Eateries need to watch the figure

Squeezed discretionary dollars mean that cafés and restaurants will be fighting for customers, reports ROBERT BRYANT of IBISWorld.

By Robert Bryant

Squeezed discretionary dollars mean that cafés and restaurants will be fighting for customers.

Australians will to continue to eat, drink and be merry despite falling consumer confidence levels and a rise in living costs. The $8.65 billion café and restaurant industry is predicted to grow at an average rate of 3.2% per year until 2012-13.

However individual cafés and restaurants will face an uncertain future due to high levels of competition within the industry and increasingly from the broader hospitality sector.

All will be fighting for a consumer whose discretionary income is being squeezed by rising interest payments, fuel costs and food prices. Restaurants and cafes will in addition have to weather rising costs and a scarcity of workers.

The café and restaurant industry includes BYO and licensed premises, but not fast-food and takeaway enterprises.

The state of the play

IBISWorld estimates that the industry has been growing at an average annual rate of 3% in the five years to 2007-08.

There was some weakness in 2004-05 and 2005-06 as lower economic growth and higher living costs curbed consumer spending on cafes and restaurants.

Cut-price and fixed-price lunches were common as many customers ceased to book ahead and regular customers were dining less frequently. Revenue grew strongly in 2006-07 as the benefits of faster economic growth and the strong labour market kicked in. Strong conditions have marked 2007-08 so far, supported by growth in household disposable income.

Future industry growth may be affected by falling real household disposable income, changes in business and consumer confidence levels, and higher levels of competition. The café and restaurant sector, as a specialised service industry, is marked by low concentration and fierce competition.

The cafe/coffee shop segment has seen a rising presence of US style chains. There is also a challenge from the wider hospitality sector.

The outlook

IBISWorld forecasts that the café and restaurant industry will grow at an average annual rate of 3.2% over the five years to 2012-13.

Researchers predict moderate positive revenue growth for the industry in fiscal 2009. The flow-on effects of higher interest rates and fuel prices on household disposable income will be less pronounced than in years past.

Consumer spending should remain strong, including on outside meals and drinks. In 2009-10 the spill-over of lower economic growth will slow down industry revenue, with growth picking up in 2010-11. By then cafes and restaurants will see a return to stronger revenues, profits and employment.

For cafes and restaurants new concepts are expected to continue to emerge, offering value for money, with an emphasis on family restaurants, as well as franchised opportunities in areas such as seafood, steak, health foods and pasta/Italian restaurants.

Continuing competition is expected from US franchised operators, including Starbucks, Hudsons and McCafes.

Key sensitivities

• The performance of the café and restaurant industry will be shaped by key dynamics both internal to and outside the sector.
• Competition to cafes and restaurants is increasing from other industries also involved with food service; this includes casinos, hotels, pubs/taverns/bars, clubs and take-away food establishments.
• Reduced leisure time means that eating out is now becoming a time for families to get together, short business meetings at cafes etc.
• Wider recreation choice means cafés and restaurants still have to fight for their share of discretionary household expenditure with other areas of entertainment such as gambling.
• More liberal liquor licensing laws allowing alcohol to be served without meals in cafes and restaurants is increasing demand for eating out.
• Changes in real disposable household income affects demand for eating out – factors to consider are changes in tax, interest rates and labor markets.

Determinants of success

What factors do industry operators need to address in order succeed?

Multi-skilled and flexible workforce: Access to a high number of casual staff and quality cooks/chefs required to control overall labour input and cost.

Business expertise: Business acumen of operator is critical, experience in retail or hospitality is crucial.

Comply with government regulations: Complying with all planning, health, wage, occupational health and safety, food handling/storage and liquor and other regulations is essential.

Effective quality control: Consistent quality and presentation of foods on menu will ensure high levels of customer satisfaction.

Effective cost controls: Cost control and monitoring is critical, particularly in terms of ordering, portion control and minimising wastage.

Optimum capacity utilisation: Ensuring maximum seating and turnover of tables on a session basis, to maximise revenue per session.

Access to high quality inputs: Maintaining quality of inputs into the catering process, in line with menu prices and customer expectations.

Receiving the benefit of word of mouth recommendations: Good word of mouth recommendations and repeat business is critical.

Having a clear market position: Understanding your position in the café and restaurant market, target customers and their needs, wants and desires.

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au