Have we reached peak coffee in Australia
In the early 2000’s, Australia's coffee landscape began to change.
Pre-2000, you could walk down most Australian strip shopping precincts and see perhaps 2 or 3 cafes offering coffee and some even used pre-ground coffee is instant.
In those days a cafe was a food business first that also happened to offer beverages including coffee - but it was clearly a greater emphasis on food than coffee.
Around 2006, new cafes were opening up everywhere and some of the more popular outlets were filled with patrons from early morning until late in the afternoon for the sole purpose to drink coffee, catch up with friends or have business meetings.
Over time, coffee became an essential social lubricant and developed to a point of being more important than food in these cafes. It was also no surprise that coffee became a higher margin product compared to food, in fact the highest margin item in a cafe.
Fast forward to 2021 and it seemed every 3rd shop in a strip serves coffee – whether they are skilled at it or not, coffee undoubtedly still evokes thoughts of gold rush fever for cafe owners and it's this sentiment that has led to saturation of the cafe market in Australia.
Specialty Coffee – a rapid evolution in just 10 short years
Coffee has history dating hundreds of years, but if we looked back at what happened in 2006, it was a time when small groups of coffee roasters began experimenting with single origin coffees and roasting their beans differently.
Instead of roasting everything really dark and relying upon the addition of sugar and sweetness of the milk to improve the cup, the motivation from a few brave roasters was to showcase the original characteristics of those high quality beans using medium roast profiles - it started a movement towards an accepted belief of cleaner and sweeter offerings – devoid of that ashy, char and over-roasted note in the coffees.
These were the beginnings of what was to become known as 3rd Wave coffee.
Weather it started in Australia, New Zealand, Scandinavia or Europe does not matter, it was fundamental shift towards coffee as we know it today and Australian coffee drinkers eagerly embraced it.
The winds of change in roasting styles also led to baristas starting to more closely manage their espresso extractions carefully via controlled ratios of dose, grind and shot times.
All of a sudden there was an emphasis on consistency, quality and awareness of freshness using dose on demand grinders and ensuring coffee was used on it’s peak “days” after roasting.
With changes to the style (or profile) for how coffee was roasted, the higher grades of quality for the sourcing of raw coffee and the baristas taking supreme care of the brew and extraction, all these changes were focused upon one important and fundamental outcome – the strive for constant quality improvements.
Specialty coffee is without doubt the fastest growing, most interesting, ultra-competitive and ridiculously complex segment of the coffee industry.
Describing it in a few paragraphs is difficult because Specialty coffee has so many elements that can command detailed explanations beyond the scope of this article. There are diverse segments such as alternative brew styles, roasting profiles and sophisticated beverage recipe ratios, etc.
The reason for such excitement about Specialty Coffee is due to the constant state of change – whether it’s farmers experimenting with different processing methods, coffee companies using scientific tools to measure and manage roasting profiles or baristas working on the cutting edge of cup engineering.
Nothing stands still for very long and barely a day passes without some type of announcement about innovation, invention or hype.
Why we say ridiculous is because some of what is marketed by attention-seeking brands is more hype than substance. There are promises and claims that are not true and certainly not tested. To say "we source the best" is plain wrong and deceptive - how would they know if they source the best ? nobody tells anyone else what they are doing and everyone is operating inside of a vacuum, so to claim they have the "best" is just bragging.
What does Specialty Coffee mean to my hospitality business ?
Skilled baristas are acknowledged as being the fundamental link in the overall quality plan for hospitality outlets.
In fact, baristas are so important they must be considered as the critical "TALENT" - just like a star player in a team.
Good baristas are just as important as the green bean grade and roasting expertise delivered by the coffee supplier. All three concepts must align for the end result to work.
It's naive to contemplate that a successful cafe can survive long-term with inexperienced baristas.
A good barista can compensate for an ordinary roasted coffee product whereas a great roasted coffee bean may not generate success in the hands of an unskilled barista.
