOD HANDLING AND SAFETY Close monitoring of daily routine for many Australians, especially high- food purchasing, preparation, storage and serving to quality gourmet coffee. ensure quality at each stage, from farm gate to plate. FAIR TRADE Coffee sourced from developing nations at FOOD SERVICE Provision of meals for customers, reasonable prices, ensuring better wages and conditions usually accompanied by alcoholic or non-alcoholic for workers. beverages.

IBISWorld Glossary BARRIERS TO ENTRY High barriers to entry mean that INDUSTRY REVENUE The total sales of industry goods new companies struggle to enter an industry, while low and services (exclusive of excise and sales tax); subsidies barriers mean it is easy for new companies to enter an on production; all other operating income from outside industry. the firm (such as commission income, repair and service CAPITAL INTENSITY Compares the amount of money income, and rent, leasing and hiring income); and spent on capital (plant, machinery and equipment) with capital work done by rental or lease. Receipts from that spent on labour. IBISWorld uses the ratio of interest royalties, dividends and the sale of fixed depreciation to wages as a proxy for capital intensity. tangible assets are excluded. High capital intensity is more than $0.333 of capital to INDUSTRY VALUE ADDED (IVA) The market value of $1 of labour; medium is $0.125 to $0.333 of capital to goods and services produced by the industry minus the $1 of labour; low is less than $0.125 of capital for every cost of goods and services used in production. IVA is $1 of labour. also described as the industry’s contribution to GDP, or CONSTANT PRICES The dollar figures in the Key profit plus wages and depreciation. Statistics table, including forecasts, are adjusted for INTERNATIONAL TRADE The level of international inflation using the current year (i.e. year published) as trade is determined by ratios of exports to revenue and the base year. This removes the impact of changes in imports to domestic demand. For exports/revenue: low is the purchasing power of the dollar, leaving only the less than 5%; medium is 5% to 20%; and high is more ‘real’ growth or decline in industry metrics. The inflation than 20%. Imports/domestic demand: low is less than adjustments in IBISWorld’s reports are made using the 5%; medium is 5% to 35%; and high is more than Australian Bureau of Statistics’ implicit GDP price 35%. deflator. LIFE CYCLE  All industries go through periods of growth, DOMESTIC DEMAND Spending on industry goods and maturity and decline. IBISWorld determines an services within Australia, regardless of their country of industry’s life cycle by considering its growth rate origin. It is derived by adding imports to industry (measured by IVA) compared with GDP; the growth rate revenue, and then subtracting exports. of the number of establishments; the amount of change EMPLOYMENT The number of permanent, part-time, the industry’s products are undergoing; the rate of temporary and casual employees, working proprietors, technological change; and the level of customer partners, managers and executives within the industry. acceptance of industry products and services. ENTERPRISE  A division that is separately managed NONEMPLOYING ESTABLISHMENT Businesses with and keeps management accounts. Each enterprise no paid employment or payroll, also known as consists of one or more establishments that are under nonemployers. These are mostly set up by self-employed common ownership or control. individuals. ESTABLISHMENT The smallest type of accounting unit PROFIT IBISWorld uses earnings before interest and tax within an enterprise, an establishment is a single (EBIT) as an indicator of a company’s profitability. It is physical location where business is conducted or where calculated as revenue minus expenses, excluding services or industrial operations are performed. Multiple interest and tax. establishments under common control make up an VOLATILITY  The level of volatility is determined by enterprise. averaging the absolute change in revenue in each of the EXPORTS  Total value of industry goods and services past five years. Volatility levels: very high is more than sold by Australian companies to customers abroad. ±20%; high volatility is ±10% to ±20%; moderate volatility is ±3% to ±10%; and low volatility is less than IMPORTS Total value of industry goods and services ±3%. brought in from foreign countries to be sold in Australia. WAGES The gross total wages and salaries of all INDUSTRY CONCENTRATION  An indicator of the employees in the industry. Benefits and on-costs are dominance of the top four players in an industry. included in this figure. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%. www.ibisworld.com.au | (03) 9655 3881 | [email protected]

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