While consumers have avoided eating out recently, business information analysts at IBISWorld say Australians are less likely to give up their daily coffee â€“ forecasting cafes and coffee shops’ revenue will grow 32% over the next five years to reach $6.55 billion.
Australia’s cafes and coffee shops industry is characterised by high sales volumes, low profit margins and intense competition, yet IBISWorld General Manager (Australia), Ms Karen Dobie, said the industry is expected to increase 2.3% this year despite a dip in consumer spending.
Ms Dobie said that cafes have outperformed hospitality rivals over the past five years, with revenue increasing 2.6% per annum compared with 0.9% for the catering industry and 1.1% for restaurants.
This strong performance has been due to more Australians adopting coffee as their morning pick-me-up. In 2005-06, the average Australian adult spent just $3.78 per week on cafe coffee. This is expected to increase 62% by 2015-16 to reach $6.13 per week.
“At the height of the global financial crisis, restaurants and caterers endured consecutive declines in income, while cafes and coffee shops’ income continued to grow â€“ albeit at a slower rate. Australians consider buying coffee outside the home an essential part of the daily routine â€“ and we’re willing to sacrifice other things rather than forgo our daily cup,” Ms Dobie said.
Cafes and coffee shops industry revenue
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The cost of a cup
“Rising costs for wages, electricity and insurance, coupled with increasing world coffee prices have seen the price of coffee in a cafe rise,” Ms Dobie said. Industry sources estimate the domestic price of coffee has increased $2 per kilo, leading to a 5 cent increase in the price of coffee in a cafe over the past year.
Our taste for premium coffee has also played a role in pushing up the price of cafe coffee â€“ as more cafes employ highly skilled baristas to dispense quality coffee. “Despite these price rises, Australians are still prepared to stretch their budgets to purchase one or more coffees a day, with those in Perth paying the most per cup,” Ms Dobie said.
According to the Gilkatho Cappuccino Price Index, an eight ounce takeaway cappuccino costs the most in Perth, at an average of $3.72, followed by Canberra ($3.36), Brisbane ($3.34), Adelaide ($3.31), Melbourne ($3.21) and Sydney ($3.09)
Is bigger really better?
When it comes to coffee, the answer appears to be no. Small coffee shops compete fiercely on the basis of service, quality and price, often outperforming global brands, which have not been able to capture more than 5.0% of the local market.
Starbucks is a prime example, having closed 61 sites in 2008 after failing to cater for our entrenched coffee culture. McDonald’s McCafe and Gloria Jean’s Coffee have managed to capture a small share of the local market, which Ms Dobie attributes to a higher level of Australian ownership and a more hands-on involvement in understanding Australia’s strong coffee culture.
Gold, nickel andâ€¦coffee
Coffee is one of the world’s most traded commodities. More than 96.7 million bags (5.8 billion kilograms) were exported last year from key growing regions including South Asia, South America and East Africa. The European Union is the biggest buyer â€“ importing more than 50% of global supply â€“ while the United States is the largest consumer of coffee.
The long-term demand for coffee is essentially stable, however the price of coffee can be volatile due to climactic conditions leading to fluctuations in supply.
“Prices have increased by 122% over the past five years, with the biggest increments occurring this year at 44% and last year at 27%,” Ms Dobie said. “Growing demand from rising affluence and westernised consumption patterns in the developing world are key factors driving this growth. We’ve also seen restricted supply due to adverse weather conditions in primary growing areas.”
An ongoing addiction
IBISWorld expects this industry will enjoy sustained future growth. Ms Dobie said local players can further increase their revenue by servicing niche markets with premium products.
“Rising public concern over carbon emissions, climate change and the health implications of consuming products tainted by pesticides present investment opportunities in areas such as organics and eco-consumerism,” Ms Dobie said.
“Operators will benefit from differentiating their products by using organic ingredients, reducing their carbon footprint and promoting ethical business practices such as the use of fair trade coffee to attract consumers that are willing to pay a premium for coffee that has been ethically sourced.”
Retail sales for fair trade coffee totalled $50.5 million or 4% of total coffee production in December 2010 â€“ representing a 33.6% increase on 2009 and a staggering 910% jump from 2005.
“McCafe was quick to capitalise on this trend by promoting the company’s social and environmental credentials via the use of certified Rainforest Alliance coffee. While economies of scale make this a more cost-effective strategy for McCafe than for some smaller players, it’s a trend that’s here to stay.”
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