Presentation of the coffee beverage (otherwise known as latte art whether it’s simple of fancy) is becoming just as important as cup flavor. Alas, latte art is a superficial layer of showmanship as it does nothing to the actual flavor of the cup, however, there is some truth in the saying that we "eat with out eyes".
Likewise, fit-outs now stand as the most important design and styling element to a cafe’s ambiance – driven by major cultural shifts away from formal dining towards a more casual cafe experience. The only time a fit-out is less important is when there is a captive market, e.g. limited alternatives, etc. and therefore you need to consider the important fact that if you have competitors within walking distance, then fit-out should be high on your list of essential components in your cafe solution.
Australian cafe market is now saturated – strategy is more important than ever
At some point during 2014, coffee in Australia reached a saturation point. Of course, there will be plenty of people willing to argue that claim - especially if they have vested interests to perpetrate the myth that plenty of opportunity remains everywhere such as the poor performing franchise segment.
The bell weather used to measure saturation is not just random slices of industry statistics or a bunch of wild assumptions – it’s based on discussions with cafe owners about their day-to-day survival among the raft of new openings nearby.
As a supplier to the industry, we see it everyday - the struggle.
Trust me, the only opportunity or upside is based on a dangerous premise of other cafes nearby failing - making the proposition of owning a cafe rather risky.
For close to a decade there's been this blinded mindset that if you open a new place it's possible to steal customers from the nearby cafes instead of filling defined a gap in the market - it's just not sustainable.
The coffee drinking “pie”, or in other words the size of the market of people who drink coffee or more specifically purchase dine-in or takeaway coffees, has not been growing at the same rate as the capacity of new outlets opening.
That is, each new cafe that opens must have in their business mode an expectation of preparing more than 150 cups of coffee per day as a bare minimum, or 300+ per day if they wish to survive properly (e.g. make enough money from coffee beverage sales to fill the gaps in low margins on food). That ramps up to 600+ cups per day if they plan to dominate their area or subsidize their food operation that is probably losing money, or marginal at best.
Each time a new cafe opens, the coffee drinking “pie” in that area is sliced into smaller portions and the neighboring outlets feel the impact immediately.
There's a false assumption that opening a new cafe may bring more customers into the area, but the reality is in most capital city main shopping streets there is a “band” of likely customer numbers, e.g. 4,000 per day or 10,000 per day, etc. and rarely will people travel far for a destination experience.
So getting back to why we believe a turning point was reached in 2014 – we have worked with customers over long periods of time, many of these customers (cafe owners) are people who have owned multiple cafes for more than a decade previously and they see the changes in the industry and market first-hand.
Instead of having a mindset for growth and struggling to keep up with volume or demand, they act defensively to preserve their customers for fear that competitors will snap them up in an instant.
These are the smart, experienced long term cafe operators that can sense something is not right in the industry – it’s not just a one-off or a factor of the economy !
Whilst many might argue that it’s not at a peak level yet (or that you can still buy crap coffee out and about which is an entirely different discussion), it’s this indisputable fact that in capital cities around Australia, there are so many cafes on struggle street from too much direct competition it's become a serious concern.
Some people think that poor performing cafes deserve to fail, but frankly that’s neither a valid or fair argument.
These original cafe businesses may have operated well for a while, but with plenty of new places opening nearby every few weeks or months, they lose the regular customers so heavily relied upon for no apparent reasons other than the new place nearby might appear interesting and customers are..... lets face it.......very fickle and get bored easily.
Mostly, it's not anything the cafe owner can directly control. New places opening up typically run discount promotions with the intent of stealing other cafe's customers. A race to the bottom.
It's not commercially viable to invest large $$ into renovations and "dazzle" every 12 months just to keep a customer's attention span - such has become the expectation in the top-end of cafe coffee.
The harsh reality is that too many outlets are selling coffee and there are not enough paying customers to generate the returns.
As an example, any event now whether it's sporting, arts, cultural, music, etc and there are mobile operators everywhere trying to flog cups of coffee. Even the humble kids sporting match on the weekend has multiple mobile van operators yelling abuse at each other for “pinching” their turf and customers.
