Growth off the menu

The closure of 61 Starbucks stores earlier this year was a warning sign for the café and restaurant sector. As the economy slows and discretionary spending dries up, some smaller operators will be forced to leave the sector. IBISWorld general manager ROBE

By Robert Bryant

The closure of 61 Starbucks stores earlier this year was a warning sign for the café and restaurant sector. As the economy slows and discretionary spending dries up, some smaller operators will be forced to leave the sector.

The closure of 61 Starbucks stores in late July marked the beginning of a period of pain for Australia’s café and restaurants sector. Not long after the Starbucks announcement, we predicted that another 500 cafes will close this year as a result of intense competition and a slowing economy.

The coffee retailing market is already so highly saturated, and most small players already run at a loss of 1% of sales. It will be small independent cafes with less than five employees that will close down next.

IBISWorld estimates that this industry will grow by 2.2% over the five year period to 2008-09. After rising disposable income and employment levels helped the sector grow strongly in the two years to 2006-07, increasing unemployment, high interest rates and fuel prices, and sharemarket and property price downturns have damaged the sector’s prospects in the last two years.

Profitability increased at a subdued rate over the current period as competition kept operators from raising prices amidst increasing costs.

The barriers to future industry growth are mainly related to growth in real household disposable income, changes in business and consumer confidence levels, high levels of competition, both within and from other areas of the broader hospitality industry, and from other alternatives available to consumers. Industry employment is expected to rise negligibly over the current period.

IBISWorld forecasts that this industry will grow by 2.6% over the five year period to 2012-13. A moderate decline in industry revenue is expected in 2009-10 due to continued subdued economic growth, even though interest rates may fall.

The outlook gets a bit better after that. From 2010-11 onwards the industry should enjoy improved conditions thanks to higher economic growth, leading to higher industry revenue and profits.

However, a tight labour market will make it hard to hire and retain staff, especially considering that most employees are casual in this industry, leading to increased wage costs. This is predicted to cause profitability to rise only marginally as operators will not be able to pass on these costs to customers due to a high level of competition from within the industry and other food service and hospitality operators.

New cafe and restaurant concepts are expected to continue to emerge, offering value for money, with an emphasis on family restaurants and franchised opportunities in areas such as seafood, steak, health foods and pasta/Italian restaurants. The industry will continue to benefit from higher incomes and time constraints on some households, as well as lifestyle changes.

Key success factors for operators in the industry

• Access to multiskilled 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 of operators. Business acumen of operator is critical, particularly with some experience in retail or hospitality.
• Must 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 the 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 of 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. Recognising that good word-of-mouth recommendations and repeat custom is critical.
• Having a clear market position. Understanding your position in the cafe and restaurant market, target customers and their needs, wants and desires, and always meet these.

Products and service segmentation

Proportion of businesses by state

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