6 big takeaways from IBISWorld’s 2022 Cafe Industry Report

The Coffee Commune

IBISWorld has recently released a 30-page Industry Report on Cafes and Coffee Shops in Australia. This report looks at the key trends, opportunities, threats and forecasts across Australia’s coffee scene as a result of the global COVID-19 pandemic. From the rise of brunch culture to global coffee prices, here are six big takeaways from the report.

The full report is made available to our members – if you would like a copy, just reach out to our membership team.

1. Coffee is an affordable luxury

Coffee is a daily ritual for many Australians, and it is our vibrant cafe culture that has driven revenue and growth across the industry in the past five years.

The relatively inexpensive nature of coffee and strong demand has fuelled the perception that it is an affordable luxury – one which consumers are often unwilling to forgo.

While spending money on cafes and coffee shops is discretionary, consumers have been unwilling to sacrifice their daily coffee consumption, preferring to seek larger savings elsewhere. This “way of life” has enabled the coffee industry to remain strong and stable, despite tough economic conditions and shifts in household income.

2. Quality is king: Shift towards organic, fair trade and premium

On the back of Australia’s rising coffee culture, consumers have become more sophisticated with their coffee choices, and this has revived interest in black coffee, and similar options, such as cold brew and nitro brew.

Consumers are increasingly focusing on coffee beans’ origin, flavour profile and roast, with demand growing for fair trade and organic blends. Smaller independent coffee houses now differentiate themselves by the quality of their coffee beans, which has boosted the popularity of rarer blends that can be charged out at higher prices.

Changes in consumer preferences and lifestyles, for example increases in health consciousness and ethical consumerism, have seen organic and fair trade coffee becoming more widespread. As consumers become increasingly concerned about the origin of their food and beverages, ethically sourced goods are projected to become more popular and attract premium prices.

There is also a growing trend towards ordering non-dairy alternatives, such as oat and almond milk, which has led to more premium pricing over the past five years.

With online review sites such as Zomato enabling consumers to easily rate and review cafes, there is an opportunity for operators to allocate more funds to high quality coffee blends and premium ingredients in meals.

As consumers search for quality, it is the cafes that offer diverse menus emphasising fresh and premium ingredients that are forecast to be the best performers.

3. Bakeries are no longer “just bakeries”

In recent years, niche artisan bakeries and patisseries have increasingly been repositioning themselves as cafes, adding coffee services and seating to their operation in order to target more “discerning” customers. This is partly due to the rise in brunch culture – a trend that has contributed to growth in the industry and has improved the quality of the industry’s food offerings.

But despite cafes focusing more on premium food options, the food segment has declined as a share of industry revenue over the past five years, which is likely due to extended periods of COVID-19 trading restrictions. A transition back to office working is expected to boost sales of on-the-go food options in the current year.

4. Higher costs means industry profitability has decreased

Australia’s rising brunch culture and the use of fresh and high quality ingredients have increased input costs over the past five years.

While demand for coffee is forecast to remain strong, the world price of coffee is anticipated to rise sharply over the current year, boosting input costs and exerting downward pressure on profit margins.

Additionally, ongoing fixed costs amid falling sales due to COVID-19 pandemic-related trading restrictions have caused declines in industry profitability over the past three years. This includes expenses associated with frequently cleaning and disinfecting dine-in areas to contain the COVID-19 spread.

Rental costs are a significant expense for more operators, and competition for locations has caused rent costs to increase over the past five years. This has meant new industry entrants are increasingly turning to smaller locations to establish their businesses.

However, overall industry profit margins are forecast to rise, supported by cost-saving measures and greater sales of higher margin products.

5. Smaller operators dominate over larger chains

Australia’s strong independent coffee culture emphasises quality over quantity, which has restricted the influence and growth of chain stores.

The report revealed a highly fragmented industry, with no single player accounting for more than five per cent of revenue in 2021-22. It is consumers who have driven this trend, preferring the quality, ambience and experience of smaller operators and niche providers over larger chain stores.

The transition of artisan bakeries and patisseries into small coffee shops has also exacerbated this trend, with consumers opting for coffee with their purchase of specialty baked goods.

6. Technology disruption has moderately affected the industry

The emergence of online food delivery services has affected the industry landscape over the past decade, with platforms like Uber Eats, Deliveroo and Menulog allowing coffee shops and cafes to reach a larger target audience – and provide greater convenience to customers wanting takeaway. The COVID-19 pandemic’s trading restrictions saw even more establishments turn to food delivery.

This has boosted investment in new computer devices, such as tablet-based cashier systems, that simplify the daily operation of businesses and improve convenience for operators.

Other online platforms such as Hey You and Liven allow consumers to place online orders and receive discounts off the total bill, allowing establishments to broaden their customer base.

Most technological advancements in the industry, such as electronic ordering systems, aim to improve systems and procedures to provide a better customer experience. As well, advances in coffee machine technology help to provide better quality coffee to more discerning customers.

Looking ahead

Industry revenue is projected to expand over the next five years, driven by greater consumer demand for high quality and convenient food and beverages. A focus on premium ingredients and gourmet cafe-style meals will remain, helping operators to boost sales of higher margin products.

Rising household discretionary incomes and premiumisation trends will likely encourage consumers to dine out more often and spend more money on industry products.

Although competition is forecast to rise over the period, industry profit margins are projected to increase in line with premium trends. In particular, ongoing consumer interest in health and ethical consumerism will likely support profitability.

Overall, industry revenue is forecast to increase at an annualised 2.1 per cent over the next five years through 2026-27.

The Coffee Commune