Really, peak coffee has been reached in some areas of Australia and what you do next is critically important.
The key driver to the explosion of “coffee everywhere” is from prospective new cafe owners, many of them inexperienced that are often blinded by their own faith that they can do it better, work harder, faster and make it a success without undertaking adequate due diligence to evaluate the size of the market and the competitors. It's called a basic business model and the number of times I've spoken to aspiring cafe owners that refuse to do their homework properly it's scary. Mostly, it's an emotional decision.....a dream that needs to be fulfilled.
Smart and experienced vendors are the Franchise chains - they spend a lot of time and money to thoroughly investigate the best available positions, negotiate hard with landlords and then flog the space to a franchisee for a large profit - but at least it provides a decent starting point for the new franchisee, however as we now know from the scandals in Retail Food Group and it's brands that they are contractually locked into low quality ingredients and forced to pay high fees for bare minimum support.
Franchising cafes in Australia lost it's appeal in 2018 when the truth about what really happens was revealed - operators going bankrupt with no ways of obtaining help and support.
The warning signs of an industry at risk ?
Whilst population growth continues - with exception to the halt on immigration from the pandemic, there are real challenges when you look at a suburban strip shopping areas in Melbourne with 38 places selling coffee within a 300m radius. It's just insane and there are no real winners in that area.
Commercial real estate agents offering empty spaces for lease warn interested tenants that cafes are well and truly saturated in these areas, so don’t even think about fitting the empty space as a cafe. It was interesting that in late 2015 we were looking at a retail space in suburban Melbourne and after speaking with 5 different agents we concluded that the proposition was marginal at best - rents are too high and the price of a cup of coffee has barely increased in 10 years.
Commercial real estate agents even told us they won't let a premises to a cafe operator in many areas because of the high risks of failure from oversupply.
The same rules for running any business also apply to cafes – you need to generate a return on your investment – which consists of both capital and time.
Many recently opened cafes are trading at a loss for the first 12 – 18 months whilst they build up their business, some are even using new lease incentives of free or reduced rent to attack the market with discounted offerings in the hope of building up a regular client base.
With escalating rents from Australia’s real estate boom (and more rent increases into the future) there are also warning signs from a chronic lack of qualified and professional (read reliable) hospitality staff.
Hiring and retaining baristas seems to be the #1 issue in cafes – it's also difficult to retain chefs. Since the pandemic, many temporary residents that typically worked part time in hospitality are no longer available.
The concept of goodwill was a primary motivation to put in the hard work and build up a cafe business, but goodwill is being really tested and in many respects significantly eroded as competitors seek to build new rather than buy existing – adding even more capacity to a stretched demand (that pie keeps getting smaller). We are now seeing cafe owners desperate to escape from their business and willing to take zero goodwill as the pressure and effort are overwhelming. Some are even wanting to escape the shackles of long leases and willing to part for their business below replacement costs.
Managing expenses is important for any business, but what we have seen over a 30 year period is that the most successful and enduring cafes are those that manage their quality as a priority over cost.
Cost focused cafes tend to run their businesses down over time, eroding the majority of their goodwill (if there is any remaining) and experiencing quite difficult problems in attracting and retaining staff, relying instead on random customers rather than a mix of transnational and regular business. It becomes a false economy when the business declines and the base costs like rent and wages are rising.
It’s important to understand your position in the industry
We still find it remarkable that many hospitality businesses do not fully understand how or where they fit within their industry.
Sometimes it’s not the owner’s fault – they may have had a strong original vision for excellence or key differentiation, however, in the implementation (or battle) of running a business things change and circumstances turn out differently or concessions are made in the practicalities of making a business generate some returns.
To some extent, suppliers can influence and confuse their customers (cafe owners) by attempting to “take the high ground” with their “we are special and unique” and I’m sure more than a lot of this actually rubs off on the business owners.
Nowhere else is it more blatant than in the cafe coffee supply market – especially the larger players that have been on the receiving end of lost accounts for almost a decade and their fightback plan is to be “re-branded” with a strong, compelling message about how they are serious about their Specialty Coffee.
Unfortunately, the coffee roasting industry is unregulated, so the extravagant and at time outrageous claims often made by coffee roasters is just smoke and mirrors.
We know acutely that many of the pretend specialty players have done very little to change in their sourcing or roasting operations and continue to churn out the same mediocre product built to a cheap and nasty budget price. Applying a Specialty label to a pack of coffee is so easy to do – it’s basically “pulling the wool” over everyone’s eyes, or lipstick on a pig (no offense to pigs).
How do we know this ?
Well, there are a handful of raw coffee brokers in Australia. Any decent sized coffee company purchases from one or many brokers, as we do ourselves and we see the beans on the same truck that delivers to us (there might be 4 or 5 coffee roaster’s beans on the same truck)………those so-called Specialty companies are buying stuff we would not touch !
We have segmented the cafe industry into 4 categories:-
- Chains and franchises – typically have good locations and mediocre quality offerings that we believe will improve over time and be more competitive. Relies on a captive market.
- Non-coffee focus outlets – generally very cost focused or high-end restaurants that are too distracted with their menu and pay little attention to quality coffee. Sees value in the perception of freebies and “on loan” bundles such as equipment, signage, etc. yet happy to tolerate a mediocre coffee product until it becomes blatantly obvious that it’s not comparable to the place across the road or a few doors up. Likely to have a position whereby trade is easier – either less competition or a unique location or food menu offering. Non-coffee focus outlets sometimes really struggle across the entire business and do minimal coffee sales and often engage untrained staff to prepare coffee - a recipe for disaster.
- Mainstream cafes aspiring to greater success. May have a sound business and skills base but is likely to be torn between the value-options of the marketing “smoke and mirrors” from coffee companies promising plenty of value-adds versus wanting something unique like the independents. Mainstream cafes are typically not brave enough to be truly independent in their coffee choices and feel secure having a large coffee brand acting as a perceived safety net for their business. Can sometimes operate on the fringe of specialty coffee and may dabble in better coffee at various times just to re-assure themselves they can make coffee just as good as the smarty pants flash independent joint up the road. Always nervous about changing coffee with the false belief their customers will go elsewhere. Often has an inflated opinion about their coffee quality and does not like being told otherwise.
- Independent, unique, easily swayed by the latest fads. Solid performer and has dominant focus on coffee. Willing to experiment with coffee and look for an edge or point of difference. Loyalty is a serious concern. Requires relentless discussion and "brain picking" on all things coffee whether the investment into time and knowledge contributed by the coffee supplier is returned or not. Easily bored with the same coffee for weeks on end, wants things changed constantly and always has doubts and fears (anxiety) that someone is doing better coffee. Obsessed by their coffee ranking on ratings sites and feedback.
Beware the rise of the Coffee Chains
For a long time, the Franchise and Chains have been mocked in the Australian coffee industry (and coffee drinking public) for producing below average coffee. Traditionally, they paid the lowest possible price for coffee and did not care as much about quality – focusing on just consistency and cost, e.g. it was ok to be consistently mediocre.
When we talk about chains, we are referring to the master franchise owner, not the franchisees that operate and run cafes.
Chains survive by having the best locations (abundant passing trade in mega shopping centre food courts) and to their credit they have good training for typically very young staff. Chains and franchise also implement good operational processes and systems, but because their staff are often rotated in and out so rapidly, they can easily drift out of optimal setup because the staff are not experienced enough to recognize something's not right.
Over time, the Franchise and Chains segment will eventually become a dominant player in the coffee industry and for many operators in the cafe supply business this comes as a scary prospect. Franchise and Chains continue to close the coffee quality gap which means everyone else needs to keep pulling further ahead. If you are standing still with your offer, then you are actually falling behind over time.
Today, you have 5 very large specialty coffee roasters now producing high volumes of coffee beans, albeit average quality for franchises and chains, so they are moving up the quality ladder ……relatively fast.
What has slowed down the chains in the last few years are the terrible scandals from the franchise Royal Commission, however, the likes of McDonalds and their huge McCafe juggernaut continue to grow exceptionally well. It's been the middle-market players that have fallen off a cliff - namely Retail Food Group, Jamaica Blue, etc.
Non-coffee-focused outlets – it’s all about contracts
Non-coffee focused outlets generally have added their coffee line as an opportunistic revenue raiser. Typically, contracts are involved and most likely suffer a degree of inflexibility.
Their business is not just about coffee and they tend to prioritize food and maybe other beverages. This type of outlet represents a big portion of coffer serving facilities and the coffee only becomes a focus when there is a customer complaint, a below average feedback/review or something else is not right in the business and the owners/managers try to temporarily jump-start or resuscitate coffee sales under the guise of “a lost opportunity“.
Where a contract-based systems is in place, it might be causing some grief to either the customer and/or supplier. Cafes go bust quite quickly or they are being sold in rapid time frames without the full rewards being earned by the suppliers who invest up to $10k – $15K upfront.
Another disruptive element to contracts is when the outlet is surprisingly sold overnight the new owners are aligned with another coffee brand or want to change because they believe they can negotiate more freebies and a cheaper price/better value. These types of circumstances mean coffee companies are ending up with lightly used equipment they can’t put into a new cafe because every owner wants only brand new gear.
Contracts don’t reward the supplier until after the 2nd or 3rd year, by which time the customer is already complaining about wanting a brand new espresso machine and/or grinder, or more free crockery, signs and marketing assistance, or the place is being sold.
With more than 1000 brands of coffee being sold in Australia, it’s only the cut-throat competition among the larger desperate coffee roasters unable to manage losing volumes that keeps this system running.
Eventually, more and more coffee roasters (like us and many others) opt out of this craziness and return to standard arrangements whereby performance of the product we produce matters more than rubbish coffee that is uplifted with built-in freebies.
Mainstream cafes facing a dangerous future
The highest risk category of coffee outlet is the Mainstream cafe – which may surprise many people.
In my opinion, mainstream cafes need to carefully consider their future strategy, especially with their coffee offering as the Franchise/Chains will creep up their quality levels and the independents will dominate coffee sales – creating a pinch point for mainstream.
More than 90+% of cafes view their coffee as an important, if not the most critical, contributor to overall cafe profit. Food these days is marginal and beverages are key to financial survival.
Being mainstream is dangerous territory in any industry – stuck in the middle without large scale economies or nimble independent specialists that can constantly innovate or adapt. History has shown across any industry that those in the middle will ultimately be the first to fail.
The number of outlets serving coffees has exploded so therein lies the challenge of being able to produce a quality product that can attract new customers or securely recruit them as repeat or regular customers from your competitors.
Independents do it differently
Have you ever wondered why some cafes have coffee company signage and logos plastered all over – outside, inside, on the cups, uniforms, sugar sticks, etc. ? and yet the most successful cafes doing coffee don’t have any signage !
Do you think that signage benefits the cafe or the coffee company ?
Truth is that nobody benefits from coffee company logo signage. A long time ago when coffee outlets were once scarce, the signs were important to inform customers that coffee was available inside the premises. These days it’s expected that every place serves coffee – and……. does.
The problem with the signs is that all it takes is for someone to have a bad experience at another outlet that uses that brand and for reasons I don’t fully understand, the consumer tends to blame the coffee brand, not the person who made it….so the brand is basically black listed in the minds of that customer.
So, you have basically narrowed your chances down to 50% as to whether someone will come inside – forget about what the brand promises…….each individual person makes up their own mind.
Coffee companies tend to benefit more from signage that cafes. Cafes that offer up the space in return for some freebies, but it can also work against the coffee company if the cafe does a crap job with their beans.
Independents rarely have coffee company logo signage. They survive by offering higher levels of product quality and/or service. Independents don’t want or need coffee company brand exposure but instead they truly engineer their food and beverages to achieve better results and therefore create that important point of difference to their competition in the area.
Independent cafes generally trade on having strong and healthy relationships with suppliers that evolve over time into solid loyalty – being more of a partner than a supplier.